WASHINGTON (MarketWatch) -- The historic proposal to have the government take the toxic waste off of the balance sheets of U.S. financial institution will balloon the federal deficit and alter the economic landscape, analysts said.

The cherished economic plans of the two presidential candidates will be derailed.

Bond yields could rise, curbing economic activity, and foreign investors may grow concerned that the Federal Reserve will inflate its way out of the mess.

The proposal sent to Congress on Friday by Treasury secretary Henry Paulson call for the authority to buy souring assets from financial firms and could cost as much as $700 billion. This would dwarf all previous bailouts.

The savings and loan crisis, where more than1,000 thrifts failed with more than $500 billion in assets, ended up costing the government $125 billion, according to a recent paper by economist at the Federal Deposit Insurance Corp.

The government also made a small profit of its $1.2 billion loan guarantees to Chrysler Corp.

Amrtrak has received $24 billion from the federal government since its creation in 1971

Where will the money come to buy the mortgage-paper?

The funds are going to be borrowed by Treasury and it will be repaid over decades by taxpayers.

As a result, the deficit for next year, fiscal 2009 that starts October 1, is likely to jump to an eye-popping record range of $800 billion to one trillion dollars, according to Stan Collender, a long-time budget analyst.

Earlier this month, before the government nationalized Fannie Mae, Freddie Mac and the giant American Insurance Group, the Congressional Budget Office forecast the deficit would rise to $438 billion next year.

For 2008 fiscal year, which ends at the end of the month, the CBO forecasts a $407 billion deficit.

The war in Iraq is costing roughly $180 billion per year. The price tag on the war is approaching $800 billion, Collender said.

All of this spending will crowd out private investment, some economists said.

And it comes at a time when Congress must also take steps to close the gap between revenues and promised benefits for Medicare and Social Security.

But some economists argued that the high cost was better than the alternative.

"I am convinced that this bold approach will cost American families far less than the alternative, which would be a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," said Neil Soss, chief economist at Credit Suisse Holdings USA in a conference call with clients Friday.

Some of the mortgages bought by the government will show good value over time, reducing the ultimate cost.

"The fiscal cost need not be overwhelming ...if prices of many assets were depressed by the liquidity crisis below their likely long-run value, it is possible for the government to acquire large volume of such assets and earn a positive return," noted economists from Citigroup in a note to clients.

But the increase in borrowing could change the dynamics in the bond market.

Avery Shenfeld, economist at CIBC World Markets, said that bonds may sell off because of the equivalent of more than $1 trillion in net issuance to deal with next year's deficit and financing these asset purchases.