Back-of-the-Envolope Estimate of the Iceberg's Size

Many people have pondered the unspeakable, "I wonder if the $700 billion bailout is enough?" Even Sarah Palin, in a bit of twisted logic opposing a stimulus package, said the unspeakable:

This next one of the Democrat's, [which is] being proposed, should be very, very concerning to all Americans because to me it sends a message that $700 billion bailout, maybe that was just the tip of the iceberg. [1]

So, how big might the iceberg be? Well, economic Nobel laureate, Paul Krugman, gives us a sense based on some historical examples:

Japan’s bank bailout in 1998 was more than $500 billion, in an economy whose dollar GDP was only about 1/4 that of the United States today. Do the math. And the just-announced IMF loan to Iceland is $2.1 billion — that’s for a country with only 300,000 people. Both of these numbers seem to suggest that an eventual outlay of $2 trillion is in the realm of possibility.

Add that to the $3 trillion war that was supposed to cost $60 million, the rest funded by Iraqi oil revenues.

As I write this on Sunday night I'm reading that "Monday in Japan" finds the Nikkei 225 Stock Average has fallen to a 26-year low. Paul Krugman has another bit of insight to share...

Right now I feel like the guy who was told, “Cheer up — things could be worse!” So he cheered up, and sure enough, things got worse.

Worse? We turn again to Paul Krugman for the truly unspeakable in his blog entry dated October 10, 2008 entitled "Faustian Bargains."

"I’ve lately become a reader of Across the Curve, the blog of the bond trader John Jansen.... it’s really helpful to have reports from a “tone and feel of the markets” guy who can tell you what the numbers can’t.

And his opening comment this morning is a shocker. After describing some of the weird action in Treasuries, he says:

Is this the beginning of the end for the dollar and the Treasury market? Is this the first sign of the bursting of the bubble in Treasury securities? That market, in a sense, represents the ultimate bubble as it exists at the whim and caprice of foreign investors, who have as participants in a Faustian bargain, financed our war(s) and our lifestyle so generously over the last decade. Maybe even that bizarre construct is crashing about us as we speak.

Krugman closes, "Maybe I should be drinking something a bit more … calming .. than coffee right now."

Sources:

[1] Politico.com, "Palin allies report rising camp tension," Ben Smith, October 25, 2008.

Paul Krugman's Blog, The Conscience of a Liberal.