As CNN anchor Lou Dobbs seems to ask (night after night) – “What in the world is going on with our government?” Many more people of ordinary means as well as those in high places of power are now asking the same question. As we commented in this space on November 26th — Is there actually a Plan at work (in the federal government’s financial markets rescue plans)? Doesn’t seem so. More of a mindset. When you have a hammer, it’s said, everythinglooks like a nail. So right out of the box the folks from Wall Street presiding in the Treasury Department zeroed in on the first to be rescued from the burning buildings in the downtown NYC canyons – Wall Street investment bankers and money center bankers. (It must be noted that not all bankers asked for rescue funding – some had it forced on them by Treasury.)
Not that a number of American commercial banks don’t need a helping hand. But it seems that the Treasury Department reacted swiftly and dramatically to the unraveling of the great schemes of Wall Street Masters of Wizardry with a mindset: Save the top management of investment banks and brokerages whose firms were failing (such as Bear Stearns, sold to Chase) or at risk of failure (Merrill Lynch, now part of Bank of America) – headed by the folks who over the past three years set aside risk management (and their fiduciary responsibilities) to plunge into risky and then totally risky and exotic investments, in the process taking all of the national economy over the cliff with them.
Not many strings attached; not many demands of the firms receiving federal money. The rescue effort so far totals in the trillions of dollars and the calculator tape is still running. Will we see more money allocated? As US Senator Kay Bailey Hutchinson (R-Texas) said today – I am very disappointed and very reluctant to approve more monies…” More House and Senate members seem to be expressing the sentiment we hear on the streets of Brooklyn, New York: Fugghhaaboutitt!
Perspective – all this in the Scheme of Things
Some numbers here (promise your eyes won’t glaze over): The US Gross Domestic Product (GDP) is the estimated the sum of the total output of good and services that our nation produces, about $15-$16 trillion range. Maybe a bit more, if you count in certain other items, but let’s go with this number. The federal government fiscal year budget for this year, as originally set out by President George Bush (February 7, 2007) was to run on $2.6 trillion cash plus $239 billion borrowed for a total of $2.9 trillion, projecting a budget with income equivalent to 18% of GDP and federal outlays of 20% of GDP. Pretty big government, yes? And now getting really BIG! (budget summary tables:http://www.whitehouse.gov/omb/budget/fy2008/summarytables.html
(The president assumed a balanced budget by 2012; read the rosy message here:http://www.whitehouse.gov/omb/budget/fy2008/message.html
Our method of federal government financings isn’t necessarily financially “responsible.” You see, so as not to present us taxpayers with the bad news we don’t want to hear — or — the true cost we don’t want to bear, the true cost of running our government, with all the expectations of what Uncle Sam could / should do for us — our esteemed leaders set up the government to run in the red. If you did this with your household monies, or with your business, or with your P&L responsibilities, how long would you last? Every state government balances its budgets, at least until this year (many are facing shortfalls now).
In the budget process, the president proposes and the congressdisposes – the White House OMB (Office of Management and Budget) sends the departmental and other budgets up to the Capitol Hill where members of House and Senate haggle and finagle and add and subtract numbers and come up with the final budget for operating the USA. Which has almost always approved with shortfalls since the grand “conservative revolution” of the 1980 elections? You see, just about the last budget to be balanced was for FY 1969. A former client of mine, CEO Charles Zwick, the last head of Southeast Banks, regularly told people that he was the last manager of the OMB during the Lyndon Johnson Administration to send a balanced budget up to the Hill. The Vietnam War was on, and LBJ decided to finance both “guns and butter,” with the financial means to wage war and provide “butter” at home with little sacrifice asked of consumers. (Sound familiar? It does to me.)
At the end of the Clinton Administration the budget was balanced for a year or two, and then the events of September 11, 2001 changed everything – quickly back to red ink.
When President Ronald Reagan and his conservative managers took over the government power levers in 1981, were they actuallyfinancially and fiscally conservative? No! The Great Communicator presided over annual budgets with deficits – growing shortfalls – that eventually amounted on his watch to a sum equal to all of his predecessors. Conservatives don’t talk about this much. So today, our government owes just well north of 9 trillion dollars. That’s $70,000+ for each family in the US. (Did you know you owed that much?) And as we say, the tape is still running up the shortfall.
You might find the U.S. National Debt Clock in New York’s Times Square interesting. The Durst real estate organization put this up (in 1989) and it steadily ticks off our growing indebtedness as a nation, which stood at these numbers two years ago:
- $20,000 new indebtedness per second
- $1.2 million a minute
- $1.7 billion a day
- $51 billion a day
And this was before all the bail / rescue / nationalization if industry money began to flow! (Check out the May 2006 story at:http://www.theledger.com/apps/pbcs.dll/article?AID=/20060514/NEWS/605140354/1036
Photo By The Editors
And now we come to fantastic events of winter 2008 – and the approval of the US Congress and White House of trillions upon trillions of dollars of relief for troubled financial
services firms – in banking, what was investment banking, insurance, and now the US auto industry. The White House is scrambling today to find $15 billion or so to prop up General Motors and Chrysler — at least until the incoming Obama Administration gets settled.
This is obviously a Band-Aid on the critical and long-term issues that the US automakers are facing. What will it take after January to develop (we hope) long-term strategies to assure that there will be futures for what we affectionately know as “Detroit’s Big 3”? Stay Tuned – this is very serious. Did the lack of a plan torpedo the Big 3’s plea for federal help? When asked by congress, the lack of plans to be offered up by the heads of Ford, GM and Chrysler at those first disastrous public appearances didn’t help. But neither did the leaders in government have any plans for the auto industry. This was a group grope in living color on cable TV, little more.
What’s important now? Still – a Plan! As the head of the federal bailout panel of monitors, Harvard Law professor Elizabeth Warren, reported last week, the panel still does not see a coherent strategy for easing the financial crisis, and the government seems to be lurching from one tactic to another without clarifying how each step fits into an overall picture (NY Times, December 2). One of the most telling comments from Professor Warren: “You cannot repair this economy if you can’t repair families, and I’m not sure that the people directing the bailout see that as their job…” Help! The pleas for help can be heard on television broadcasts, on radio shows, in the halls of congress, in thousands of emails to congress, from the Main Street advocates struggling with broken dreams…HELP!
Back to mindset: When your mindset is on helping “the financial markets” (investment bankers, money managers etc.) the focus is not on Main Street and the woes of the folks who are struggling with household debt, underwater housing values, ARM mortgage triggers to high payment levels, the loss of a job (or fear of same), and more. May be hard to relate to all that stuff when in your previous life on Wall Street the annual bonus was your annual salary (generous by itself by Main Street standards) and way beyond. (And so it’s easy to shovel out money to Wall Street with little strings attached.) But if we don’t address the consumer’s needs – this flow out of taxpayer money will not turn the economy around any time soon.
And so, back to the massive and growing federal debt. The debt clock in New York City has to be re-done – to accommodate federal government debt levels above $10 trillion. Waaayyyy beyond $10 trillion will be needed. The estimates now that the federal rescue efforts alone may require up to $7 trillion; then there’s the annual federal budget (with ballooning deficits); the cost of the wars in the Middle East; federal aid to states struggling with shortfall; the rising costs of Social Security and Medicare; President-elect Obama’s awaited health care reform; the cost of the failures of the leaders of the auto industry….all this and more surely awaits the incoming congress and administration (and cabinet officers).
Let’s hope they do a better job than the leaders we’re watching in action today in the nation’s capital. HELP!
And so, Lou Dobbs, we will join you in asking: “What in the world is going on with our government?”
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PS: pick up this month’s The Atlantic Monthly and carefully readthe James Fallows interview of the US-educated manager of China’s foreign finances has to say about the United States economy, fiscal irresponsibility, and more. Scary! The Chinese are among our major foreign creditors – and their patience may be running out.