The $700-billion gambit in the headlines is just part of the overall spend. Tom Sowanick is CIO of Clearbrook Research, part of Clearbrook Financial, a Princeton, N.J.-based wealth-management service provider.

By my calculations, the gross cost of the proposed rescue package for the U.S. financial system to the U.S. taxpayer could be $2.18 trillion, either in outright guarantees or extended loans. Far greater, in other words, than the $700 billion bailout championed by U.S. Treasury secretary Hank Paulson.

The gross numbers and could come down substantially if the $29 billion of non-performing assets that the government guaranteed JPMorgan for its takeover of Bear Stearns turns to performing assets, if AIG pays off its $85 billion two-year loan, and if the government can sell illiquid assets for a profit.

Estimated cost of U.S. government rescue plan Funds committed or expenditures proposed...so far...

Item

Cost

Original cost of Fannie/Freddie $200 billion Guarantee to JPMorgan for Bear Stearns $29 billion Two-year loan to AIG $85 billion Exchange rate stability funds $50 billion Increase to FDIC $500 billion Fannie/Freddie purchase of mortgage-backed securities $500 billion Resolution Trust Corporation-style portfolio $700 billion Pelosi/Obama stimulus package $115 billion Total $2.179 trillion

These are staggering sums of money to deal with a problem of uncertain scope. It's not clear -- and may never be clear -- whether the Federal Reserve and Treasury are acting prudently or simply panicking.

Uptick

We do know that the SEC has reacted to the crisis with temporary measures rather than real reforms.

Perhaps the SEC's most egregious mistake was its decision to abandon the "uptick" rule in July 2007. (That rule, in effect for almost 70 years, called for short sellers to sell at a price above the last price paid for a given stock.)

With the uptick rule gone, market short sellers can exacerbate market downdrafts. In fact, since then the S&P 500 has fallen by more than 24%.

Rather than address the real root of the problem, the SEC has banned short-selling of 799 financial stocks until 2 October 2008 with the option of extending the ban for another month.

This temporary action sparked a massive short-covering rally that resulted in a two-day gain of 8.5% for the S&P.

Whether this gain is sustainable will depend more on the SEC then on the spending plans that the government is soon to embark on. The SEC needs to reinstate the uptick rule to create sustainable stability. -FWR

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