Following a string of guarantees, buy-outs, and bailouts for various financial firms, Congress is now rushing to authorize the Treasury Secretary to spend $700 billion to bail out the rest of Wall Street. Since its role in the sale of investment bank Bear Stearns to rival J.P. Morgan in March, the federal government has intervened three times in the nation's financial markets by using taxpayer dollars to prop up the value of various private banking and mortgage entities. While taxpayers ought to be concerned about the sums of money involved in these transactions, a more fundamental problem exists: the bottom-line cost is anybody's guess. The current crisis in the financial markets is rooted in the basic problem of bad debt. Since the housing bubble burst, millions of homeowners have been unable to pay off their mortgages, ultimately surrendering to foreclosure. Unfortunately, the repercussions of these foreclosures extend beyond just the individual homeowners who default. The mortgages for these homes were bundled, sliced and diced, and sold by and to Wall Street investors in the form of mortgage-backed securities (MBS). Investment banks, using borrowed money, bought up trillions of dollars of these securities in a bid to enlarge their profit margins. But, as the housing market collapsed, the values of these MBSs became unknowable as good debt — mortgages whose holders maintain payments — was mixed in with the bad. And because these banks cannot properly estimate the value of the outstanding bad debt or identify which MBSs contain those bad debts, banks have significantly reduced their lending to each other to minimize their risk. Recognizing the potential depression-magnitude effects that this failure to lend might have on the economy, the Federal Reserve Bank and the Treasury Department have initiated several extraordinary measures over the past six months.

On March 16, investment bank J.P. Morgan agreed to purchase competitor investment bank Bear Stearns. But the sale was at a substantial discount and was premised on the condition that the Federal Reserve lend J.P. Morgan $29 billion, with $30 billion in MBSs used as collateral. If J.P. Morgan defaults on the loan, the Federal Reserve will be left holding a pile of MBSs worth substantially less than the $29 billion it loaned the investment bank. And because the Fed transfers its profits to the Treasury, a $29 billion loss will result in $29 billion less revenue for the federal government — to be made up by taxpayer-financed debt. An estimate for potential costs to taxpayers remains unknown, however, as the value of Bear Stearns's MBSs are unknown. Yet, a few months later, the Bush administration requested, and Congress granted, the authority for the government to own even more risky assets.

When the president signed into law the Housing and Economic Recovery Act of 2008 (H.R. 3221), he gave the Treasury Department the authority to takeover Fannie Mae and Freddie Mac — the two government-sponsored entities (GSEs) that own or guarantee some $5 trillion in mortgage debt. The measure also gave Treasury the authority to purchase "any amount of obligations and other securities" issued by these GSEs. When the Bush administration proposed these provisions, the Congressional Budget Office (CBO) estimated that the cost to the federal government would be about $25 billion. CBO's explanation for its estimate, however, turned out be based on little more than speculation.

Although CBO asserted that "there is a significant chance — probably better than 50 percent — that the proposed new authority for the Secretary would not be used before it expired at the end of December 2009," the Treasury Department took Fannie and Freddie into conservatorship (essentially taking over ownership and operations) in September. Explaining the necessity for such a move, Jim Lockhart, director of the new independent regulator of the GSEs, the Federal Housing Finance Agency (FHFA), stated, "Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing." As part of the takeover, the Treasury Department extended a $200 billion line of credit to the GSEs to ensure their continued operation. It also implemented a plan in which the GSEs would expand their ownership of MBSs up to $850 billion, with the goal of ultimately reducing the inventories of these securities to $250 billion. Like CBO's initial estimate, the ultimate cost to taxpayers remains in a murky realm of speculation.

About a week after taking over Fannie Mae and Freddie Mac, the federal government intervened in financial markets once again when it took an 80 percent stake in AIG (American International Group). Like the GSEs and recently bankrupted investment bank Lehman Brothers, AIG had trouble meeting its debtor obligations. Believing that "a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance," the Federal Reserve Board loaned the massive insurance firm $85 billion. The loan is to be repaid as AIG sells off its assets, and Fed staffers believe that the loan will be paid in full. It is not certain, however, that the current value of AIG's assets will be maintained over the two-year life of the loan.

Following the Fed's purchase of AIG, the Bush administration began maneuvering to intervene in the market yet again. Treasury Secretary Henry Paulson asked Congress to provide even more authority to the executive branch to take on more bad debt. Released this past weekend (Sept. 20), the Paulson request calls for a $700 billion blank check from Congress. The initial text of legislation would have given the Treasury Secretary virtually unchecked authority to purchase $700 billion more in toxic MBSs. And like the other instances in which the federal government took securities onto its books, the ultimate cost to taxpayers remains totally unknowable. What is clear, however, is that the administration projects a $700 billion increase in the national debt, as the draft legislation included a provision to increase the debt ceiling from $10.6 trillion to $11.3 trillion.

The administration is seeking quick approval of its plan from Congress during this last week before a scheduled adjournment to head out on the campaign trail on Sept. 26. But both Democrats and Republicans appear hesitant to write the blank check without significantly more transparency, oversight, and accountability mechanisms in place. Sen. Chris Dodd (D-CT) has begun drafting changes to the Treasury proposal he hopes will bring increased transparency and oversight, as well as direct assistance for homeowners with mortgages in danger of default.

The upshot of these market interventions, for better or ill, is that the federal government has added to its balance sheet potentially hundreds of billions, perhaps even trillions, of dollars in bad debt. And while economists and policymakers may argue the importance of bailing out Wall Street, they can carry out only the most rudimentary of cost-benefit analyses, because they are working in such an information void. It is precisely this dearth of information that is cause for concern: A crisis in the nation's long-term finances is looming, and now the federal government may or may not be piling on more than a trillion dollars in future obligations. The knots of federal budgeting have just gotten tighter, although by how much is difficult to determine.