Pick whatever price tag you'd like attach to the ongoing government bailouts. $700 billion? $3.9 trillion? To infinity and beyond? The amount of outlays, guarantees, and investments in the likes of JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC) will probably keep piling up for a while.

Let's leave aside the argument that whatever the actual cost of the bailout will be less than the proposed insurance promises, outlays, and bank liquidity injections at any given point in time. Don't get me wrong: There will be losses -- there's no way around that. But what's disturbingly absent from this conversation is the lack of a single bailout opponent attempting to discuss the very real cost of doing nothing.

There're three major complaints regarding unintended consequences of government bailouts. Namely:

  • Doing so will destroy the value of the dollar.
  • Doing so will lead to inflation (really the outcome of a destroyed dollar).
  • Connect the dots, and the U.S. economy faces a potential collapse.

Every one of those arguments is spot-on. I'd bet my life that we'll have a good bout of inflation in the future, and I've been arguing for months that the state of the U.S dollar is pretty pathetic. What I disagree with is the assumption that if Ben Bernanke and Hank Paulson did nothing (as so many seem to wish for), none of those fears would be made potentially worse.

Throughout this debacle, one quote has scared the daylights out of me. It came from a former member of China's central bank back when Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) were teetering on failure. Not mincing any words, the former member warned of a collapse, saying, "If it is not the end of the world, it is the end of the current international financial system."

What the quote so painfully highlights is that foreign investors hold more than $1.5 trillion of Fannie and Freddie securities. Does anyone truly believe that allowing Fred and Fan to collapse would cause those foreign investors to do anything else but dump what was left of their investments? Can anyone argue that foreigners dumping agency securities would cause anything short of a surge in real borrowing costs, leading to an ever faster and more ruthless economic collapse than we've already seen? And wouldn't that surge in borrowing costs and demise of "the current international financial system" fuel an even deeper loss of consumer confidence than we've already experienced?

I certainly think it would. While recessions are a normal part of economic cycles, downright collapses are not.

Moreover, some of Citigroup (NYSE:C) and Merrill Lynch's (NYSE:MER) largest shareholders are Sovereign Wealth Funds; the same Sovereign Wealth Funds directly tied to central governments, and the same central governments that collectively hold over $2.8 trillion worth of U.S. Treasury securities.

Can any bailout opponent honestly make the case that a foreign central banker watching the complete and utter demise of America's financial system wouldn't be tempted to jettison U.S. Treasuries? And can those same bailout opponents explain how that mass exodus from U.S. securities wouldn't cause the same collapse of the dollar, a surge in interest rates, and the same crippling inflation they're quick to warn that the bailouts will cause? Isn't it only logical that the government would make up for a surge in borrowing costs by printing more money to cover existing obligations? And isn't printing money the infuriating deed Bernanke and Paulson are being chastised for?

The bottom line is that, either way, there are going to be enormous costs to the economy. That's reality. There's no magical solution that'll bring us back to the utopia we'd come to love. The assumption that Bernanke and Paulson are imposing $8 trillion in "costs" to the economy that could have been avoided by allowing a laissez-faire approach to strut its stuff is, in my opinion, only a fraction of the complete story. If bailouts come with even a slight possibility of preventing a collapse that would otherwise be guaranteed by doing nothing, they're worth every penny.

Again, don't confuse me for someone who wakes up every morning giddy over news of yet another bailout. I'm not jumping for joy over them, nor am I attempting to "obliquely defend" their virtues. I'm simply pointing out that of the dozens upon dozens of articles ridiculing Bernanke and Paulson for the cost they're imposing (down to every last dollar), I've yet to see a single mention of the very real cost that doing nothing would be to an economy that's so beholden to the financial kindness of the rest of the world.

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