Economy & Budget

Future shock

Greece can’t issue new bonds or, for that matter, turn over old debt, because investors fear the country will eventually default. And, as you’ve probably rediscovered in the last few weeks, Greece’s membership in the European monetary union effectively prevents the government from paying its bills by printing money because Greece’s central bank doesn’t have the authority to create euros.

But the debt-ridden United States could never be caught in that circumstance because Uncle Sam can create dollars, and thus can always meet its fiscal obligations by selling dollar-denominated bonds to the Federal Reserve. Right?

The answer to that question is no longer as simple as it seemed even a year or two ago. Yes, unlike Greece, the United States has the technical ability to create as much of its own currency as its regulators choose. But in global financial markets that have just begun to rethink the safety of holding assets in the form of the sovereign debt of the world’s economic superpower, it is far from clear how such an event would play out.

OK. Say the day comes when United States is unable to find private investors (more to the point, government investors including the Bank of China and the Bank of Japan to absorb its latest debt offerings and instead sells the IOUs to the Fed in return for dollars deposited to Treasury accounts). If nobody blinks – that is, if the owners of the trillions of dollars in outstanding Treasury obligations don’t react by trying to sell their bonds – all that happens is the U.S. money supply gets a little bigger. That would be a bit inflationary in the long run. But in a global climate in which deflation seems more of a threat than inflation, no big deal.

More likely, though, investors would blink: Owners of U.S. Treasuries would try to exchange them for assets denominated in other currencies, driving down both the market value of Treasury securities and the exchange value of the dollar. Just where that fire sale on dollars would take the global economy is one of the great imponderables of contemporary international finance.  Other governments (and the IMF) would surely come to America’s aid, buying up Treasury debt in order to stabilize exchange rates. But America isn’t Argentina: the volume of outstanding U.S. debt is humungous, and other governments would be loath to pony up the sums that might be needed to convince private investors (as well as skittish central banks in Asia and the Persian Gulf) to stop dumping dollars.

In any event, even in the best of scenarios, the rescue effort would be temporary. Unless Washington sharply cut its budget deficit, the fix wouldn’t stick.

So, what has changed since the days when the dollar was truly the only global currency? Lots of things. But two biggies stand out. First, more than 100 percent of the world’s (entirely ample) savings has been accumulated outside the United States in recent years -- a process that must eventually force people and governments to contemplate how the imbalance will right itself. Second, the era of uncontested American dominance is ending, and no collective institutions have risen to replace it as keeper of global economic stability.

Greece’s fiscal problems are scary. America’s are much, much scarier.

Bob Hahn and Peter Passell are the founders of Regulation2point0.org, which features original content and aggregation on economic regulation.

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Senate's Wall St. bill shows reminds of House bill's flaws (Rep. Ed Royce)

As the Senate moves closer to another cloture vote on Senator Dodd’s legislation, we are again reminded of the several flaws found in the Dodd-Frank approach to financial regulatory reform.

Beginning with the rescue of investment bank Bear Stearns in the spring of 2008, the Federal government has committed trillions of taxpayer dollars to institutions like Fannie Mae, Freddie Mac, AIG, Citigroup and Bank of America, out of fear that the demise of any of these “too big to fail” institutions would trigger a systemic crisis and collapse of the global financial system. With the bailout of creditors domestically and overseas, we have seen an increase in moral hazard and a 78 basis point advantage in lower borrowing costs for those firms receiving government funds.

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Real Wall Street Reform (Sen. Bernie Sanders)

Alan Greenspan, the former Federal Reserve chairman and one of the architects of financial deregulation, testified recently to the effect that no one could have predicted the Wall Street collapse of 2008. Really?
 
As a member of the House Financial Services Committee voting against the Gramm-Leach-Bliley bank deregulation bill on the House floor in 1999, I said,   “I believe this legislation, in its current form, will do more harm than good. It will lead to fewer banks and financial service providers; increased charges and fees for individual consumers and small businesses; diminished credit for rural America; and taxpayer exposure to potential loses should a financial conglomerate fail.  It will lead to more mega-mergers; a small number of corporations dominating the financial service industry; and further concentration of economic power in our country.”

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Tilting at indebted windmills (Sen. George LeMieux)

The president’s debt commission holds its first meeting today and the first order of business should be to pull the fire alarm. Nero fiddled while Rome burned. Now Washington is ablaze and Congress is the symphony. Government spending is so out of control, tax revenues are barely enough to cover entitlement programs. Every other operation of the federal government including defense, transportation, education, emergencies and other responsibilities, is funded by borrowed money.
 
Having come from running a business and having worked in State government, it is alarming the way Washington misspends money. In perhaps no other place in the world is money spent by an organization without any reference to how much money is taken in. Unfortunately, the situation has gotten to a point where it is completely unsustainable for this country.

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Restitute tax dollars lost in Lehman collapse (Rep. Anna Eshoo)

When Lehman Brothers collapsed in September 2008, it represented the single largest bankruptcy in the history of the United States. As a result, more than 40 municipalities from around the country lost almost $1.7 billion. I’ve introduced the Restitution for Local Government Act to assist the affected municipalities in recouping these lost tax dollars.

In my Congressional District, San Mateo County and its public institutions were part of the collateral damage and today are still reeling from the losses. When Lehman collapsed, San Mateo County lost $155 million. Teachers are being laid off. Schools are not being built or renovated. Roads are not being improved. Transportation plans are being scrapped, and critical upgrades in public safety have ceased.

San Mateo County is required by California State law to hold operating funds, reserves and bond proceeds in an investment pool. Their investment pool held funds on behalf of the county and local cities, school districts, transit agencies and the community college district.   

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A critical number (Sen. Mark Udall)

Last week, Senator Lugar and I, along with eight of our colleagues, introduced the Fair Access to Credit Scores Act of 2010. This bill is a common-sense way to empower consumers to take responsibility for their finances – by offering Americans annual access to their credit score when they access their free annual credit report. 

In 2003, Congress enacted legislation requiring the three major consumer credit reporting agencies to provide a free annual credit report to consumers. A credit report tells consumers what outstanding credit accounts they have open, like student loans, credit cards, and perhaps a car or home loan, but it tells them little else. And they often, hopefully, already know the kind of information contained in their credit report.

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Expensive lights (Rep. John Campbell)

The sheer amount of spending that has gone on in this town for the preponderance of this year and the last is simply staggering. Whether it was the stimulus bill at the beginning of 2009 or the health care bill at the beginning of 2010, and everything in between, most Americans understand that the spending levels are simply out of control…and are continuing in ways that are both big and small. But I assure you, even the instances that receive less media attention, they are every bit as egregious.

On Wednesday, House Speaker Nancy Pelosi called a press conference of the Capitol Hill Press Corps to announce the installation of new light fixtures in one of the House cafeterias. Nothing major to report here right?  Well these new light fixtures will cost the taxpayer $140,000. That’s $140,000 for light fixtures in ONE room in a single House cafeteria.

I will let you draw your own conclusions about the lighting needs of the Capitol, but at a time when we have debt and deficits as far as the eye can see…do we really need a $140,000 lighting system for a cafeteria?

Crossposted from Green Eyeshade Blog

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No more deceit -- strictly regulate Wall Street

Recent stories about Wall Street contain a recurring theme: deceit. 

For example, this week the CEO of the late Lehman Brothers, Richard S. Fuld Jr., with a completely straight face swore to Congress that he’d been utterly out to lunch on the issue of “Repo 105,” a sleight-of-hand accounting procedure auditors found Lehman used to conceal its debts. 

Last week, the Securities and Exchange Commission filed a civil lawsuit charging Goldman Sachs with securities fraud and describing a scheme in which Goldman defrauded clients by selling them a mortgage investment to bet on after secretly permitting selection of its component securities by a hedge fund manager who Goldman knew planned to bet against it.  

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