It is currently impossible to balance the budget. But it is not impossible to drastically cut spending. You are right it is not a good time to do anything and this is the worst time to spend.
I agree, that money would have been better spent bailing out taxpayers, at least we would have had the stimulus of the bailout we are paying for. That should have directly come as a payoff against consumer debt or mortgages, take your pick.
I'm not sure what you're trying to say here. The purpose of the wasout was to loosen the credit markets. The original method was to buy toxic assets, but they decided that the smarter way to go was to directly inject capital - that authority was specifically given to them in the TARP legislation. And it has loosened up the credit markets. Are you saying it's a BAD thing that the government found ways with less long-term costs to loosen up the credit markets?
I disagree. With the economy in real danger of a severe recession, now is the time to spend on useful projects like infrastructure. The economy is contracting in a big way, and the need to control the national debt is balanced by the urgent need to keep the economy from contracting further. The fact that the US government can currently borrow at extremely low rates of interest makes this even more true.
I think he's saying it's an insolvency issue not a liquidity issue. These bailouts are given on the assumption of the latter. For example, the first AIG bailout has been a big disaster for the exact same assumption. The second and larger bailout hits the toxic CDS upfront, and tries to corral its damage. The tax payers have definitely been taken for a ride when it comes to AIG. I don't know much about Tim Geitner, but that he had a major role writing these bailouts would not strike confidence in me unlike how Wall Street responded yesterday...
Michael Hodges publishes a good amount of material on the debt on his website. You just can't get the picture unless you analyze our total debt. Please look over the entire website carefully. Some of our politicians are aware of the situation, you can be sure the Fed is aware of the debt issues but they are playing us for fools. Read through this material, I think it was updated as of Jan 2008. http://mwhodges.home.att.net/
[emphasis mine] Look, the point that I'm trying to make is that while government deficits certainly have significant drawbacks, there are policies which, while leading to more debt, can have a very beneficial impact in combatting the current economic crisis. It's unfortunate that the government is going to have go deeper into debt, but it would be far worse if the economy were to slip into deflation and depression, which would be much more likely to occur if the government suddenly decided to pursue more constrictive fiscal policy. When you further consider that the US government is currently in a position to borrow at very attractive rates, it appears that this is a moment for deficit spending. Of course it's not a good thing when the US turns its wealth into debt. However, at this moment the alternative is far worse.
The point is that banks are using this infusion of capital not in the way it was originally meant. The big one are using it to acquire more banks and uses them as leverage against the taxpayer because they know this government will bail them out no matter what happens. There is no incentive for them to change or evolve. Even the toxic assets are still on the books and we will continue funneling them money. Look at CitiGoup, a few months ago they were looking to buy Wachovia not because they were strong and healthy but that they knew, once you become "too big to fail" the government won't let you fail. Also they know the more toxic assets you have the bigger the extortion demands you get to make. This subsidizing of bad business management and throwing good money after bad will lead us into ruins. My main argument is that the 750 billion has now turned into magnitudes of TRILLIONS, something the taxpayers never signed off on. Now I am not stupid so I have been in opposition of this bailout from the beginning for that very reason. The government has no idea as to how much money this will really cost and everyday the figures keep on growing. The automakers are next in line, swiftly followed by home builders and even the retailers if you look at what is going on with the Ceo of Walmart quietly sneaking out the backdoor. The hard question to answer is where will this stop? This has become a slush fund in the name of saving the economy and we need to put an end to it or the cost will be to great to burden.
Look, I understand what short term benefit might come from the infusion of debt by the Fed. I know how you feel, nobody wants to face a hard recession or worst. But the economic crisis is simply a debt crisis. And adding any debt at all will only worsen the situation. We might buy a little time by a big infusion of federal debt into public work projects or alternative energy initiatives, but those jobs will be balanced by losses in other economic sectors and eventualy that bubble will pop also; the added debt will make the crash much more dire. I wish it was more complex. It isn't. Every man, woman, and child in America is approx. $100,000 in debt right now when you take just federal, state and consumer debt and divide it by census numbers. I regret Bush so much because he ran this debt up to unsustainable levels (he got us to this point) The numbers are going up significantly with each bailout and every single dime that is going to be spent by the next Admin to try and soften what cannot be stopped. That debt is already unmanageable. There are just four left in my family but I cannot pay off $400,000. I can't pay the interest. Taxpayers at some point soon will pay. We are so deep in do do it isn't funny at all. I am pretty sure that the bankers and industrialists are not going to let the US go bankrupt so expect significant unemployment and higher taxes and a big drop in our standard of living. (or some combination of such stuff) That would be a best case scenario. Anything harsher would probably require Martial Law and National Guard troops. Let me tell you three people not to trust on this one- Anyone with the Fed (any connection whatsoever) Anyone in the administration Any analyst on the major media outlets, Fox, CNN, ABC etc I suggest you prepare for things to be difficult unless you are loaded with cash or real assets that are fairly liquid. I don't think people with wealth and liquidity are going to feel much. Right now I personally favor facing and bracing for a very hard recession, high enemployment and a combination of bankruptcies, re-organizations, and slashing federal spending and infusing limited but targeted federal aid. I would favor setting up a federal monitored non-profit trust for unemployment relief also. Next, I would trim as much as possible from current spending levels and use any excess funds to provide tax incentives for venture capital in strategic areas like alternative energy. The think about a very hard recession is we get things corrected and it forces us to renew our industry and productivity. That would give us the foundation to expand the economy and balance the trade deficit without going insolvent with debt. Anyways, none of what we want is going to happen anyway. So, if you are good with more debt, then I highly recommend you take a strong position in savings account, get out of all personal debt and apply for a very good paying government job.
Not really. Here goes my attempt to explain what's been going on: At the root of the crisis is the misallocation of resources and bad investments that came about with the bubble in housing prices. A ton of resources were put into building new houses for which demand had been grossly overestimated. When the bubble in prices finally burst, all of that value was lost. Subsequently, financial assets like mortgage-backed securities, the values of which were dependent on housing prices remaining high, became worthless as people defaulted on their now-overpriced mortgages. This led to a huge contraction in the credit markets, as banks struggled to dump housing-related assets and ultimately other kinds of assets as well in seeking liquidity; many institutions have even fallen into insolvency. It is true that a link in the chain of the whole mess is the unpaid debts that were owed by homeowners; however, the overarching problems were the bubble in housing prices and the related mismanagement of risk by financial institutions. To say that this is a "debt crisis" and is somehow due to the debts of the federal government is really misleading. It's good to be for deficit reduction in general, but government debt didn't cause this crisis.
Most of this financial stuff is still above my head but I don't get a good feeling about this. From reading the back and forth on here I can understand the short term argument for selling more bonds for debt but I can also understand that in the long term this doesn't appear sustainable. I have a hard time figuring out whether this will be a disaster or what sort of disaster this will be but at the moment I'm not seeing a good argument that a disaster will be avoided and whether selling more debt won't make it worse. Can any of the Keynesians out there provide some reassurance that the potential disaster that some of the posters are painting isn't going to happen and that the Fed piling debt up for bailouts isn't going to come back and screw us over?
There are some who feel like this is a temporary measure in order to "work out the poison", and they'll also likely consider this an illiquidity problem rather than insolvency (meaning that the government will make money or lose "a little" from these bailouts...eventually) The major card we have is that if we go down a death spiral (it could begin with a credit downgrade), we'll take almost everyone else down with us. China, Japan, S. Korea, Russia, Saudi Arabia, Kuwait and other smaller Asian nations owns trillions of our treasury securities. I think that's the major reason, though some would like to bring %age of GDP or other statistical gimmickry in order to bolster the claim that we can do this.
Bucket, I think we are just looking at the same disaster from two different views; I am flying over at about 50,000 ft. It is true that the bursting of the mortgage bubble/ especially the subprime meltdown has triggered the current reaction, especially in financials. But the truth is it is the size of the debt left by all the credit bubbles and govt. spending over the past 15 years that is the real problem. Of the 10 trillion $$ of total US home mortgages only about 7% are subprime mortgages (the ones in serious trouble) and only about 25% of these are currently in default. The total losses to default for all mortgages is about 500 billion $$$ That could easily already been rescued with all the bailouts and Fed infusions, but that only revealed the problem. The bigger issue is the tightening of the credit market over all. What has happened is that all the bubbles have burst, or in other words there is not alot of people able to continue to borrow money at the break neck rates we have seen over the past decade. Add to that the leveraging of these debts and you can see that bad mortgages can quickly trigger a liquidity problem for all the banks/debt holders who depend upon making loans and selling loans for cash flow. Most all loans are packaged and sold at some point, more than 2/3 I think of all mortgages are sold. Banks depend upon these credit bubbles growing to sell off debt and continue making loans. Once the debt load gets really large in the consumer sector in any one area the bubble bursts and unless there is another bubble to create a further expansion of credit the banks lose liquidity and the economy cools down. But if even a small % of the loans default then it really escalates the credit crunch because debtors also just assume that they are going to get their payments. It is pretty complicated if you try to break down the exact financial position of each bank/ lender but basically a company like CitiCorp may be in trouble irregardless of home mortgages or home values, they may be unable to get new credit infusion and are just totally cash short. They may not be able to sell loans either. And if they have any defaults in this position they will really be sqeezed. Most banks are going to have to de-leverage their positions and downsize to a realistic credit position if their is not more credit pumped to heat up lending. What is troublesome is that all the credit bubbles resulted in alot of debt which makes it harder to get another big bubble started. So the banks are in a very credit tightened situation. Everyone is saying that credit is tight, but that is more a function of not enough borrowers and too many defaults. Banks are looking for stabilizing their balance sheets more than making more loans. Just look how low interest rates are- no reason to not borrow if there were enough borrowers out there. Once credit tightens then businesses that depend on debt are hit hard and their is a chain reaction. Unemployment less borrowers. The cycle of contraction is started. The total debt is a result of several bubbles- First the Dotcom boom of the late '80's - 90's This was a big influx of debt and venture capital in Dotcom companies. Many millionaires and billionaires were made in computer, software and internet bubble. All the debt was fueled by rapid investment in Dotcom, when many of these bellied up the bubble burst. Second was the low interest Fed bubble that fueled consumer credit. Low interest rates burned through the debt economy has consumers spent their credit cards and bought cars like there was no tomorrow. Third the real estate market kept heating up with low interest rate and all the fancy mortgage instruments that got most everyone any house they wanted and a lot more than they really could afford. These bubbles all came to maxing out and have all but popped. Add to this inflation caused by expansion of the money supply largely through debt. And consumer bubbles are not likely at this time. Govt. debt doesnot really factor in except as the end play. What govt. debt affects is the confidence factor of the dollar and eventually taxes. At some point govt. debt could be the deal breaker for the Fed. It is almost like the Fed is working against the taxpayer. I know that is over simplistic. But I am sure the size of our consumer debt and govt. debt is way too large and bad mortgages and other defaults on credit are going to reveal this strongly at some point. The problem is debt. If we didn't have so much these current mortgage / home price issues could be sustained, written off, etc I think the tight credit might ease a bit with the large spending President Obama is planning, it will infuse credit into the economy. But at some point this is all going to hurt. As companies start reducing employment it will cause th cycle to worsen. I have no expertise, I hope I am totally wrong, and I doubt any of us understand all that is happening. This is all my own misguided opinion. I do know we have to live within our means to survive. There are alot of things I don't understand, but I do understand that we are living beyond our means and still borrowing too much.
I certainly don't have any good solutions myself. If we had enough industry and business expansion through global trade to heat up the economy without further debt we could pay down all debts and raise taxes without too much adverse affects. But our economy/industry is running on debt. What is troublesome is that we are trying to borrow large make that huge amounts right now that will drastically make the problem harder later. There is not a good long term fix apart from much higher taxes, and much higher corporate profitability and expansion of the economy through industry and profit. If Companies start making loads of profit they can hire more workers, produce and sell more all without borrowing. Then people could pay off debt and the govt. could tax more to pay down debt- that is if the govt cut spending. It is simple enough that if all we are doing is borrowing then eventually the US credit rating will get hit- that is the disaster I think we must consider. I really don't believe bankers and wealthy people will allow this to happen that is why we are still able to borrow right now. We are the strongest economy in the world with all our debt which explains how bad most of the world really is especially in third world countries. Through cheap labor and fast economic expansion countries like China and India have pretty hot economies, but even their central banks are fueling expansion. I think the best thing that can happen short term is that we get at least one more big credit bubble going. Heat the economy up once more, probably with govt spending in infastructure and energy projects, or maybe a technology or healthcare... anyways I think that is what most all of Washington and the media are playing for right now. The best thing long term is that we take our medicine right now, I think we are strong enough to survive and come out on the other side of a hard recession with stronger companies and families with alot less debt. Eventually we can't keep borrowing can we? Does it really matter how much treasuries the govt sells if some fool keeps buying them... when does it stop at 100 trillion$$$ If we can get away with 100 trillion $$$ in debt then let the Fed go go go, and I am sure President Obama can spend it and we can have the majority of our workforce employed by Uncle Sam.
where are people going to put their money instead? I know that the incredible demand for US Treasuries will not persist forever but where will capital flow otherwise....? And in case you haven't noticed, neither Europe nor Asia has exactly been employing a tight monetary or fiscal policy in recent months...
Well, if the major reserve holders are busy going Keynesian to prevent their own economy from falling, they could sell off more of their existing treasury notes to fund it and/or hold off buying the extra 2-3 trillion that would float around in the market. Maybe there was a wink wink deal that was agreed upon at the G20 to facilitate such madness, but that would assume foreesight and extreme faith in gaming the system.
