Government Bailouts May Increase Long Term Interest Rates

The price tag for the US taxpayer of the government bailouts is reaching staggering proportions. To date the estimated costs has been reported at:

$29 billion for Bear Stearns

+$100 billion for Freddie Mac and Fannie Mae

$85 billion for AIG

$400 billion for the FDIC failed bank fund

$700 billion for the entity which will buy mortgage securities from financial companies and banks

Total estimated cost +$1.3 trillion

The total cost is almost twice the current account deficit which is the amount of money the Treasury Department has to raise annually through the sale of US Treasury securities to meet our spending demands. Historically foreign investors have been more than willing to buy our debt as the US dollar has been considered as a safe haven. Many economists are now publicly questioning if the large amount of new debt which will be issued will push up longer-term interest rates as foreign investors demand more yield for their commitment to the US.

One major economist has forecast that the 10-year Treasury bill currently yielding 3.86% may be as high as 6.50% in one year as our extra debt demands force yields higher. This would have many detrimental effects on the US economy which is already in fragile shape. Homeowners with mortgages should consider these relatively new forecasts of higher and persistent long-term interest rates when choosing the right type of mortgage.

Showing 1 comment | Add your comment