Neoliberal free-market policies failing again.  Under Reagan it was the S&L debacle, then it was the dot com and teach stock bubble and now the housing market collapse.  Solution, raise the debt, drop and sell more T-bills, which is done through dropping the value of the U.S. dollar. 

Hale “Bonddad” Sterwart in the Huffington Post at http://www.huffingtonpost.com/hale-stewart/lets-add-more-debt-to-the_b_114692.html

Posted 7/24/08

Let’s Add More Debt to the National Total

From a story talking about the housing bill in the Wall Street Journal on the mortgage bill Congress is passing “As a result of the bill, Congress will raise the national debt ceiling to $10.6 trillion from $9.8 trillion.”  (See bottom of page for article). (In addition there is household which during the Bush reign has risen from $7.6 to $13.9 trillion, an increase of 82%.)

Let's just add more debt to the total, shall we? After all, we don't have enough debt. And we certainly wouldn't want to do anything that remotely resembles fiscal responsibility. That might send the wrong message to the markets about the US government's intentions.

Let's review. First, here is the yearly total of total US government debt outstanding at the end of each federal fiscal year.

09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

Why are these figures important? Because they indicate there is a systemic problem with the US government's budgeting system. Since the end of fiscal year 2002, the federal government has added at least $500 billion dollars of net new debt per year every year. That indicates the budget has never even come close to being balanced over the last 7 years -- despite rampant claims to the contrary. "But Bonddad -- the national press says the budget deficit is small!" Right -- that's why we're borrowing all that money -- because we're balancing the books of the federal government. Anyone who is reporting the federal government's books are balanced should resign from the financial press right now because they have no idea what they are talking about.  All this debt has resulted in $550 billion in write downs (see http://www.huffingtonpost.com/hale-stewart/from-one-disaster-to-anot_b_126442.html, Hale Stewart, 9/15/8).

But there are three deeper and far more important reasons why this continual raising of the debt ceiling is so incredibly dangerous.

The first is psychological. At the national level the federal government has continued to abdicate fiscal responsibility. The US went to war and didn't raise taxes to pay for it. The US increased domestic spending and didn't increase taxes to pay for it. Instead, we acted as though the debt didn't matter and that tax cuts pay for themselves. As a result we are left with an ever-increasing mountain of debt which we continue to kick down to road. {One kick is that the second biggest item—excluding SS which pays for itself in a separate tax—is the interest the U.S. pays on the debt—jk.} By not making tough choices now we make it easier to not make tough choices tomorrow.

The second reason is far more practical. As the debt load of the US has increased, the value of the dollar has dropped. Although the US economy was in an expansion* from November 2001, the value of the dollar continually dropped. Why?** An expanding economy should attract investment which in turn bids up its currency. Yet the dollar dropped. Some of the reason for this is interest rate policy which is an important determinant in currency valuation. However, the US -- which is the world's largest economy -- was seeing the value of its currency continue to decline. This has lead to inflationary pressures because commodities are priced in dollars. A drop in the value of the currency a good is priced in amounts to a de facto price increase in the good. In other words, one of the primary reasons for the spike in oil prices is the dollar's long-term drop in value. And we can thank fiscal irresponsibility as a primary reason for that.

The third reason why this development is important is it continues to push the national economic foundation closer to the edge. At some point all of this debt may cause very serious problems. Suppose that US creditors (bondholders) looked at the US' books and said, "I don't think you're going to be able to repay this loan I'm making to you. I need a higher interest rate as compensation for the risk I'm taking by lending you money." At that point, US interest rates increase. Imagine if that happened right now when the economy is at the beginning of a recession***. In other words, we're creating a situation that is rife with possible future problems. And some of these problems are serious -- as in they could lead to the financial system freezing from a random world event.

"But Bonddad. We've been doing business like this for almost 30 years and nothing bad has happened! It must be OK to do things things this way." Fine. Try smoking a pack a day for 30 years. You may not get cancer. But your chances of contracting it are a whole lot higher. That's why doctors will always advise you to quit.

Comments by JK

*  *  T-bills are sold to repay those that mature.  The way to make them attractive to foreign markets is either to make the U.S. dollar cheaper (over 40 percent in 4 years against the Euro), or to have them pay a higher return through raising the percentage of dividends.  But since bank loans, floating mortgages, etc. are tied to the T-bill rate this would effect negatively all sectors of the economy, thus the falling dollar.

**  The economy hasn’t been expanding because the figures based upon this expansion do not account for the declining value of the dollar.  Since the 1980’s various price inflations have been dropped from the calculation of inflation (including food, energy and consumer goods).  Increases in manufacture goods prices is skipped (the logic is that they last longer).  Adjust for the true value of the dollar, and our economy has been contracting.    

*** We are in a recession: more flaky account.  Adjust these figures for the actual rate of inflation. 

By lying about the rate of inflation our government saves billions of dollars.  For example the increase in social security payments is tied to the rate of inflation, as is government employee salaries.  Most large corporations, and those with unions, give pay raises based on the rate of inflation.  In the last two years the real rate of inflation (how much it costs to do everything you normally do) has gone up over 10% each year--jk. 

The Feds must shore up the banks, if they fold they will suck we will be in another great depression.  Don’t assume that our Neoliberal Republicans and the fellow-travelers Democrats are doing this to save your home from foreclosure.  It is about saving their banking supporters.

Wall Street Journal page 1 store also at http://online.wsj.com/article/SB121681776929477089.html?mod=hps_us_whats_news

Housing Bill Will Extend
Federal Role In Markets

By DAMIAN PALETTA and JAMES R. HAGERTY
July 24, 2008; Page A1

WASHINGTON -- A sprawling bill that reaches deep into the U.S. housing industry is close to becoming law, in what will likely stand as the federal government's most expansive effort to stabilize the mortgage and financial markets.

The bill, which began seven months ago as a modest attempt to help struggling homeowners, will now likely touch a vast array of borrowers, lenders, and investors: from owners in Colorado facing foreclosure to community banks in California and investment banks on Wall Street.

The package could also come at a significant cost to the U.S. government, which would be authorized to invest billions of dollars in troubled mortgage giants Fannie Mae and Freddie Mac, as well as insure up to $300 billion in refinanced mortgages. As a result of the bill, Congress will raise the national debt ceiling to $10.6 trillion from $9.8 trillion. It will also give Fannie Mae and Freddie Mac a new, tougher regulator.

                        …………………………..                                        

The legislative effort began in earnest after the Christmas recess with a measure to help roughly 500,000 homeowners avoid foreclosure. Since then, several of the country's most influential financial institutions, including Bear Stearns Cos., Countrywide Financial Corp. and IndyMac Bancorp, either collapsed or were sold at fire-sale prices.

Lawmakers and the Bush administration cobbled together a legislative response that became more ambitious at each turn, culminating with the rescue plan for the twin mortgage giants. The bill temporarily increases the Treasury Department's potential line of the credit to Fannie Mae and Freddie Mac from $2.25 billion to an unlimited amount. It would allow the government to bulk up regulation of Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks -- something critics of those institutions have been pushing for more than a decade.

                                    ………………………………

Fannie, Freddie and the FHA accounted for about 90% of U.S. home mortgages originated in the second quarter, the highest level in at least 50 years and up from 49% a year earlier, according to Inside Mortgage Finance, a trade publication. Fannie and Freddie buy home loans from lenders, turn those loans into mortgage-backed securities and sell the bulk of the securities to other investors. The FHA insures lenders and loan investors against losses on defaults. 

The legislation provides a federal backstop for the two companies, a move prompted by broad worries that both might falter, a scenario that would cripple the housing market and envelop other financial institutions. Buyers of bonds issued by Fannie and Freddie range from small community banks to foreign central banks.

The biggest boost for homeowners is a program that would allow the FHA to back the refinancing of as much as $300 billion in home loans for distressed borrowers. Under this plan, the lender or investor holding the mortgage would have to accept at least a 15% write-down in the value of the previous loan. The new mortgage would then receive federal backing.

Mark Zandi, chief economist at Moody's Economy.com, said the legislation doesn't provide any miracle cure for the housing market, but a defeat "would have been catastrophic." He still expects the average nationwide house price to fall another 10% or so between now and next April or May. Then he expects prices to bottom out and begin a gradual recovery. He expects that about 1.25 million American households will lose their homes to defaults in both 2008 and 2009.

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