The U.S. must start to prepare for challenges posed by an aging population with a credible plan to gradually reduce a soaring public debt, Federal Reserve Chairman Ben Bernanke said Wednesday.
Health spending is set to increase over the long term as the U.S. population grows older, posing challenges to the country’s already strained finances, the Fed chief warned.
The United States should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker said on Tuesday.
This is the right decision. The FCC was clearly going beyond its mandate, as it has no mandate to regulate the internet in this manner. In fact, what amazed us throughout this whole discussion was that it was the same groups that insisted the FCC had no mandate over the broadcast flag, that suddenly insisted it did have a mandate over net neutrality. You can’t have it both ways (nor should you want to). Even if you believe net neutrality is important, allowing the FCC to overstep its defined boundaries is not the best way to deal with it.
With ferocious speed, the financial crisis, recession and efforts to combat the recession have swung the U.S. debt from worrisome to ruinous, promising to handcuff the administration. Lost amid last month’s passage of the new health care law, the Congressional Budget Office issued a report showing that within this decade, President Obama’s own budget sends the U.S. government to a potential tipping point where the debt reaches 90 percent of gross domestic product.
Economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University have recently shown that a 90 percent debt-to-GDP ratio usually touches off a crisis.
This year, the debt will reach 63 percent of GDP, a ratio that has ignited crises in smaller wealthy nations. Fiscal crises gripped Canada, Denmark, Sweden, Finland and Ireland when their debts were below where the United States is shortly headed.
By December 2005, subprime mortgages that had been issued just six months earlier were already showing atypically high delinquency rates. (It’s worth noting that even though most of these mortgages had a low two-year teaser rate, the borrowers still had early difficulty making payments.)
The market for subprime mortgages and the derivatives thereof would not begin its spectacular collapse until roughly two years after Mr. Greenspan’s speech. But the signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.
Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool ”” the epic and unfair taxpayer-financed bailouts. Now, in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children’s children will suffer terrible financial consequences.
It did not have to be this way. And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis. Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat. If the mistakes were properly outlined, that might both inform Congress’s efforts to improve financial regulation and help keep future Fed chairmen from making the same errors again.
It’s been a banner week for Democrats: ObamaCare passed Congress in its final form on Thursday night, and the returns are already rolling in. Yesterday AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses.
This wholesale destruction of wealth and capital came with more than ample warning. Turning over every couch cushion to make their new entitlement look affordable under Beltway accounting rules, Democrats decided to raise taxes on companies that do the public service of offering prescription drug benefits to their retirees instead of dumping them into Medicare. We and others warned this would lead to AT&T-like results, but like so many other ObamaCare objections Democrats waved them off as self-serving or “political.”
Perhaps that explains why the Administration is now so touchy. Commerce Secretary Gary Locke took to the White House blog to write that while ObamaCare is great for business, “In the last few days, though, we have seen a couple of companies imply that reform will raise costs for them.” In a Thursday interview on CNBC, Mr. Locke said “for them to come out, I think is premature and irresponsible….”
On top of AT&T’s $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks….
Obama administration officials on Friday ramped up their attempts to help struggling homeowners, announcing major changes to the government’s much-criticized $75-billion program to modify mortgages to avoid foreclosures.
The most significant change is a set of complex new incentives for banks and investors to reduce the principal on so-called underwater mortgages — loans for homes now worth less than what is owed.
In addition, the administration announced that many unemployed homeowners could receive three to six months of reduced mortgage payments while they look for a job.
Together, the revisions are designed to spur the Home Affordable Modification Program to reach its target of helping 3 million to 4 million homeowners avoid foreclosure through 2012.
While the changes are significant to a year-old program that so far has helped just 170,000 homeowners receive permanently lowered mortgage payments, administration officials stressed they would only make a dent in the projected 10 million to 20 million foreclosures expected in the next three years.
The net results of the credit bubble are as follows:
1) An enormous number of families living in homes they cannot afford.
2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.
3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.
4) A weak overall economy with a very slow, soft recovery.
Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two ”” the bad loans the banks are carrying.
Even worse, they are making issue #4 ”” the economy ”” increasingly problematic.
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.
The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.
This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.
Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.
The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.
Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point ”” the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.
Read it all from the front page of yesterday’s New York Times.
But Pimco’s Bond King and Barron’ s Roundtable member Bill Gross contends the relatively high yield on a 30-year bond (compared to a less than 1% on a two-year note) reflects the mounting unfunded obligations taken on by the U.S. government.
In his latest monthly missive, Gross notes the discounted present value of future social-insurance expenditures, mainly Social Security and Medicare, total $46 trillion. The passage of health-care reform will only add to that entitlement.
“No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and in fact the Congressional Budget Office,” Gross writes. “Common sense alone would suggest that extending health-care benefits to 30 million people will cost a lot of money and that it is being ‘paid for’ in the current bill with standard smoke, and all-too-familiar mirros that have characterized such entitlement legislation for decades.”
In that regard, Gross cites an op-ed piece in Sunday’s New York Times by former CBO director Douglas Holtz-Eakin, who wrote that rather than reducing the budget deficit by $138 billion over the next 10 years, health-care reform will add $562 billion to the deficit over that span. “Long-term bondholders beware,” he warned.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
The global economic crisis has left “deep scars” in the fiscal balances of the world’s advanced economies, which should begin to rein in spending next year as the recovery continues, the No.2 official at the International Monetary Fund said Sunday in Beijing.
In a speech at the China Development Forum in Beijing, the I.M.F. official, John Lipsky, who is the deputy managing director, offered a grim prognosis for the world’s wealthiest countries, which are at a level of indebtedness not seen since the aftermath of World War II.
For the United States, “a higher public savings rate will be required to ensure long-term fiscal sustainability,” Mr. Lipsky said.
On Thursday, the Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, cost about $950 billion, but because it would raise some revenues and lower some costs, it would also lower federal deficits by $138 billion. In other words, a bill that would set up two new entitlement spending programs ”” health insurance subsidies and long-term health care benefits ”” would actually improve the nation’s bottom line.
Could this really be true? How can the budget office give a green light to a bill that commits the federal government to spending nearly $1 trillion more over the next 10 years?
The answer, unfortunately, is that the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.
In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.
The forced march to pass ObamaCare continues, and all that matters now is raw politics. But opponents should go down swinging, and that means exposing such policy debacles as President Obama’s 11th-hour decision to apply the 2.9% Medicare payroll tax to “unearned income.”
That’s what savings and investment income are called in Washington, and this destructive tax wasn’t in either the House or Senate bills, though it may now become law with almost no scrutiny.
While it doesn’t have the voltage it once did, Social Security is still the third rail of politics. Politicians are afraid to touch it out of fear of damaging their careers.
Their decades of cowardice have led us to 2010, the year that Social Security begins its descent into the financial abyss. This year it will pay out $29 billion more in benefits than it takes in through the payroll tax that funds the retirement program.
A Sunday Associated Press report highlighting this deficit suggests that “it’s time to start cashing” in the $2.5 trillion Social Security trust fund that has built up through the decades of the system taking in more than it has paid out.
Only problem: There is no trust fund.
As the story notes, “the federal government already spent that money over the years on other programs.”
While it doesn’t have the voltage it once did, Social Security is still the third rail of politics. Politicians are afraid to touch it out of fear of damaging their careers.
Their decades of cowardice have led us to 2010, the year that Social Security begins its descent into the financial abyss. This year it will pay out $29 billion more in benefits than it takes in through the payroll tax that funds the retirement program.
A Sunday Associated Press report highlighting this deficit suggests that “it’s time to start cashing” in the $2.5 trillion Social Security trust fund that has built up through the decades of the system taking in more than it has paid out.
Only problem: There is no trust fund.
As the story notes, “the federal government already spent that money over the years on other programs.”
The survey shows astonishing intensity and sharp opposition to reform, far more than national polls reflect. For 82% of those surveyed, the heath-care bill is either the top or one of the top three issues for deciding whom to support for Congress next November. (That number goes to 88% among independent women.) Sixty percent want Congress to start from scratch on a bipartisan health-care reform proposal or stop working on it this year. Majorities say the legislation will make them and their loved ones (53%), the economy (54%) and the U.S. health-care system (55%) worse off””quite the trifecta.
Seven in 10 would vote against a House member who votes for the Senate health-care bill with its special interest provisions. That includes 45% of self-identified Democrats, 72% of independents and 88% of Republicans. Three in four disagree that the federal government should mandate that everyone buy a government-approved insurance plan (64% strongly so), and 81% say any reform should focus first on reducing costs. Three quarters agree that Americans have the right to choose not to participate in any health-care system or plan without a penalty or fine.
That translates into specific concerns with the Senate legislation””and none of these objections would be addressed by the proposed fixes. Over 70%””indeed in several districts over 80%””of respondents, across party lines, said that the following information made them less supportive: the bill mandates that individuals purchase insurance or face penalties; it cuts Medicare Advantage; it will force potentially millions to lose existing coverage; it will cost an estimated $2.3 trillion over its first 10 years; and it will grant unprecedented new powers to the Health and Human Services secretary.
The survey shows astonishing intensity and sharp opposition to reform, far more than national polls reflect. For 82% of those surveyed, the heath-care bill is either the top or one of the top three issues for deciding whom to support for Congress next November. (That number goes to 88% among independent women.) Sixty percent want Congress to start from scratch on a bipartisan health-care reform proposal or stop working on it this year. Majorities say the legislation will make them and their loved ones (53%), the economy (54%) and the U.S. health-care system (55%) worse off””quite the trifecta.
Seven in 10 would vote against a House member who votes for the Senate health-care bill with its special interest provisions. That includes 45% of self-identified Democrats, 72% of independents and 88% of Republicans. Three in four disagree that the federal government should mandate that everyone buy a government-approved insurance plan (64% strongly so), and 81% say any reform should focus first on reducing costs. Three quarters agree that Americans have the right to choose not to participate in any health-care system or plan without a penalty or fine.
That translates into specific concerns with the Senate legislation””and none of these objections would be addressed by the proposed fixes. Over 70%””indeed in several districts over 80%””of respondents, across party lines, said that the following information made them less supportive: the bill mandates that individuals purchase insurance or face penalties; it cuts Medicare Advantage; it will force potentially millions to lose existing coverage; it will cost an estimated $2.3 trillion over its first 10 years; and it will grant unprecedented new powers to the Health and Human Services secretary.
OVER the past few years, a growing number of America’s parentless children have found homes. In 2008 there were 463,000 children in foster care, a system where the government places orphans and children with parents who are abusive or unable to take care of them in the care of guardians. That is 11% down since 2002, and great news. But experts worry the trend might now go into reverse.
Some welfare advocates fear that the bad economy may cause parents with frayed nerves to abuse and neglect their children, and even cause some to abandon them. Already, several hospitals across the country have reported an increase in the frequency and severity of injuries from child abuse.
The most recent national data on child welfare available dates from September 2008, before the recession was in full throttle; data from 2009 won’t be reported until later this year. But there is some question about whether the data, when reported, will even be accurate. Many states and counties, in an attempt to cope with their fiscal straits, are considering cutting down on child-welfare services, such as benefits for foster parents and the number of social workers they employ.
OVER the past few years, a growing number of America’s parentless children have found homes. In 2008 there were 463,000 children in foster care, a system where the government places orphans and children with parents who are abusive or unable to take care of them in the care of guardians. That is 11% down since 2002, and great news. But experts worry the trend might now go into reverse.
Some welfare advocates fear that the bad economy may cause parents with frayed nerves to abuse and neglect their children, and even cause some to abandon them. Already, several hospitals across the country have reported an increase in the frequency and severity of injuries from child abuse.
The most recent national data on child welfare available dates from September 2008, before the recession was in full throttle; data from 2009 won’t be reported until later this year. But there is some question about whether the data, when reported, will even be accurate. Many states and counties, in an attempt to cope with their fiscal straits, are considering cutting down on child-welfare services, such as benefits for foster parents and the number of social workers they employ.
The United States, Germany and other major economies could see their top-notch credit rating come under pressure if the recovery in the global economy stalls, Moody’s Investors Service warned Monday in a report.
The ratings of the Aaa governments ”” which also include Britain, France, Spain and “the less fiscally challenged Denmark, Norway, Finland and Sweden” ”” “are currently well positioned despite their stretched finances,” Moody’s said in its quarter Sovereign Monitor report.
But the agency noted that “the recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies.”
The United States, Germany and other major economies could see their top-notch credit rating come under pressure if the recovery in the global economy stalls, Moody’s Investors Service warned Monday in a report.
The ratings of the Aaa governments ”” which also include Britain, France, Spain and “the less fiscally challenged Denmark, Norway, Finland and Sweden” ”” “are currently well positioned despite their stretched finances,” Moody’s said in its quarter Sovereign Monitor report.
But the agency noted that “the recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies.”
Premier Wen Jiabao aimed sharp words at Washington on Sunday, ceding little ground on China’s currency policy and suggesting that U.S. efforts to boost its exports by weakening the dollar amounted to “a kind of trade protectionism.”
In his once-yearly news conference, Mr. Wen blamed the recent deterioration in what he called China’s most important foreign relationship on U.S. weapons sales to Taiwan and President Barack Obama’s meeting with Tibetan spiritual leader the Dalai Lama.
“These moves have violated China’s territorial integrity,” Mr. Wen said. “The responsibility does not lie with the Chinese side but with the United States.” Mr. Wen said a good China-U.S. relationship “makes both sides winners while a confrontational one makes both sides losers.”
Because Mr. Wen comments so rarely in public, his annual press conferences have a magnified importance. This year’s comments were a rare opportunity to hear candidly, and in unusual depth, a Chinese leader’s perspective on the U.S.
Premier Wen Jiabao aimed sharp words at Washington on Sunday, ceding little ground on China’s currency policy and suggesting that U.S. efforts to boost its exports by weakening the dollar amounted to “a kind of trade protectionism.”
In his once-yearly news conference, Mr. Wen blamed the recent deterioration in what he called China’s most important foreign relationship on U.S. weapons sales to Taiwan and President Barack Obama’s meeting with Tibetan spiritual leader the Dalai Lama.
“These moves have violated China’s territorial integrity,” Mr. Wen said. “The responsibility does not lie with the Chinese side but with the United States.” Mr. Wen said a good China-U.S. relationship “makes both sides winners while a confrontational one makes both sides losers.”
Because Mr. Wen comments so rarely in public, his annual press conferences have a magnified importance. This year’s comments were a rare opportunity to hear candidly, and in unusual depth, a Chinese leader’s perspective on the U.S.
We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.
This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.
We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.
This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.
As long as the U.S. national debt is entirely denominated in dollars, there is no risk that we will run into the sort of financial crisis that small countries often run into. What gets them into trouble isn’t the debt per se, but an inability to acquire sufficient foreign exchange with their own currency to service it. While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is conceivable that it could be forced to do so if the dollar falls sharply and foreign demand for U.S. bonds wanes. That will be the point at which our debt problem becomes more than theoretical and we are really on the road to national bankruptcy.
As long as the U.S. national debt is entirely denominated in dollars, there is no risk that we will run into the sort of financial crisis that small countries often run into. What gets them into trouble isn’t the debt per se, but an inability to acquire sufficient foreign exchange with their own currency to service it. While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is conceivable that it could be forced to do so if the dollar falls sharply and foreign demand for U.S. bonds wanes. That will be the point at which our debt problem becomes more than theoretical and we are really on the road to national bankruptcy.