The "bailout" vs. other debt
11-15-2008, 04:55 PM
#1
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Position: Burning the Agitprop of the Apparat
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The "bailout" vs. other debt
Staggering costs? Unfunded retiree benefits 50 times higher
News reports and congressional hearings focus on the eye-popping bill for government bailouts of failed financial houses on Wall Street and in Washington.
What's gotten far less attention is a price tag for tomorrow's taxpayers that's 50 times higher, to pay for promised benefits for retirees in the Medicare and Social Security programs.
No question, typical taxpayers think $700 billion is a staggering price to pay for the missteps and misjudgments of high-rolling financiers that prompted the nation's mortgage meltdown. Add tens of billions in related bailouts, including Fannie Mae and Freddie Mac, and taxpayers are being asked to fork over $840 billion -- almost a trillion dollars – to solve the credit crisis.
Who wouldn't want a small piece of that in tax relief?
"The long-term answer isn't more federal control, it's a return to free-market principles," Heritage Foundation President Ed Feulner wrote in his weekly column before the House voted Sept. 29 against the $700 billion deal struck by congressional leaders and the White House.
"Faced with a crisis of this scale," Heritage's Stuart Butler and Edwin Meese argued, "lawmakers need to consider steps that would be out of the question in more normal times. That is why Congress must structure a recovery plan that involves an extraordinary taxpayer commitment to stabilizing the situation and restoring confidence in the financial system."
There's been no shortage of questionable add-ons proposed for Uncle Sam's bailouts, and Congress has many steps still to take, as Heritage fiscal experts David C. John and J.D. Foster detailed in recent days. Even so, the estimated cost to taxpayers amounts to a fraction of the nation's unfunded retirement benefits under Social Security and Medicare.
"Imagine a taxpayer bailout even larger than what's proposed for Wall Street," Heritage senior budget analyst Brian Riedl writes in a new column. "Now imagine it reoccurring every single year in perpetuity. That's our fiscal future unless we fundamentally reform these unsustainable entitlement programs."
Unless Congress acts, paying all promised retiree benefits would require:
Doubling all tax rates.
Eliminating all other federal programs, including defense and education.
Running massive budget deficits that eventually would capsize the economy.
"Today we're grappling with a very real financial crisis," Riedl says. "While we cannot go back in time and fix it, we can start acting now to prevent the next, clearly visible crisis."
News reports and congressional hearings focus on the eye-popping bill for government bailouts of failed financial houses on Wall Street and in Washington.
What's gotten far less attention is a price tag for tomorrow's taxpayers that's 50 times higher, to pay for promised benefits for retirees in the Medicare and Social Security programs.
No question, typical taxpayers think $700 billion is a staggering price to pay for the missteps and misjudgments of high-rolling financiers that prompted the nation's mortgage meltdown. Add tens of billions in related bailouts, including Fannie Mae and Freddie Mac, and taxpayers are being asked to fork over $840 billion -- almost a trillion dollars – to solve the credit crisis.
Who wouldn't want a small piece of that in tax relief?
"The long-term answer isn't more federal control, it's a return to free-market principles," Heritage Foundation President Ed Feulner wrote in his weekly column before the House voted Sept. 29 against the $700 billion deal struck by congressional leaders and the White House.
"Faced with a crisis of this scale," Heritage's Stuart Butler and Edwin Meese argued, "lawmakers need to consider steps that would be out of the question in more normal times. That is why Congress must structure a recovery plan that involves an extraordinary taxpayer commitment to stabilizing the situation and restoring confidence in the financial system."
There's been no shortage of questionable add-ons proposed for Uncle Sam's bailouts, and Congress has many steps still to take, as Heritage fiscal experts David C. John and J.D. Foster detailed in recent days. Even so, the estimated cost to taxpayers amounts to a fraction of the nation's unfunded retirement benefits under Social Security and Medicare.
"Imagine a taxpayer bailout even larger than what's proposed for Wall Street," Heritage senior budget analyst Brian Riedl writes in a new column. "Now imagine it reoccurring every single year in perpetuity. That's our fiscal future unless we fundamentally reform these unsustainable entitlement programs."
Unless Congress acts, paying all promised retiree benefits would require:
Doubling all tax rates.
Eliminating all other federal programs, including defense and education.
Running massive budget deficits that eventually would capsize the economy.
"Today we're grappling with a very real financial crisis," Riedl says. "While we cannot go back in time and fix it, we can start acting now to prevent the next, clearly visible crisis."
11-15-2008, 05:38 PM
#2
Gets Weekends Off
Joined APC: Jun 2008
Position: USAF
Posts: 1,398
Perhaps they should re-name this forum "Doom and Gloom talk"
All of this speak will be interesting when push comes to shove... especially in the US-Chinese relationship. Maybe Mao was on to something when he said that the US was a "paper tiger"...
Insidious these entitlement programs are... but yet we all deserve them right? After all this is America?
entropy
All of this speak will be interesting when push comes to shove... especially in the US-Chinese relationship. Maybe Mao was on to something when he said that the US was a "paper tiger"...
Insidious these entitlement programs are... but yet we all deserve them right? After all this is America?
entropy
Last edited by ryan1234; 11-15-2008 at 05:47 PM.
11-15-2008, 06:39 PM
#3
With The Resistance
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Not really doom and gloom, just a trip to the alien planet called reality. In a very real sense this past year has been host to two elections. One of hollow political promise made by candidates who are the result of decades of poor fiscal policy. One of reality where people vote with their wallets. This country has been bankrupt for quite a while, unless every man woman and child in your household is holding 400,000 or so in cash.
There is no coincidence that there is a worldwide rejection of both political and corporate promises that have no basis in reality. There are easy solutions to this, but recovery isn't going to happen until people have a justifiable confidence in the economic future.
Government can't buy this, it is only achievable through sound economic action.
There is no coincidence that there is a worldwide rejection of both political and corporate promises that have no basis in reality. There are easy solutions to this, but recovery isn't going to happen until people have a justifiable confidence in the economic future.
Government can't buy this, it is only achievable through sound economic action.
11-15-2008, 07:12 PM
#4
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Joined APC: Oct 2008
Position: 17 S.E. of Kedzi
Posts: 71
The much-maligned bailout appears set to become law. Members of Congress suggest they'll hold their noses but vote for it anyway. Their reasoning? Something must be done.
The premise is that doing nothing will hasten recession. And recession is unacceptable.
But that kind of thinking is a big reason we're now on the verge of a financial meltdown. By taking a zero-tolerance policy toward recession, Washington has dangerously juiced the economy with monetary steroids for more than a decade.
The painful truth is that recession may be precisely what's needed to restore economic health. Yet the bailout attempts to avoid this crucial reckoning – which may make things worse.
It may seem odd that avoiding slowdowns could have side effects. Recessions, after all, cause real damage: job losses, higher levels of business failures, and falling tax receipts.
However, just as seemingly healthy measures, such as taking vitamins, can cause damage if done to excess, so did the Greenspan-era Federal Reserve take recession avoidance too far. It helped feed the excessive borrowing that is the root of our current crisis.
In the wake of the dot-com crash, the Fed went way beyond past fixes and lowered the funds rate to 1.25 percent for nearly eight months, then an extraordinary 1 percent for a full year.
At such low levels, consumers who save lose; they are better off spending or borrowing. And they did both. Private debt as a ratio to Gross Domestic Product skyrocketed some 50 percent in five years. Similarly, the savings rate plummeted to zero.
But the Fed was overly permissive even earlier. By 2001, the "Greenspan put," the idea that the Fed would be quick to cut rates to prevent a stock market decline, was part of the vernacular and investor conditioning.
This was a radical departure, since the Fed had never seen the stock market as part of its job description.
In the 1990s, the central bank recognized the benign effect of cheap imports on inflation but failed to adjust interest rates accordingly, leaving them too low. In fact, the increase in the private debt to GDP ratio steepened starting in 1996, and the savings rate has been falling since 1992. Greenspan was famously obsessed with data, so his ignorance of the implications of these trends is incomprehensible. It is tantamount to keeping an athlete on steroids even when he is showing clear signs of distress.
To be sure, this easy money policy isn't the only culprit in today's crisis. Lax regulation failed to keep tabs on Wall Street's excessive risk-taking and byzantine financial products.
But even as they work fervently to beef up regulations, policymakers today are repeating the Greenspan error of trying to avoid recession no matter what. The ugly fact is that there is no painless way out of our financial mess.
John McCain and Barack Obama weren't willing to admit this in Friday night's debate. Mervyn King, the head of the Bank of England, has been more forthright, telling the British that their standard of living will fall. No US policymaker has been so candid. And Washington appears determined to minimize the immediate damage of Wall Street settling its debt, no matter the long-term cost.
The bailout bill is a classic example of expediency over effectiveness. It will purchase dud assets at above-market prices. It does serve to recapitalize banks, but it rewards the worst offenders and does nothing to restore trust. Even though Japan is the poster child of how not to manage a banking system crisis, this is a page straight out of its playbook.
By contrast, the most successful approach is to let asset prices fall to discover the extent of the damage, take over failed banks, recapitalize them, and later sell them back to investors. That's according to a new International Monetary Fund report that examined 124 banking crises in the past 27 years.
This approach is harder on the economy in the short term, usually leading to a two- to-three-year deep recession, but with a strong growth rebound after that. Too bad the US doesn't do recessions; the idea of a painful purge is deemed to be beyond the pale. And getting religion later doesn't work: the Japanese later recanted, forced banks to write down bad loans, and injected public funds, but today, 18 years after the country's asset bubble started popping, they remain stuck in a deflationary trap.
American attachment to instant gratification is strong. So is the pressure to pass the bailout. But left unchecked by self-restraint and honest reckoning, both forces may lead America to repeat, on a grander scale, the same sort of error that got us in this financial mess in the first place.
The premise is that doing nothing will hasten recession. And recession is unacceptable.
But that kind of thinking is a big reason we're now on the verge of a financial meltdown. By taking a zero-tolerance policy toward recession, Washington has dangerously juiced the economy with monetary steroids for more than a decade.
The painful truth is that recession may be precisely what's needed to restore economic health. Yet the bailout attempts to avoid this crucial reckoning – which may make things worse.
It may seem odd that avoiding slowdowns could have side effects. Recessions, after all, cause real damage: job losses, higher levels of business failures, and falling tax receipts.
However, just as seemingly healthy measures, such as taking vitamins, can cause damage if done to excess, so did the Greenspan-era Federal Reserve take recession avoidance too far. It helped feed the excessive borrowing that is the root of our current crisis.
In the wake of the dot-com crash, the Fed went way beyond past fixes and lowered the funds rate to 1.25 percent for nearly eight months, then an extraordinary 1 percent for a full year.
At such low levels, consumers who save lose; they are better off spending or borrowing. And they did both. Private debt as a ratio to Gross Domestic Product skyrocketed some 50 percent in five years. Similarly, the savings rate plummeted to zero.
But the Fed was overly permissive even earlier. By 2001, the "Greenspan put," the idea that the Fed would be quick to cut rates to prevent a stock market decline, was part of the vernacular and investor conditioning.
This was a radical departure, since the Fed had never seen the stock market as part of its job description.
In the 1990s, the central bank recognized the benign effect of cheap imports on inflation but failed to adjust interest rates accordingly, leaving them too low. In fact, the increase in the private debt to GDP ratio steepened starting in 1996, and the savings rate has been falling since 1992. Greenspan was famously obsessed with data, so his ignorance of the implications of these trends is incomprehensible. It is tantamount to keeping an athlete on steroids even when he is showing clear signs of distress.
To be sure, this easy money policy isn't the only culprit in today's crisis. Lax regulation failed to keep tabs on Wall Street's excessive risk-taking and byzantine financial products.
But even as they work fervently to beef up regulations, policymakers today are repeating the Greenspan error of trying to avoid recession no matter what. The ugly fact is that there is no painless way out of our financial mess.
John McCain and Barack Obama weren't willing to admit this in Friday night's debate. Mervyn King, the head of the Bank of England, has been more forthright, telling the British that their standard of living will fall. No US policymaker has been so candid. And Washington appears determined to minimize the immediate damage of Wall Street settling its debt, no matter the long-term cost.
The bailout bill is a classic example of expediency over effectiveness. It will purchase dud assets at above-market prices. It does serve to recapitalize banks, but it rewards the worst offenders and does nothing to restore trust. Even though Japan is the poster child of how not to manage a banking system crisis, this is a page straight out of its playbook.
By contrast, the most successful approach is to let asset prices fall to discover the extent of the damage, take over failed banks, recapitalize them, and later sell them back to investors. That's according to a new International Monetary Fund report that examined 124 banking crises in the past 27 years.
This approach is harder on the economy in the short term, usually leading to a two- to-three-year deep recession, but with a strong growth rebound after that. Too bad the US doesn't do recessions; the idea of a painful purge is deemed to be beyond the pale. And getting religion later doesn't work: the Japanese later recanted, forced banks to write down bad loans, and injected public funds, but today, 18 years after the country's asset bubble started popping, they remain stuck in a deflationary trap.
American attachment to instant gratification is strong. So is the pressure to pass the bailout. But left unchecked by self-restraint and honest reckoning, both forces may lead America to repeat, on a grander scale, the same sort of error that got us in this financial mess in the first place.
11-15-2008, 07:44 PM
#5
Gets Weekends Off
Joined APC: Jun 2008
Position: USAF
Posts: 1,398
Originally Posted by jungle
Not really doom and gloom, just a trip to the alien planet called reality. In a very real sense this past year has been host to two elections. One of hollow political promise made by candidates who are the result of decades of poor fiscal policy. One of reality where people vote with their wallets. This country has been bankrupt for quite a while, unless every man woman and child in your household is holding 400,000 or so in cash.
There is no coincidence that there is a worldwide rejection of both political and corporate promises that have no basis in reality. There are easy solutions to this, but recovery isn't going to happen until people have a justifiable confidence in the economic future.
Government can't buy this, it is only achievable through sound economic action.
There is no coincidence that there is a worldwide rejection of both political and corporate promises that have no basis in reality. There are easy solutions to this, but recovery isn't going to happen until people have a justifiable confidence in the economic future.
Government can't buy this, it is only achievable through sound economic action.
11-15-2008, 09:22 PM
#6
With The Resistance
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Joined APC: Jan 2006
Position: Burning the Agitprop of the Apparat
Posts: 6,191
BTDT, if you wrote that you have an excellent understanding of the real problems that need to be dealt with. A+
Despite the doom that many see, I see hope for a realistic solution based on cold, hard economic fact and rejection of hope, emotion and wishing as a basis for a cure.
Understanding people will continue to flee for the exits until the correct policy is implemented. Once you are clear of a burning building, one can watch the carnage at leisure.
Despite the doom that many see, I see hope for a realistic solution based on cold, hard economic fact and rejection of hope, emotion and wishing as a basis for a cure.
Understanding people will continue to flee for the exits until the correct policy is implemented. Once you are clear of a burning building, one can watch the carnage at leisure.
11-16-2008, 04:16 AM
#7
Line Holder
Joined APC: Oct 2008
Position: 17 S.E. of Kedzi
Posts: 71
I can't take credit for writing that. I agree with it so did a copy and paste.
That was written by this person:
• Yves Smith has worked in the financial services industry since 1980. She blogs at nakedcapitalism.com.
That was written by this person:
• Yves Smith has worked in the financial services industry since 1980. She blogs at nakedcapitalism.com.
11-18-2008, 10:41 AM
#9
Gets Weekends Off
Joined APC: Dec 2005
Position: Southwest FO
Posts: 140
Originally Posted by jungle
BTDT, if you wrote that you have an excellent understanding of the real problems that need to be dealt with. A+
Despite the doom that many see, I see hope for a realistic solution based on cold, hard economic fact and rejection of hope, emotion and wishing as a basis for a cure.
Understanding people will continue to flee for the exits until the correct policy is implemented. Once you are clear of a burning building, one can watch the carnage at leisure.
Despite the doom that many see, I see hope for a realistic solution based on cold, hard economic fact and rejection of hope, emotion and wishing as a basis for a cure.
Understanding people will continue to flee for the exits until the correct policy is implemented. Once you are clear of a burning building, one can watch the carnage at leisure.
Stetson20
11-18-2008, 11:02 AM
#10
With The Resistance
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Joined APC: Jan 2006
Position: Burning the Agitprop of the Apparat
Posts: 6,191
Originally Posted by Stetson20
Jungle- so are you clear of the burning building? If so, mind sharing how?
Stetson20
Stetson20
Not at all. Like others here who saw the train coming down the track and stepped aside, I went to cash some months before the current disaster. I am not a goldbug, so I don't think going that far was a needed step. Look for support as the DOW INDU hovers around 8,000. It is going sideways for a while after that until a few things get worked out.
Interesting times.
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