Government Deficits and Private Growth
Future living standards will take a hit as federal borrowing balloons and bank lending to business shrinks.
By GEORGE MELLOAN
For anyone who wondered if last winter's federal seizure of the financial services industry would have adverse economic consequences, an answer is now available. The credit market has been tilted to favor a single borrower with a huge appe e for money, Washington. Private borrowers, particularly small businesses, have been sent to the end of the queue.
The Federal Reserve, which supervises some 7,000 banks, has been telling bankers that they must cut risk. The most spectacular step in that effort was the Fed announcement last month that it will evaluate the salaries of bank officers on how carefully they manage risk.By official definition, Treasury securities are risk-free, so how better to manage risk than to pad your bank's portfolio with Treasury securities, which is what bankers are doing. Under the new management from Washington, bankers who take a flyer on a venture that might some day become an Apple, Microsoft or Google will risk not only their depositors' money but a possible pay cut. Banking has been captured by the nanny state, which means that its potential for contributing to economic growth and job creation has been sharply curtailed, even as its potential contribution to government growth has been expanded.
The federally dictated risk-aversion was underway even before the Fed began monitoring banker paychecks. According to the Fed's September flow of funds report, commercial banks were net buyers of Treasury securities to the tune of $25 billion on an annualized basis in the second quarter. They were net buyers of federal agency paper—think Fannie Mae and Freddie Mac—at an annualized rate of a whopping $185 billion, contributing mightily to federal efforts to keep these miscreants afloat. Meanwhile, private lending, which once was the mainstay of banking, was shrinking at a $392 billion annual rate.
Economist David Malpass detailed the squeeze on lending to small business in a recent post on his Encima Global blog. He noted that a member survey by the National Federation of Independent Businesses in May found that 16% of respondents were reporting loans hard to get, the worst reading since the 1980-82 recession. The Federation's October report showed only a small improvement. Mr. Malpass predicted further tightness through the third and fourth quarters.
Washington hasn't been able to milk the taxpayers sufficiently to finance its massive deficit. The Chinese are getting skittish as well. So tapping bank deposits is yet another avenue to a big pot of cash. As for the bankers, they've been awarded an easy life. Thanks to the Fed's zero interest-rate policy, they can make a decent profit on "safe" Treasury and agency securities yielding 3% or more. The too-big-to-fail banks like Citi and Bank of America can draw on their big shareholder, the U.S. Treasury, if their capital needs further supplements. Bankers don't have to worry about making risk judgments because they've been ordered to not take risks. So maybe the Fed is justified in cutting their salaries, since whatever banking skills they had—meaning the ability to assess risk—are no longer needed or wanted. An office boy could buy government bonds.
There is a plentiful supply. The reported federal deficit for the fiscal year ended Sept. 30 was $1.4 trillion. That is a whale of a deficit in itself, but the primitive cash-flow accounting from which it is derived understates the real red ink. As former Treasury official Peter Wallison says, it's the way a mom and pop grocery does accounting: cash in versus cash out. It would not pass muster under the accounting rules corporations are required by the Securities and Exchange Commission to follow, in that it takes no account of such huge contingent liabilities like Medicare and the Enron-style off-budget agencies.
A number more relevant to what the government is actually demanding from the capital markets is the Treasury's financing requirement. At a recent Chartered Financial Analyst Ins ute conference, Treasury official Karthik Ramanathan proudly described the prodigious fund-raising task he and his colleagues pulled off in the fiscal year, what one might call a borrowing feat unparalleled in human history: "In the course of 291 auctions in 251 business days, Treasury issued nearly $7 trillion in gross Treasury marketable securities to raise approximately $1.7 trillion to finance the government."
But the Treasury Borrowing Advisory Committee on Long-term Finance was less than thrilled. In its August report to Secretary Timothy Geithner, the committee said: "This year's double-digit-as-a-percent-of-GDP budget shortfall [the federal deficit] is unsustainable. Moreover, there is little support for a marked shrinking in the deficit in the year ahead, as revenue trends likely will remain sluggish amid high unemployment and lingering capital losses and public spending will remain elevated as a share of the economy. Various policy efforts under discussion by the Administration and Congress also probably would add to the deficit and public debt on a net basis."
Needless to say, the Obama administration and Congress aren't heeding such warnings. More big spending programs on health care and green energy are getting teed up.
Fed Chairman Ben Bernanke said at a Richmond Fed market symposium last April that the Fed was attempting to "avoid both credit risk and credit allocation in our lending and securities purchase programs." The "attempt" has hardly been obvious and clearly is not succeeding, particularly with regard to credit allocation. Aside from the not-so-subtle efforts to enlist the banks in a government bond drive, there are the direct allocations of credit that have been practiced by the Fed and Treasury since the banking crisis a year ago. Infusions to Citigroup, Bank of America, JP Morgan Chase for the takeover of Bear Stearns, Fannie, Freddie, AIG, GM, Chrysler, the commercial paper industry, money market funds, etc., have clearly been credit allocation, big time.
James Hamilton of the University of California at San Diego wrote in his "econbrowser" blog on March 29 that, "the new Fed balance sheet represents a fundamental transformation of the role of the central bank." He noted that for many years the Fed had pumped money into the economy with no attempt to direct which borrowers would receive credit. The whole idea behind the Fed's open market operations is to make the process of creating new money completely separate from the decision of who receives any fiscal transfers.
"In a traditional open market operation," Mr. Hamilton writes, "the Fed buys or sells an existing Treasury obligation for the same price anyone else would pay for the security. As a result, the operation itself does not involve any net transfer of wealth between the Fed and the private sector. The philosophy is that the Fed should base its decisions on economy-wide conditions, and leave it entirely up to the market or fiscal authorities to determine where those funds get allocated.
"The philosophy behind the pullulating new Fed facilities is precisely the opposite of that traditional concept. The whole purpose of these facilities is to redirect capital to specific perceived priorities."
Yes, things have changed in a year. Feeding the government and starving free enterprise looks like a prescription for long-term economic stagnation. It's not unlike what we witnessed in the depression of the 1930s.
Mr. Melloan, a former columnist and deputy editor of the Journal editorial page, is author of "The Great Money Binge: Spending Our Way to Socialism," published last week by Simon & Schuster.
http://online.wsj.com/article/SB1000...712388988.html
Last edited by spursncowboys; 11-24-2009 at 09:47 PM.
Does that not follow after the last however many decades of federal subsidization of the financial services industry? It's interesting how that isn't considered some variant of socialization.For anyone who wondered if last winter's federal seizure of the financial services industry
$703,130,593,027 spent on a bull war in Iraq is no problem, I suppose, but now deficits are a big issue because changing the way medical care is delivered may benefit the economic serfs of this country. Of course, a major cause of these big deficits was pulling the economic elite's chestnuts out the fire that their greed and avarice created (while American citizens whose taxes were committed for the rescue were having their homes repossessed by those same corporations). Now they want to fight the oversight that would prevent that from happening again. WSJ is just as credible as the Worker's Daily (if there is such a rag) when it comes to reporting economic news; it is all just spin to support the propaganda needs of the economic elite.
Last edited by byrontx; 11-25-2009 at 12:47 AM. Reason: added to it
On the contrary, disrupting the previous scheme of subsidization is regarded as tampering with the "free market". Such tunnel vision would be laughable if the myth it sustains weren't so pernicious.
I have a problem with it. We're paying too much for too little, and the vital US interest served is hard to detect.
WTF did we, the USA, get for this extravagant expenditure of blood and treasure?
Socialism for the megabanks and bank receivers is pragmatic and sensible; but for ordinary Americans? That's communism!
There's a political element in the etiology, too. Decades of countercyclical monetary policy drove the trend toward securitization and leveraged risk, and away from prudence and thrift (i.e., the traditional cradle of capital.)
This overstates the efficacy of regulatory oversight IMO, but you do have a point here. The WSJ knows which side of the bread is buttered.
For this, IMO, we owe the WSJ a debt of gra ude.
I consider it a courtesy and a public service that the WSJ touts the desiderata of our economic elite so frankly and unashamedly.
Last edited by Winehole23; 11-25-2009 at 01:41 AM.
Yes, Iraq was/is/will continue to be a waste. But it's too late. That money is gone. All we can control is what happens from here forward and the fact of the matter is that the deficits really are killling us. If we continue to spend $2 for every $1 we make we're going to end up broke, irregardless of what we chose to spend that money on.
Does anyone know how bad our debt is in historical terms right now -- say, in comparison with WWII -- expressed as a ratio to GDP?
I don't (and will be looking it up shortly).
I'd like to know, too -- but I have to say that the political situation is so different now than it was in 1935-45 that making comparisons would be at least difficult, if not impossible. Just consider the Marshall Plan, which established the basis for the modern European economy... it has to change the play-board, doesn't it?
Annual deficits as a percentage of annual GDP:
http://www.usgovernmentspending.com/...cit_chart.html
Total debt as a percentage of annual GDP:
http://www.usgovernmentspending.com/...ebt_chart.html
We're not yet at WW2 levels for either, but there's a very noticeable accelerating trend.
Interesting to note that despite running deficits in the mid-high 20%'s during WW2 we were running a surplus by 1947.
Amazing what a little atomic whiz-bang thingamajigger will do for an economy, innit?
Yeah it sure worked out nicely for us when we got together with europe and japan and blew up all their industry leaving the United States as the only industrialized nation on earth. Unfortunately I don't think that's an option we have at this particular moment in history though.
So then, the banner is hyperbole, but the problem is serious enough, historically speaking. All the more so, since barring some miraculous technical leap forward, an era of slow growth and high unemployment awaits us at the recession's end.
I wouldn't call it hyperbole. We need to keep in mind that coming out of ww2 we didn't have these two other monstrosaties known as social security and medicare looming on the horizon. Within the next 10 years medicare will be insolvent and social security will start having to cash in their treasury notes to maintain payments. Only problem is that the treasury doesn't have the cash, so they're going to have to borrow more money from china to pay back the money they borrowed from social security. That's going to make it increasingly difficult to cut deficits.
I know I'll get booed, but why not raise taxes? I like Medicare -- it's taken great care of my father and I think it's at least as valuable as what I pay each year -- and I'm not convinced SS is a bad idea as much as an ill-executed one.
Besides, taxes beat debt, don't they?
The tax increases are coming. As are the benefit cuts. It's unavoidable.
I don't doubt you CG, but for my own edification, who's your source on this?
Also: Couldn't a "legal pathway to citizenship" for undo ented immigrants who are here already, conditional upon paying taxes among other things, be a temporizing move? 12-20 million new taxpayers could have the effect of kicking the can down the road a spell. Not that this is necessarily desirable. Just doable. I hear that immigration reform is on the sked for next year....
The "lockbox" kinda made sense, didn't it?
In light of the bull bill we're getting handed, I can only agree. It honestly amazes me the left-wing media is seemingly so proud of the turds both houses have laid on our doorstep -- as if calling the bill what it is will make them look bad, when it hangs exclusively on the useless swine who wrote/voted for it. They're dying to NOT make it Obama's Waterloo, but in doing so, they're... creating Obama's waterloo.
It's in the social security administration trustees report.
http://www.ssa.gov/OACT/TRSUM/index.html
Social Security's annual surpluses of tax income over expenditures are expected to fall sharply this year and to stay about constant in 2010 because of the economic recession, and to rise only briefly before declining and turning to cash flow deficits beginning in 2016 that grow as the baby boom generation retires. The deficits will be made up by redeeming trust fund assets until reserves are exhausted in 2037..........
(CG: the trust fund's assets being the treasury notes they hold)
Medicare's financial status is much worse. As was true in 2008, Medicare's Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017,........
It sounds plausible, but it still looks like just a bandaid fix to me.Also: Couldn't a "legal pathway to citizenship" for undo ented immigrants who are here already, conditional upon paying taxes among other things, be a temporizing move? 12-20 million new taxpayers could have the effect of kicking the can down the road a spell. Not that this is necessarily desirable. Just doable. I hear that immigration reform is on the sked for next year....
Yep.The "lockbox" kinda made sense, didn't it?
If our goal was to get rid of Saddam and his WMD, we should have done it and left. Gone in full force and got out. Now it seems, from both sides of the isle, nation building is the safe method (no one has ever proven it is successful) and that is why we are there. Although I think there would have been a vacuum, there is an argument that we are fixing that or atleast fixing it the right way.
If we agree with the simplist idea of the Fed, supplying liqudity to banks as a last resort, then you cannot just quickly write them off as helping out other rich. I wish the Fed was gone but atleast acknowledge that good they have done, 87 and after 9-11 for instance.Socialism for the megabanks and bank receivers is pragmatic and sensible; but for ordinary Americans? That's communism!
Reading the editorial page of the WSJ from the 70's to now, I think you could conclude that they are against all oversight, or most atleast. I think they realistically include the "oversight" that is already enacted since rarely is new government regulation ever removed.This overstates the efficacy of regulatory oversight IMO, but you do have a point here. The WSJ knows which side of the bread is buttered.
Can you see the dissonance in the bolded?
safe as in politically. To show that these politicians who vote themselves raises, care about the people in differrent countries, like they do with americans when giving welfare.
Gotcha. Rather than acknowledging the futility of our strategy and cutting our losses, the war effort is instead prolonged contrary to prudence, reality and the national interest. Nobody wants the loser placard hung around their neck, so they'll all do what's wrong for the country, on purpose. I agree.
A democratically elected, capitalist government in the Middle east is in america's national interest. Like Japan and S. Korea was for us in Asia. Or West Berlin for the iron curtain. Reality, the country of Iraq is running better than it ever did with Saddam. The Democrats in 06 were willing to have the loser ribbon. Every dem running for election was willing, and felt it politically safe to pull out of Iraq as losers.
Whether a governmental system can be installed or not remains a question. In Germany, S. Korea, and Japan, all countries were explicitly controlled by the US. Beyond that, we were overseeing the governance of a fairly geneous body politic. In Iraq, we can claim neither advantage. We are imposing democracy on them, but they are too fractured to give themselves a government that satisfies them all. Even people with every ambition of crowning themselves winners over Iraq are destined to be losers.
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