[ExI] The bailout

BillK pharos at gmail.com
Tue Sep 30 09:54:56 UTC 2008

On Mon, Sep 29, 2008 at 9:38 PM, John K Clark wrote:
> I see that the House has rejected the 700 billion bailout of Wall
> Street. But clearly something must be done and done damn quick to
> outmaneuver disaster, and this is no time to be paralyzed by dogma even if
> that dogma happens to be true. I was wondering about an alternative idea
> that I've had, a massive 700 billion tax cut with 90% aimed at the middle
> class. Realistically you've got to let corporations have at least 10% if you
> actually expect the idea to get passed by the congress. I'd be interested to
> know if any of you economic wonks think that
> idea would pass the mustard. It may not, it may be too slow,
> I'm just asking.

Too little, too late.

A new book "The End of the American Century"
(Rowman & Littlefield Publishers, Inc., $34.95, release date Oct. 1)
by Butler University Political Science Professor David Mason.

Quote from an interview:
The United States is at the end of the period of global leadership and
domination that we've enjoyed for the last 50 years or so. The country
is bankrupt economically. We've lost our edge in terms of politics,
economics, socially. We no longer compare well with other countries
around the world, and we're not admired as we once were by countries
around the world. And we're not viewed as a model for economic and
political development, as we once were. So this really marks a global
shift in world history, both for the United States and the rest of the

The author has a blog here, with lots of additional comments.

The root of the problem is this: the U.S. has been living on borrowed
money for an entire generation; this debt has been serviced internally
by a mushrooming but shaky financial services sector, and externally
by foreign governments (especially the Chinese); and now both of these
sources are evaporating. Whether or not the bailout package is
approved, the U.S. economy and American consumers are going to take a
bit hit.

First--the borrowed money. Both government and consumers have been
spending beyond their means, almost continuously, for two decades. The
federal government has had huge budget deficits every year since 1980,
except for a few years during the Clinton presidency. The deficits
have built the federal debt up to some $10 trillion, accounting for
two-thirds of GDP, compared to only one-third in the 1970s. Next
year's budget deficit will add almost $500 billion to that debt. The
bailout package will probably add another trillion dollars. Just the
interest on the federal debt is one of the largest items in the
federal budget, draining over $400 billion annually.

Government profligacy is matched by consumers: the household savings
rate in the U.S. has been declining for two decades, is the lowest
among all developed countries, and in 2005 fell below zero for the
first time ever. Credit card and mortgage debt are both at record
levels, as are bankruptcies and mortgage foreclosures. Most Americans,
even those near retirement age, have almost no retirement savings. The
Social Security and Medicare "trust funds" are actually unfunded, to
the tune of some $41 trillion. The government is unlikely to find
resources to meet these liabilities, which will put further strains on

Consumer spending now accounts for two-thirds of all economic activity
in the U.S. This growth in spending has been possible only by
borrowing. The consumer spending and borrowing binge has been fueled
by the growth of the financial services industry, which has
increasingly replaced manufacturing as the mainstay of the U.S.
economy. Banks, mortgage companies, loan agencies and credit card
companies make their money by making loans, and they are constantly
seeking new customers and encouraging existing ones to borrow more. It
is this symbiotic relationship between binging consumers and profit
seeking financial companies that has created the piles of consumer
debt and subprime mortgages.

All of this is starting to unravel now. People borrowed more than they
could afford; the mortgage crisis undercut their ability to repay
loans and mortgages; the banks and loan agencies faced mounting
defaults and declining profits and stock prices. Banks are
increasingly unable or unwilling to extend loans to businesses or
individuals, which will crimp both consumer spending and economic
growth, accelerating the economic downturn.

The U.S. government is not really in a position to rescue bankrupt
companies, because it is itself bankrupt. And just as the financial
industry has been an enabler of consumer deficit spending, foreign
governments have enabled the U.S. government to spend more than it
brings in, by buying up U.S. debt. Over half of U.S. debt is now owned
by foreigners—compared to just 5 percent that was owned by foreigners
twenty years ago. The biggest outside holder of U.S. debt is the
government of China. Holding such debt only makes sense if you are
sure you can redeem the funds when you need to. As you can imagine,
foreign governments and banks are increasingly worried about this, and
have already started shifting such investments to other countries, and
other currencies, especially the euro. This is one of the reasons for
the sharp drop in the value of the dollar, to record low levels
against the euro and other currencies.

So this $700 billion bailout, as large as it is, will only scratch the
surface of these multiple dimensions of debt and economic weakness. We
cannot continue to grow, based on borrowing against the future. The
domestic financial pot is empty, and our foreign enablers are wising
up. The economy will contract, our standard of living will decline,
and more people will join the ranks of the poor and unemployed. This
sucker could go down. The U.S. is in for tough times.


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