So far the U.S. government has allocated $700 billion to bail out our banks. It turns out that total could amount to merely drops in the ocean of red ink.
“The amount of working capital you'd expect the government to take into this would be around $3 trillion to $4 trillion,” Simon Johnson, former chief economist of the International Monetary Fund, tells Fortune magazine.
Johnson, now a senior fellow at the Peterson Institute for International Economics, says banks will need more capital infusions from the government because their reserves are so thin amid mushrooming losses.
In addition, banks still have a slew of toxic assets to wipe off their books before they can think about returning to health.
The net cost for the government (which should be able to recoup some of its spending) will probably register about $1 trillion to $2 trillion, Johnson says — or 5 to 10 percent of gross domestic product (GDP).
That total is “in line with the experience” of other nations that have implemented wholesale restructurings of their banking systems, he points out.
Johnson isn’t the first expert to warn that banks will need huge additional help from the government.
FBR Capital analyst Paul Miller said in November that the biggest eight financial companies in the country need at least $1 trillion by themselves in new common equity, Fortune notes.
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