There doesn’t seem to be much that makes sense in this world these days. Take for example events in the past week. Standard & Poor’s threatened to lower the credit rating on the national debt unless some kind of agreement was reached on raising the debt ceiling. When an "agreement" was finally achieved, S & P lowered their rating anyways. To avoid this, Congress could have simply agreed as they did hundreds of times before to raise the debt ceiling without attaching anything more than the usual pretend bluster concerning the deficit; during the Bush administration, Republicans told us that deficits don’t matter, so they were glad to do it. But because Rush Limbaugh and Fox News blowhards were telling us that Barack Obama is an anti-white “socialist” who wants to communize the country, suddenly there is this irrational fear that the debt is out-of-control because of this spendthrift maniac of a president out to steal more of “your” money to give to “his people.” It’s absurd, but many paranoid millions believe it. Not only that, but those on the left are equally critical of Obama for not demanding another stimulus package, as if there was any chance of getting one from a House full of rabid Tea Partiers who don’t understand the realities of public and international debt.
The debt issue is actually quite simple, if you think about it. If you don’t have enough money to pay your bills, you use a credit card. As long as you pay a minimum balance every month and stay below your “debt ceiling,” you still have credit you can draw on if you fall short. As long as you have a more or less steady income, you should be in no danger of being unable to make your minimum payment. Thus it is with the federal government; as long as there is an expectation of a certain amount of revenue, and can pay a minimum amount of interest on its debt, the government will remain solvent.
It is not that we shouldn’t be concerned about how high the national debt is, but it is useful to note that the extent and problem of a nation’s debt varies wildly. Japan’s public debt is 225 percent of its GDP, and its government borrowing actually exceeded its revenues last year. Yet there seems to be this assumption that the Japanese have it all in hand; The Economist noted that Japan’s head-in-the-sand approach includes a break-away political party seemingly modeled on the U.S. Tea Party movement, claiming to be reformers but who seem to believe that anti-immigrant nationalism is the “tonic” Japan needs to solve its decreasing economic output, as its native labor pool continues to age. On another extreme is the UK’s international balance of payments debt, 400 times that of its GDP. Thus the U.S.’ short-term debt picture tends to be falsely characterized by the media, politicians and the public. The country’s external debt—its international balance of payments—is over 90 percent of GDP, but this is not necessarily a measure of government debt, but of trade imbalances; whenever you buy a Japanese-made car or a Chinese-made laptop computer, you are contributing to that debt. The U.S. public debt (debt held by non-governmental entities, usually in the form of sales of Treasury bonds) is about 60 percent of GDP (according to the CIA Factbook), which is fairly manageable compared to other countries. These figures, however, do not take into account “intra-governmental” borrowings from trust surpluses (like Social Security) and Medicare funds. The federal deficit numbers usually bandied about do take into account this debt, but the public debt as a short-term concern is overblown; but for the long-term, intra-government borrowing is a significant concern if draws down the Social Security and pension trust funds too far too quickly.
So what credibility should we give Standard & Poor’s lowering of the U.S. credit rating? A BBC World News reporter went out on the streets of Times Square and asked passersby what they thought of the ramifications. One man had this to say: “This all began with Clinton, Bush didn’t do anything about it, and Obama made it worse.” This is about the kind of sense you might expect from someone who gets all his misinformation from Fox News and CNBC. But while many Americans have reached the conclusion that something really bad has happened, one needs to put this in proper perspective, and apparently some people already have: While the Stock Market plummeted on Monday, people who were selling off their stocks were apparently re-investing them—in the U.S. government, just as they did in 2008. As the LA Times reported, “The continuing global stock market panic is the gift that keeps on giving to the U.S. Treasury. Despite the U.S. credit-rating downgrade by Standard & Poor's last week, the Treasury on Wednesday saw huge demand when it sold $24 billion in new 10-year notes.” Despite all the media handwringing, this was a direct slap in the face to S & P, which many commentators on both the right and the left were already deriding as without substance or credibility. Barry Ritholtz of the Washington Post recently noted it was, after all, rating firms like S & P who contributed to the Great Recession:
“Moody’s Investors Service, Standard & Poor’s and Fitch Ratings — all originally served bond investors, who paid for their research. But that model changed in the 1990s to one that was funded by the syndicators and underwriter of structured financial products such as mortgage-backed securities. Essentially, bankers “purchased” the rating they desired. As a result, the performance of the rating agencies decayed, as they were no longer judged on the quality of their analytical reviews. Second, the underwriting quality of syndicators fell, as they —not a neutral third party — were, in effect, picking their own credit ratings. The real question for the financial markets is why we even require rating agencies to evaluate complex financial products any more.”
The “model” changed thanks to fanatical deregulators like the incompetent Sen. Phil Graham, who subsequently chose to blame the victims rather than the perpetrators of the 2008 financial meltdown. The greatest failing of Bill Clinton’s presidency was not the Lewinsky scandal, but caving in to the Republican Congress’ deregulation madness—in particular the repeal of Glass Steagall, which allowed banks to be run like gambling casinos with depositors’ money. George Bush and the federal regulators on his watch gleefully turned a blind eye to the consequences, while ratings firms like S & P added hydrogen to the financial airship by providing usefully improper credit reports. S & P’s latest actions should be seen not as a reaction to its past indiscretions, but as a purely political move. It criticizes the political stalemate in Washington, but it is clear what side of the political fence it leans on when it insists on major social program cuts to get back in its “good” graces. When Obama came with his statement on Monday, he only tepidly disagreed with S & P’s move; he should have forcefully brushed it aside by noting as Ritholtz did that S & P is a self-glorified stooge of the banking industry, and in effect incompetent to make a judgment one way or the other.
Meanwhile, on NPR economist James Galbraith and some Wall Street Journal editor I dismissed as a right-wing partisan hack in the Fox News mold (the WSJ, as we know, is now owned by Rupert Murdoch) argued about who was responsible for the present economic morass. A third commentator—probably correctly—intimated that there is little the government can do about the economy, since it seems impervious to any policy tinkering; tinkering only marginally helps one side or the other—meaning either the rich or everyone else, but not both. Despite the intransigence of House Republicans, they all blamed Obama alone for the debt crisis and the failure of the economy to more rapidly emerge from its doldrums. One side says that Obama has done too much, the other side says has done too little. There was a lot of talk about his supposed inability to lead; there was less talk—or rather no talk—about how Republicans do not want to be led, except by the nose by the Tea Party.
But Obama had nothing to do with the disastrous policies that led to the “Great Recession,” and he has been able to do little but nibble at the toes of those policies. Had Clinton’s tax and fiscal policies—which had gone a long way to fixing the damage done by Ronald “Deficits Don’t Matter” Reagan and George H.W. “Doo the Voodoo Too” Bush and their tax-cutting for the rich and military spendthrifting—been continued during the Bush II administration, the nation would have gone a long way toward erasing its national debt. But remember what Bush II told us? The poor rich needed a break, and with increased employment, the subsequent taxation on that income would make-up for the initial losses in revenue. Only Republicans seemed to believe this; after the controversial 2000 election, Bush told us that he “heard” the American People” and had second thoughts about the extent of the tax cuts. But Congressional Republicans demanded the whole hog, except that instead of getting it all at once, they passed part of it in 2001 and the rest in 2003.
Bush also forgot to tell us that he intended on starting a war from the very start, just like Gov. Scott Walker forgot to tell Wisconsin voters that he was going to gut public union bargaining rights. It was also Bush who pushed predatory home loans to those who did not have the means, after gutting affordable housing and rental subsidies. His SEC regulators apparently had little do except watch internet porn (and it wasn’t just men who were guilty of using government property for their illicit activities: “A Regional Office Staff Accountant received nearly 1,800 access denials for pornographic websites using her SEC laptop in only a two-week period, and had nearly 600 pornographic images saved on her laptop hard drive” according to the SEC inspector). Then Bush started his two mostly needless wars; instead of a marginalized Saddam Hussein who at least served as a bulwark against Iran, fanatical anti-American cleric and Iranian place-holder Muqtada al-Sadr waits in the wings to engage in a bloody overthrow of Iraqi “democracy.” Just last week, al-Sadr announced that any American soldiers remaining in Iraq after 2011—even those serving as trainers—would be targeted for death as infidel “occupiers.”
Bush’s continuation of Reaganesque “voodoo economics”—that is, the “trickle down” theory—only led to 3 million net manufacturing job losses, and while only increasing overall job gains by a net of 2 million in eight years—compared to 22 million during the Clinton years. But these losses were masked by a booming housing construction bubble based on very unsound credit. When the Bush administration gutted low-income housing subsidies, “in return” it made it easier for lenders to avoid accountability by luring potential low-income homeowners with low “teaser” interest rates that went-up dramatically at a certain time. Since many of these lenders were outside the commercial banking sphere, their practices were not regulated at all, and home loan borrowers who were not educated in the potential hazards involved were exploited by these lenders, who could easily foreclose to get their money back. But these lenders didn’t wait for that to happen; they sold their mortgages in bundles to banks or to Freddie Mac and Fannie Mae, who in turn might sell them to investment firms. The expectation was, of course, that homeowners would continue to pay their monthly mortgage.
We’ve heard of derivatives; what do they have to do with this? When people buy a security like a stock or bond, they own a piece of what they are buying, thus they gain or lose according to that security’s market performance. But when someone invests in a derivative, they don’t actually own a “piece” of a company, they are placing a wager on whether the security will rise or fall in price, and it is quite likely that many of these people had a very good idea of what they were betting on. Insurance companies like AIG engaged in derivatives when they sold policies in which losses from mortgage-based investments would be covered. This “insurance”—called “credit default swaps”—led to speculation on the future yield of these mortgage-based investments in which these speculators could "influence" the course of events; the actual owners of the investments faced most of the risk, and insurance companies like AIG could face massive losses if the housing bubble burst. By the time of the financial crisis of 2008 occurred, an incredible $60 trillion in mortgages were insured—compared to just under $1 trillion when Bush first took office. All that was propping this up was rising home prices and the ability of home owners to pay their mortgages—who were often of such impoverished means that they were forced to borrow on their home equity, putting themselves in deeper into debt and one paycheck from losing their home. When the “bubble” finally burst and home prices plummeted and homeowners could no longer pay their mortgages, even “only” a 7 percent default rate was disastrous for the insurance companies, banks and investment firms who were heavily involved.
Then as now, as the stock market plummeted, investment in Treasury bonds soared, since the U.S. government was still viewed as the safest investment haven. This didn’t, of course, help the economy; despite the $700 billion infusion of cash into banks who owned toxic home mortgage securities, banks chose not to use the money to lend, but to buy Treasury bonds, thus hindering economic recovery. Given the stagnation of the economy at the moment, it seems certain that whatever economic growth occurred in 2009-2010, was largely due to the Obama stimulus program; more than seven months into the extension of tax cuts for the rich, there is almost no sign that they have done anything to stimulate the economy or job growth. It seems obvious that more—not less—government spending is required to spur job creation and consumer spending; with the rest of the world’s economy (save in China and India) in question, this country has to do something shocking—do the sensible thing and demand that Congress make job creation--not more useless tax breaks for businesses--its number one priority, which does not include job-killing budget cuts to fix a “problem” which exists mainly because the government has done too little rather than too much, to correct the country’s wealth imbalances.
"Common sense," said Obama in his Monday statement, is what we need more of in Washington. Of course, that means having a "sense" of what happened the past three years. We should have learned that unfettered deregulation of financial markets, giving money to banks and tax cuts for the wealthy have not worked to jump start the economy, while targeted stimulus funds did work. But with the Tea Party in charge, the children are running the nursery.
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