A Greek Tragedy, Part 4: Lessons (Not) Learned

The first thing is fairly obvious: debt is a problem. And creative ways of financing that debt increases the problem. Debt was the cause of, and derivatives trading largely contributed to, both the American and the Greek fiscal meltdowns. What is happening in Greece should be a warning for us in America (and other countries across the globe) about the ramifications of public debt. It took us 235 years here in America to rack up $10 trillion in public debt. Under the Obama administration’s own budget estimates, we will add at least another $10 trillion to that (doubling it) by 2020 (some estimates have it doubling as early as 2016). We’ve already added well over two trillion just since Obama became President.

Our public debt is currently around 55% of our GDP. But when you add in America’s intra-government debt obligations (debt we owe ourselves, such as to the Social Security trust fund, Medicare, and Medicaid), our debt extends above 90% of our GDP. It’s not difficult to see investors getting skittish about financing our debt if that number, like Greece’s, rises above the 100% barrier — something that is projected to happen sometime before 2020 without including intra-governmental obligations. There has even been talk by Moody’s and S&P’s that they may downgrade the American debt rating as well (although a downgrade to junk status is still highly unlikely).

Additionally, derivatives trading is simply out of control and is threatening to explode in a manner that will make both the subprime mortgage and the Greek crises look like someone who defaulted on a pack of gum on layaway. The whole of the global derivatives market in 2002 was worth about $100 trillion — an enormous market even then, to be sure. But that market exploded and rode a massive bubble up to more than $500 trillion in 2007. Current estimates put the valuation of the derivatives market well over $700 trillion. (Consider for comparison sake: our entire GDP is under $15 trillion. A recent valuation of the entire world’s stock and bond markets was just over $100 trillion.)

As a general rule in finance, every bubble has to eventually pop, and when the derivatives bubble finally does it will be a disaster. The subprime mortgage crisis and subsequent housing bubble pop was just the tip of the iceberg that showed the potential power of failed derivatives trading.

So then, the danger we face is the potential alignment of several factors — any one of which would create an economic downturn in itself, but if all of them occur in close proximity to one another could spell disaster. First, as Americans grow older we will find ourselves unable to make good on our intra-governmental obligations such as Social Security and Medicare. Secondly, outside those obligations, because of incredibly loose fiscal policy in Washington right now our public debt will continue to soar and approach or pass the 100% of GDP mark, with the potential of being downgraded like Greece’s debt was. And thirdly, the derivatives market bubble is eventually going to pop and when it does hundreds of trillions of dollars of bad debt will come crashing down on the global financial economy.

So what can be done to avoid this convergence of financial ruin? First and foremost, the biggest lesson we need to take away from the situation in Greece is that debt matters. Dick Cheney infamously told Bush’s Treasury Secretary Paul O’Neill that “deficits don’t matter” and he couldn’t have been more incorrect. Perhaps they don’t matter a lot in the short term, but in the long term debt causes financial ruin. Ordinary Americans and world citizens, of course, already know this. Governments are apparently just starting to wake up to that common sense realization. We must necessarily get our debt under control. We must find a way to fund or eliminate social welfare programs. We must stop enacting expensive new social programs such as health care and pay for what we already have in place. And we have got to stop hiring new federal public employee positions, sweetening their pay and their benefit packages and expanding the federal government at a time when our debt is spiraling downward out of control. And finally, we must find some way of limiting or regulating derivatives trading — but this must be done in an intelligent way, not in a political way designed to score points with an uninformed electorate. The derivatives bubble can either pop violently and calamitously, or it can be brought back down to earth safely and carefully. It’s going to take politicians with steel wills and steeled nerves to take on any of these solutions, however.

Only time will tell if the world learns anything from the crisis in Greece. My guess is that we will not, just as we never learned the most important lessons from the subprime mortgage crisis and housing market meltdown. After all, our own President was one of the voices urging European leaders to bail Greece out just as he had bailed out the companies in America that made poor investment decisions with their debt. He encouraged an additional $1 trillion in European debt to save Europe, as he adds trillions of dollars to our debt in order to save America. At some point, this Ponzi scheme is going to come crashing down and we will finally understand the words of the prophet Habakkuk: “Will not your debtors suddenly arise? Will they not wake up and make you tremble? Then you will become their victim.”

UPDATE: Apparently, the White House budget director agrees with this assessment:

WASHINGTON (Reuters) – White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.

Now, let’s see if they’re actually going to do anything about it, or just talk about it.

A Greek Tragedy, Part 4: Lessons (Not) Learned

The first thing is fairly obvious: debt is a problem. And creative ways of financing that debt increases the problem. Debt was the cause of, and derivatives trading largely contributed to, both the American and the Greek fiscal meltdowns. What is happening in Greece should be a warning for us in America (and other countries across the globe) about the ramifications of public debt. It took us 235 years here in America to rack up $10 trillion in public debt. Under the Obama administration’s own budget estimates, we will add at least another $10 trillion to that (doubling it) by 2020 (some estimates have it doubling as early as 2016). We’ve already added well over two trillion just since Obama became President.

Our public debt is currently around 55% of our GDP. But when you add in America’s intra-government debt obligations (debt we owe ourselves, such as to the Social Security trust fund, Medicare, and Medicaid), our debt extends above 90% of our GDP. It’s not difficult to see investors getting skittish about financing our debt if that number, like Greece’s, rises above the 100% barrier — something that is projected to happen sometime before 2020 without including intra-governmental obligations. There has even been talk by Moody’s and S&P’s that they may downgrade the American debt rating as well (although a downgrade to junk status is still highly unlikely).

Additionally, derivatives trading is simply out of control and is threatening to explode in a manner that will make both the subprime mortgage and the Greek crises look like someone who defaulted on a pack of gum on layaway. The whole of the global derivatives market in 2002 was worth about $100 trillion — an enormous market even then, to be sure. But that market exploded and rode a massive bubble up to more than $500 trillion in 2007. Current estimates put the valuation of the derivatives market well over $700 trillion. (Consider for comparison sake: our entire GDP is under $15 trillion. A recent valuation of the entire world’s stock and bond markets was just over $100 trillion.)

As a general rule in finance, every bubble has to eventually pop, and when the derivatives bubble finally does it will be a disaster. The subprime mortgage crisis and subsequent housing bubble pop was just the tip of the iceberg that showed the potential power of failed derivatives trading.

So then, the danger we face is the potential alignment of several factors — any one of which would create an economic downturn in itself, but if all of them occur in close proximity to one another could spell disaster. First, as Americans grow older we will find ourselves unable to make good on our intra-governmental obligations such as Social Security and Medicare. Secondly, outside those obligations, because of incredibly loose fiscal policy in Washington right now our public debt will continue to soar and approach or pass the 100% of GDP mark, with the potential of being downgraded like Greece’s debt was. And thirdly, the derivatives market bubble is eventually going to pop and when it does hundreds of trillions of dollars of bad debt will come crashing down on the global financial economy.

So what can be done to avoid this convergence of financial ruin? First and foremost, the biggest lesson we need to take away from the situation in Greece is that debt matters. Dick Cheney infamously told Bush’s Treasury Secretary Paul O’Neill that “deficits don’t matter” and he couldn’t have been more incorrect. Perhaps they don’t matter a lot in the short term, but in the long term debt causes financial ruin. Ordinary Americans and world citizens, of course, already know this. Governments are apparently just starting to wake up to that common sense realization. We must necessarily get our debt under control. We must find a way to fund or eliminate social welfare programs. We must stop enacting expensive new social programs such as health care and pay for what we already have in place. And we have got to stop hiring new federal public employee positions, sweetening their pay and their benefit packages and expanding the federal government at a time when our debt is spiraling downward out of control. And finally, we must find some way of limiting or regulating derivatives trading — but this must be done in an intelligent way, not in a political way designed to score points with an uninformed electorate. The derivatives bubble can either pop violently and calamitously, or it can be brought back down to earth safely and carefully. It’s going to take politicians with steel wills and steeled nerves to take on any of these solutions, however.

Only time will tell if the world learns anything from the crisis in Greece. My guess is that we will not, just as we never learned the most important lessons from the subprime mortgage crisis and housing market meltdown. After all, our own President was one of the voices urging European leaders to bail Greece out just as he had bailed out the companies in America that made poor investment decisions with their debt. He encouraged an additional $1 trillion in European debt to save Europe, as he adds trillions of dollars to our debt in order to save America. At some point, this Ponzi scheme is going to come crashing down and we will finally understand the words of the prophet Habakkuk: “Will not your debtors suddenly arise? Will they not wake up and make you tremble? Then you will become their victim.”

UPDATE: Apparently, the White House budget director agrees with this assessment:

WASHINGTON (Reuters) – White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.

Now, let’s see if they’re actually going to do anything about it, or just talk about it.

A Greek Tragedy, Part 3: Consolidation of Power

Longterm, the problem with this bailout plan is the same thing that was (and remains) wrong with the American government bailout plans of various banks and corporations: that of moral hazard. As I wrote about here, moral hazard is the idea that when someone is insulated from the ramifications of a risk they took, they will be more likely to take worse risks in the future knowing they will be bailed out if they fail again. As it pertains to the current European crisis, the $1 trillion bailout package does very little to address the root of the problem: immense amounts of public debt. Now, theoretically, other EU countries will see the bailout and will do little to rein in their own public debt with the assumption that they, too, will be rescued in the future.

In essence, you have in the European Union a group of 27 countries who are all now “too big to fail” to use American financial crisis terms, because they are almost all unified under a common currency.

The $1 trillion bailout package took some poking and prodding to get approved as well, especially because it essentially transforms the center of fiscal power in Europe. Up until now, the European Central Bank (ECB) has been technically and legally an “independent” bank, and as such has maintained a policy of never getting involved in countries’ sovereign debt problems. With the agreement by the ECB to purchase Greek debt, they have transformed themselves into the center of European finance now. As the New York Times noted, through this trillion dollar bailout the European Union has “moved fitfully toward more centralization, toward a French vision of an economic government for the region”. This shift itself, although not the primary story here, cannot be overstated in its importance to the future of the EU and the global economy.

There were many countries opposed to this shift, including Germany and Italy, that eventually only agreed to the plan after hours and hours of negotiations and compromises lasting well into the night. In part, it took a phone call from none other than Barack Obama urging them to vote in favor of the bailout to help them reluctantly change their minds. And, some news sources are noting, the vote by the ECB’s board was not unanimous – even as the bailout plan was approved there were still holdouts in the Bank who did not agree with the move.

Essentially what is going on now is the ECB is (for the first time ever) guaranteeing sovereign debt that has been rated as junk status in the hopes that Greece can pull itself out of this crisis and save Europe in the process. The Director of the International Monetary Fund (IMF)’s European department pointed out the bailout was “obviously” not “a long term solution… This is some kind of morphine that stabilizes the patient — and the real medication and the real treatment has to come.”

So what happens from here? It largely depends on what Europe does moving forward. This could be a contained problem now – but I personally doubt it. It could become another crisis that sets the global markets on edge or causes them to collapse as well, but that extreme is fairly unlikely as well. Most likely, it will be something in between those two results, and most likely we will still not learn our lesson even after this. What might be a better question at this point then is this: what can we learn from the Greek crisis?

A Greek Tragedy, Part 3: Consolidation of Power

Longterm, the problem with this bailout plan is the same thing that was (and remains) wrong with the American government bailout plans of various banks and corporations: that of moral hazard. As I wrote about here, moral hazard is the idea that when someone is insulated from the ramifications of a risk they took, they will be more likely to take worse risks in the future knowing they will be bailed out if they fail again. As it pertains to the current European crisis, the $1 trillion bailout package does very little to address the root of the problem: immense amounts of public debt. Now, theoretically, other EU countries will see the bailout and will do little to rein in their own public debt with the assumption that they, too, will be rescued in the future.

In essence, you have in the European Union a group of 27 countries who are all now “too big to fail” to use American financial crisis terms, because they are almost all unified under a common currency.

The $1 trillion bailout package took some poking and prodding to get approved as well, especially because it essentially transforms the center of fiscal power in Europe. Up until now, the European Central Bank (ECB) has been technically and legally an “independent” bank, and as such has maintained a policy of never getting involved in countries’ sovereign debt problems. With the agreement by the ECB to purchase Greek debt, they have transformed themselves into the center of European finance now. As the New York Times noted, through this trillion dollar bailout the European Union has “moved fitfully toward more centralization, toward a French vision of an economic government for the region”. This shift itself, although not the primary story here, cannot be overstated in its importance to the future of the EU and the global economy.

There were many countries opposed to this shift, including Germany and Italy, that eventually only agreed to the plan after hours and hours of negotiations and compromises lasting well into the night. In part, it took a phone call from none other than Barack Obama urging them to vote in favor of the bailout to help them reluctantly change their minds. And, some news sources are noting, the vote by the ECB’s board was not unanimous – even as the bailout plan was approved there were still holdouts in the Bank who did not agree with the move.

Essentially what is going on now is the ECB is (for the first time ever) guaranteeing sovereign debt that has been rated as junk status in the hopes that Greece can pull itself out of this crisis and save Europe in the process. The Director of the International Monetary Fund (IMF)’s European department pointed out the bailout was “obviously” not “a long term solution… This is some kind of morphine that stabilizes the patient — and the real medication and the real treatment has to come.”

So what happens from here? It largely depends on what Europe does moving forward. This could be a contained problem now – but I personally doubt it. It could become another crisis that sets the global markets on edge or causes them to collapse as well, but that extreme is fairly unlikely as well. Most likely, it will be something in between those two results, and most likely we will still not learn our lesson even after this. What might be a better question at this point then is this: what can we learn from the Greek crisis?

A Greek Tragedy, Part 2: The Ponzi Scheme

Now we’re here in May of 2010 and we’re facing another financial crisis driven by debt (and the creative financing thereof). Greece has been piling up a huge national debt for quite a while and it finally reached its tipping point. Their total national debt passed 100% of their total economic output (GDP) last year, and although there is no hard and fast rule when it comes to economic downturns, crashing through that barrier spooked a lot of investors.

The thing about piling up debt as a federal government is that you always have to have someone to buy it. There’s a reason one of Hillary Clinton’s first stops as Secretary of State was to China to more or less beg them to continue purchasing American debt. When investors, largely other governments in this case, begin losing confidence in your debt, you begin to lose the ability to continue adding to it.

This is exactly what happened in Greece. The problem was exasperated even further when it was revealed that derivatives trading masked the true extent of Greek debt. Derivatives, such as futures or options trading, or in the case of Greece, credit swaps, allow customers to borrow money without adding to their total public debt. It’s a financial shell game of sorts. Greece borrowed billions through these “creative” accounting practices, enabled by companies like Goldman Sachs and JP Morgan.

Currently, Greek debt stands at 115% of their GDP and they find themselves stuck between a rock and a hard place. They could cut government spending, which would mean cutting from their two biggest expenses: welfare programs and public sector employment costs, they could raise taxes, or they could do some combination of the two. But doing either of those would likely drive their economy into an even deeper recession. Plus, neither one of those addresses the immediate need: Greece needs a massive influx of cash in a hurry, or else they risk defaulting on their debt.

If Greece was to default on their debt, it would hurt not only Greece but also all the countries and investors who own that debt — the largest of which include Spain, Italy, and Portugal. The Greek crisis could quickly become a European crisis (which it already is to some extent because most of Europe uses the same currency which is being devalued because of this whole mess).

So Greece took on one of the last remaining options they had: they went begging to other countries in the EU for loans to cover their debt. That’s right — taking on more debt to pay off their current debt. We’ll get to that in a second. But Greece’s pleas for loans were made more difficult by the fact that Standard and Poor’s – an organization that rates debt – downgraded Greece’s debt to a rating of BBB-, also known as ‘junk status’. In other words, they were warning people that Greece would likely be unable to pay off their debt, so don’t finance it any more. S&P’s also downgraded Portugal’s rating because of fears that they held too much Greek debt. Portugal went from the top rating of AAA down a couple notches to an A- rating.

Eventually, however, Greece was able to convince the rest of the European Union that a Greek collapse would hurt the EU as much as it would hurt Greece itself, and the European Central Bank agreed to finance nearly $1 trillion of loans so Greece could get out of its current situation. At first, the markets and the investors were happy to hear such decisive action was being taken to solve the problem. But then, reality began sinking in once again and just this morning the markets turned downward again. Why?

Because people started realizing exactly what you already realized a few paragraphs ago: Greece was attempting to get out of debt by taking on more debt. It’s like a family who is in deep credit card debt taking out another credit card to pay the minimum payment on their first credit cards. Bloomberg business news this morning called the $1 trillion bailout package a European Ponzi scheme and noted that Germany and France, who are required to purchase Greek debt as part of the bailout plan, are risking downgrades of their own debt ratings as a result as well.

A Greek Tragedy, Part 2: The Ponzi Scheme

Now we’re here in May of 2010 and we’re facing another financial crisis driven by debt (and the creative financing thereof). Greece has been piling up a huge national debt for quite a while and it finally reached its tipping point. Their total national debt passed 100% of their total economic output (GDP) last year, and although there is no hard and fast rule when it comes to economic downturns, crashing through that barrier spooked a lot of investors.

The thing about piling up debt as a federal government is that you always have to have someone to buy it. There’s a reason one of Hillary Clinton’s first stops as Secretary of State was to China to more or less beg them to continue purchasing American debt. When investors, largely other governments in this case, begin losing confidence in your debt, you begin to lose the ability to continue adding to it.

This is exactly what happened in Greece. The problem was exasperated even further when it was revealed that derivatives trading masked the true extent of Greek debt. Derivatives, such as futures or options trading, or in the case of Greece, credit swaps, allow customers to borrow money without adding to their total public debt. It’s a financial shell game of sorts. Greece borrowed billions through these “creative” accounting practices, enabled by companies like Goldman Sachs and JP Morgan.

Currently, Greek debt stands at 115% of their GDP and they find themselves stuck between a rock and a hard place. They could cut government spending, which would mean cutting from their two biggest expenses: welfare programs and public sector employment costs, they could raise taxes, or they could do some combination of the two. But doing either of those would likely drive their economy into an even deeper recession. Plus, neither one of those addresses the immediate need: Greece needs a massive influx of cash in a hurry, or else they risk defaulting on their debt.

If Greece was to default on their debt, it would hurt not only Greece but also all the countries and investors who own that debt — the largest of which include Spain, Italy, and Portugal. The Greek crisis could quickly become a European crisis (which it already is to some extent because most of Europe uses the same currency which is being devalued because of this whole mess).

So Greece took on one of the last remaining options they had: they went begging to other countries in the EU for loans to cover their debt. That’s right — taking on more debt to pay off their current debt. We’ll get to that in a second. But Greece’s pleas for loans were made more difficult by the fact that Standard and Poor’s – an organization that rates debt – downgraded Greece’s debt to a rating of BBB-, also known as ‘junk status’. In other words, they were warning people that Greece would likely be unable to pay off their debt, so don’t finance it any more. S&P’s also downgraded Portugal’s rating because of fears that they held too much Greek debt. Portugal went from the top rating of AAA down a couple notches to an A- rating.

Eventually, however, Greece was able to convince the rest of the European Union that a Greek collapse would hurt the EU as much as it would hurt Greece itself, and the European Central Bank agreed to finance nearly $1 trillion of loans so Greece could get out of its current situation. At first, the markets and the investors were happy to hear such decisive action was being taken to solve the problem. But then, reality began sinking in once again and just this morning the markets turned downward again. Why?

Because people started realizing exactly what you already realized a few paragraphs ago: Greece was attempting to get out of debt by taking on more debt. It’s like a family who is in deep credit card debt taking out another credit card to pay the minimum payment on their first credit cards. Bloomberg business news this morning called the $1 trillion bailout package a European Ponzi scheme and noted that Germany and France, who are required to purchase Greek debt as part of the bailout plan, are risking downgrades of their own debt ratings as a result as well.

A Greek Tragedy, Part 1: Debt

This is the first of a four-part series. The first two parts are scheduled to post today and the following two will post tomorrow.

It seems like just yesterday that an economic meltdown and financial crisis were all over the news. Now, just as we might be actually beginning to climb our way out of this one, we have another one to worry about.

First it was the American financial crisis. Now it’s the Greek financial crisis. And though they are completely different crises, they hinge on the same simple principle: debt.

In the United States, our meltdown came on the heels of two decades of horrendous federal policy toward the housing market (from politicians of every stripe with nearly no one raising objections). Home ownership, it was argued, was in everybody’s best interest. Everybody should be able to buy a home – or, if not everyone, at least a vast majority of people. Toward this end, the Clinton and Bush administrations with the help of both Democratic and Republican Congresses applied massive pressure to two Government Sponsored Entities (pseudo public/private organizations). These two entities were the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation — better known today as Fannie Mae and Freddie Mac. As a result, once-tight rules for who qualified for a home loan were loosened. A lot.

The liberals did this in the name of equality. Because fewer African-Americans and Latinos than whites could afford down payments and other expenses associated with purchasing a home, liberals saw it as a social justice cause to enable those demographics to purchase homes anyway. Conservatives pushed this agenda in the name of the so-called ownership society with the goal that Americans would experience the responsibilities and freedom that came with owning a home.

To get around traditional lending rules, both groups pushed and celebrated “creative” lending practices– practices like Adjustable Rate Mortgages, balloon mortgages, and no-down-payment loans. Sub-prime loans. No one stopped to question what would happen when these folks that couldn’t have afforded to buy a house in the past figured out they would not be able to afford them in the future – after they were already living in them.

Well, as everyone knows now the loan defaults piled up quickly, the banks that invested in bundled packages of these creative loans went under (or should have gone under), and the American financial crisis set the entire world on edge. That was back in October of 2008.

Now we’re here in May of 2010 and we’re facing another financial crisis driven by debt (and the creative financing thereof).

The Current Economic Crisis, Part IV

Check out parts one, two, and three before you read this post.

What is the government proposing as a solution?
Well, the federal government (and by extension, you) now owns 79.9% of AIG, the world’s largest insurer. The federal government now has the authority to hire and fire board members and make company policy at what used to be a private institution.

The federal government now also runs Freddie Mac and Fannie Mae, inserting themselves square in the center of the mortgage business. And now, to save the other banking institutions from collapse, the Bush administration is offering a bailout package that will cost you and I over $700 billion. Basically what it amounts to is the federal government assuming all the bad debt in order to get it off the books of the financial institutions. What a great deal for us, huh? But the government tells us not to worry, because not all of those loans are going to go completely belly up, so it probably won’t cost the entire bill of $700 billion. Whew – that makes me feel better.

Additionally – and this is the scarier part – the Treasury Department and the Fed are asking for (and will receive) increased levels of authority that they currently don’t have in order to carry out this plan.

At the end of this, the federal government will be exponentially larger and its reach further than ever before in this nation’s history. They will have more authority over more people and more areas of the economy than ever thought possible, and they will have added nearly a trillion dollars to our national debt in order to do it.

Obama is actually publicly backing the Bush administration plan (which according to a new poll 44% oppose and only 25% of Americans support) while McCain’s campaign has indicated he’s going to fight the bailout plan, but at this point it doesn’t really make a difference. The plan will go through and the federal government will not relinquish this new authority and new power anytime soon – if ever.

Both McCain and Obama are calling for increased federal oversight and regulation of the banking industry, which will only do two things: choke the life out of that massively important sector of our economy and cost us, the taxpayers, hundreds of billions of dollars more for something that will, again, ultimately fail.

Calling for more regulation of banks in a crisis like this is like calling for more gun control after a school shooting: it’s something that makes sense on the surface and satisfies the public’s need for a scapegoat and an easy solution, but offers no real solution and harms the country in the long run.

Woah. You obviously don’t like any of the solutions being proposed so far, so what do you think we should do?
Well, like I said, I’m no financial expert, so I don’t really know specifics. But I do know this: the American economy is currently being built on the back of massive and historically unheard of amounts of debt. Whether it’s consumer debt, mortgage debt, national debt, or whatever, we as a nation both publicly and governmentally are carrying more debt now than ever before – and it’s only getting worse.

From 1990 to 2000, the total amount of all Americans’ private credit card debt increased from $300 billion to over $1.5 trillion. On average, a family’s credit card debt increased over the same time period from around $2,000 to over $7,500. And now, eight years later, studies show the average credit card debt sitting at $14,500 per family.

Holy crap.

And that’s just credit card debt. That doesn’t count mortgage debt or school loan debt or personal loan debt. This is the major problem we’ve gotten ourselves into as a country. Our American economy has grown to be a huge creature that requires more and more and more money to be spent to keep it alive. And if the economy ever stopped growing, and jobs stopped being created and people ended up out of work, we wouldn’t tolerate it. It’s kind of like feeding a fat kid more and more chocolate thinking that it’s the only way to keep him alive. So here we are, trapped in this catch-22: if Americans stopped carrying so much debt, the economy would collapse. But we’ve seen what happens when you build an economy on debt: when that debt comes due, and you can’t pay it, the economy collapses anyway. The investment banks showed us just a glimpse of the more serious problem that’s heading our way sometime in the not-so-distant future.

So here’s the deal, and it sucks: we either collapse our economy in the most healthy, controlled way possible by eliminating the debt we’ve taken on (and stopping accumulating any in the future), or we collapse our economy by increasingly feeding its growth through debt.

The first happens quickly and we can make adjustments as a country to maintain a healthier fiscal lifestyle. But let’s be honest: it’s not going to happen. There’s no amount of legislation that’s going to stop people from using credit cards when they shouldn’t or stop people from wanting bigger and better things they can’t afford. We’ve simply built a monster that is now going to turn on us and devour us.

So that’s my official prediction: the American economy is going to completely collapse because of all of our collective debts. All our current government officials in both parties are doing is delaying the inevitable (and making the inevitable more painful in the long run) by propping up a fundamentally unhealthy institution with even greater amounts of debt. The federal government will continue to exert newfound authority over various other private sectors in order to prop them up for as long as possible, all the while incurring greater levels of debt that will make the collapse even worse.

Combined with other cultural and global trends, I believe America will lose its superpower status as we watch China and a resurgent Russia surpass us and continue to gain prominence on the world stage. Within the next generation or two, we will become simply another Britain or France – a good country that was once great and dominant.

It all might sound kind of depressing, really, but we’ve made our bed and now we must lie in it. But the silver lining is this: once people can’t hide behind or find solace and false peace in their possessions, they are more likely to turn to God. Once people are broken, their hearts are more open to the good news that Jesus gives us. And the overarching silver lining is that God controls all of history – and without getting into freaky end times prophecy, he will eventually use all of this to bring about his Kingdom of restored shalom on the earth.

The Current Economic Crisis, Part IV

Check out parts one, two, and three before you read this post.

What is the government proposing as a solution?
Well, the federal government (and by extension, you) now owns 79.9% of AIG, the world’s largest insurer. The federal government now has the authority to hire and fire board members and make company policy at what used to be a private institution.

The federal government now also runs Freddie Mac and Fannie Mae, inserting themselves square in the center of the mortgage business. And now, to save the other banking institutions from collapse, the Bush administration is offering a bailout package that will cost you and I over $700 billion. Basically what it amounts to is the federal government assuming all the bad debt in order to get it off the books of the financial institutions. What a great deal for us, huh? But the government tells us not to worry, because not all of those loans are going to go completely belly up, so it probably won’t cost the entire bill of $700 billion. Whew – that makes me feel better.

Additionally – and this is the scarier part – the Treasury Department and the Fed are asking for (and will receive) increased levels of authority that they currently don’t have in order to carry out this plan.

At the end of this, the federal government will be exponentially larger and its reach further than ever before in this nation’s history. They will have more authority over more people and more areas of the economy than ever thought possible, and they will have added nearly a trillion dollars to our national debt in order to do it.

Obama is actually publicly backing the Bush administration plan (which according to a new poll 44% oppose and only 25% of Americans support) while McCain’s campaign has indicated he’s going to fight the bailout plan, but at this point it doesn’t really make a difference. The plan will go through and the federal government will not relinquish this new authority and new power anytime soon – if ever.

Both McCain and Obama are calling for increased federal oversight and regulation of the banking industry, which will only do two things: choke the life out of that massively important sector of our economy and cost us, the taxpayers, hundreds of billions of dollars more for something that will, again, ultimately fail.

Calling for more regulation of banks in a crisis like this is like calling for more gun control after a school shooting: it’s something that makes sense on the surface and satisfies the public’s need for a scapegoat and an easy solution, but offers no real solution and harms the country in the long run.

Woah. You obviously don’t like any of the solutions being proposed so far, so what do you think we should do?
Well, like I said, I’m no financial expert, so I don’t really know specifics. But I do know this: the American economy is currently being built on the back of massive and historically unheard of amounts of debt. Whether it’s consumer debt, mortgage debt, national debt, or whatever, we as a nation both publicly and governmentally are carrying more debt now than ever before – and it’s only getting worse.

From 1990 to 2000, the total amount of all Americans’ private credit card debt increased from $300 billion to over $1.5 trillion. On average, a family’s credit card debt increased over the same time period from around $2,000 to over $7,500. And now, eight years later, studies show the average credit card debt sitting at $14,500 per family.

Holy crap.

And that’s just credit card debt. That doesn’t count mortgage debt or school loan debt or personal loan debt. This is the major problem we’ve gotten ourselves into as a country. Our American economy has grown to be a huge creature that requires more and more and more money to be spent to keep it alive. And if the economy ever stopped growing, and jobs stopped being created and people ended up out of work, we wouldn’t tolerate it. It’s kind of like feeding a fat kid more and more chocolate thinking that it’s the only way to keep him alive. So here we are, trapped in this catch-22: if Americans stopped carrying so much debt, the economy would collapse. But we’ve seen what happens when you build an economy on debt: when that debt comes due, and you can’t pay it, the economy collapses anyway. The investment banks showed us just a glimpse of the more serious problem that’s heading our way sometime in the not-so-distant future.

So here’s the deal, and it sucks: we either collapse our economy in the most healthy, controlled way possible by eliminating the debt we’ve taken on (and stopping accumulating any in the future), or we collapse our economy by increasingly feeding its growth through debt.

The first happens quickly and we can make adjustments as a country to maintain a healthier fiscal lifestyle. But let’s be honest: it’s not going to happen. There’s no amount of legislation that’s going to stop people from using credit cards when they shouldn’t or stop people from wanting bigger and better things they can’t afford. We’ve simply built a monster that is now going to turn on us and devour us.

So that’s my official prediction: the American economy is going to completely collapse because of all of our collective debts. All our current government officials in both parties are doing is delaying the inevitable (and making the inevitable more painful in the long run) by propping up a fundamentally unhealthy institution with even greater amounts of debt. The federal government will continue to exert newfound authority over various other private sectors in order to prop them up for as long as possible, all the while incurring greater levels of debt that will make the collapse even worse.

Combined with other cultural and global trends, I believe America will lose its superpower status as we watch China and a resurgent Russia surpass us and continue to gain prominence on the world stage. Within the next generation or two, we will become simply another Britain or France – a good country that was once great and dominant.

It all might sound kind of depressing, really, but we’ve made our bed and now we must lie in it. But the silver lining is this: once people can’t hide behind or find solace and false peace in their possessions, they are more likely to turn to God. Once people are broken, their hearts are more open to the good news that Jesus gives us. And the overarching silver lining is that God controls all of history – and without getting into freaky end times prophecy, he will eventually use all of this to bring about his Kingdom of restored shalom on the earth.

The Current Economic Crisis, Part III

Check out parts one and two before reading this one…

What is the term ‘moral hazard’ some folks keep throwing around?
“Moral hazard” is an idea that if you insulate someone from the failures of the risks they take, they are more likely to take worse risks in the future thinking you’ll protect them again.

In the case of this economic crisis, it specifically refers to whether or not the federal government should bail out organizations such as Lehman Brothers when they are about to fail. The arguments on both sides are fairly compelling: on one hand, Lehman Brothers was a private institution that made poor decisions and took unnecessary risks on bad subprime mortgage bundles – so the federal government was right to let them fail. On the other hand, we saw the awful economic ramifications of allowing Lehman Brothers to fail, and the fact remains that a major institution such as an investment bank with the status of Lehman Brothers has a wide-reaching impact on global economies.

Moral hazard would say if the government had bailed Lehman Brothers out, then other companies would be asking the federal government for bailouts as well – and there has to be some kind of tipping point where it does more harm than good for the government to do that. In the next instance of a company asking for a bailout, AIG, the government reneged and gave them $85 billion to save them from collapse. In that situation, the government weighed the prospect of AIG (the world’s largest insurer) going under as greater detriment than moral hazard. But as Jim Geraghty notes,

You’re going to see a lot of companies, interest groups, lawyers representing class-action suits, etc., knocking on the Treasury’s door chanting, “bail us out, bail us out!” The temptation for Congress and the president to look “decisive” and “compassionate” will be enormous. No one wants to be the one saying, “Let ‘em fail, even if that means lots of people lose their jobs.”

Moral hazard in a nutshell says that if the government continues to bail these companies out, they will continue taking unnecessary risks because the government will bail them out again in the future. A high risk/high reward scenario becomes low risk/high reward to companies when this precedent is set. The government is perceived by some to have drawn a line in the sand with Lehman, only to cave when backed into a corner by AIG.

What does all this have to do with the average American worker?
Most Americans have retirement or savings plans that are invested in mutual funds at some level, and these investment banks going bankrupt or losing much of the value of their shares directly impacts the value of your IRA or 401(k) or other market investments. Additionally, the shockwave ripples sent throughout the markets will further reduce investment values.

Finally, the credit crunch is likely to worsen for a while now as banks become even more hesitant to take risks and lend money. Banks will most likely be looking for low risk/low return type investments in the short term, so unless your credit is perfect or you have a lot of collateral to offer it might be tough to get a loan.

More to come… Part IV: “Solutions” and where we’re headed…