"University of Iowa Sexual Assault Controversy -- 2007-08," July 19-present (incorporating and updating original blog entry, "UI Sexual Assault Update," July 19-August 9).
"Who's The Reason?" September 5, 2008.
"Important Things in Politics," August 29, 2008.
"Governor Sarah Palin," September 4, 2008.
"Solving Illegal Behavior Problems by Making It Legal," August 20, 2008.
"Riverside's Deeper Gambling Debt," November 11, 2006.
"Random Thoughts on Law School Rankings," April 29, 2008.
"Abolish Bar Exams?" August 22, 2008.
"Alcohol Update," September 6, 2008.
"Reactions to Obama's Telecom Immunity Vote," July 9, 2008.
"City's Moral Compass is Spinning," August 27, 2008.
"Police Accidental Shootings -- Of Themselves," May 9, 2008.
"UI Held Hostage Day 451 - Open Letter to Regents," April 17, 2007.
"Greenbelts, Greenways and Flood Prevention," June 16, 2008.
"Tell Me a Story," August 30, 2008.
And see, Database Index of 500-plus blog entries
We need a third standard for evaluating when firms are "too large." The antitrust laws' standard (adverse impact on market competition), and what Congress originally intended to be the FCC standard for broadcast stations (a robust "marketplace of ideas") are no longer adequate.
The third standard? Institutions should not be permitted to become so large that the impact of their collapse on our national economy would be so severe that taxpayers must be asked to pay for their bailout.
It's not that our nation's founders didn't know better. As Thomas Jefferson once wrote, "I, however, place economy among the first and most important of republican virtues, and public debt as the greatest of the dangers to be feared."
This morning we're dealing with yet another case study of why we need this new standard: the potential $200 billion bailout of Fannie Mae and Freddie Mac, described by the New York Times as an "extraordinary" bailout that "could become one of the most expensive financial bailouts in American history."
I remember when I was involved in the Administration of President Lyndon Johnson how insistent the President was one year that the federal budget not go over $100 billion. He felt there might be a significant public and media backlash were that cap to be exceeded.
Yes, I know, there's been some inflation over the past few years; $100 billion isn't what it used to be. Still it's something of a shocker to realize that the mere interest on the national debt was $430 billion in 2007 -- over four times the entire federal budget when I was in government.
There are some basic terms here that need to be distinguished and understood, and are often and easily confused. (The details, and "off budget" expenditures, make it even more confusing; I'm not even going there -- except to note that the total, long term costs of the latest Iraq War are projected to be something on the order of two-to-three trillion.)
The "federal budget" is what the government projects it's going to spend during the next fiscal year (October to October).
A "budget deficit" is what the government incurs for a given year if the government spends more than it takes in. It's what you have during any year that you put more debt on your credit cards than you pay off.
The "national debt" is what the government has, or what keeps increasing, when those budget deficits accumulate year after year. The same thing applies to your credit cards: spend more than you pay off and your total "credit card debt" increases.
"Interest on the national debt" is what the government has to pay, just as you have to, to those from whom it's borrowed. Were it to fail to pay these interest payments -- even if it has to borrow even more money to pay the interest on its former loans -- it would result in a collapse of our own entire economy, and very likely that of Japan and European countries as well. Of course, paying interest doesn't reduce the debt; it just keeps the Chinese from refusing to loan our government the money it borrows each year to keep the country running. It's like your making large enough payments to the credit card company each month to cover the interest you owe -- while your total balance owing continues to rise.
"Unfunded obligations" are what's coming in the future that the government has no way of paying, and has no plans for addressing -- in our government's case a couple major examples are Medicare and Social Security. It would be like your taking out a second mortgage on your house to pay off your credit card debt with no realistic way to make the mortgage payments when they come due; or a low monthly payment mortgage on a house with an enormous "balloon payment" obligation down the road you have no way of paying off.
So what are these numbers?
Budget. President Bush this year (2008) presented Congress with a budget of $3.2 trillion (over 30 times what it was in my day).
Budget deficit. Whoever occupies the White House next year will inherit from President Bush a $482 billion budget deficit.
National debt. Our current national debt is about $9.7 trillion. (If you'd like to track its increase day by day check the "Debt Clock." or the U.S. Treasury page.)
Interest on the national debt, as noted above, is now well over $400 billion a year.
Unfunded obligations -- hold onto your hat -- are now about $53 trillion.
What does all this mean?
Let's start with Fannie Mae and Freddie Mac.
The bailout plan for the companies, Fannie Mae and Freddie Mac, a seismic event in a year of repeated financial crises followed by aggressive federal intervention, places the companies in a government conservatorship, much like a bankruptcy reorganization. The plan also replaces the management of the companies.Stephen Labaton and Edmund L. Andrews, "In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans," New York Times, September 7, 2008.
The rescue package represents an extraordinary federal intervention in private enterprise. It could become one of the most expensive financial bailouts in American history . . . [as it] commits the government to provide as much as $100 billion to each company to backstop any shortfalls in capital. . . .
Alan Greenspan, the former Federal Reserve chairman, and Lawrence H. Summers, a Treasury secretary under President Bill Clinton, along with many other critics, have long maintained that the companies were too powerful politically and financially, and that their huge portfolios posed enormous risks to the financial system. . . .
[Treasury Secretary Henry M.] Paulson has sought to avoid taking sides in the debate, but in recent months came to the conclusion that the companies’ conflicting missions of providing federally backed financing for affordable housing while serving shareholders were untenable.
“Market discipline is best served when shareholders bear both the risk and the reward of their investment,” Mr. Paulson said on Sunday.
CNN's Glenn Beck refers to our nation's unfunded future obligations as a $53 trillion asteroid hurtling toward Earth, the first impact from which is scarcely 10 years away. Glenn Beck, "The $53 Trillion Asteroid," CNN, March 14, 2008.
No one in Washington, or those headed that way, seems willing to talk about it, but the United States is headed for a severe shaking up from this asteroid. Although we are the primary target, rather than the whole of planet Earth, no country will escape the impact of our failing economy -- including our major creditor, China.
Former Comptroller General David Walker has been riding around the country on his horse shouting "the asteroid is coming, the asteroid is coming," but we either haven't heard him or can't internalize the significance of what he's saying. (Here's his July 2007 segment on CBS' "60 Minutes.")
What does this mean to my family?
If you count Mary and me, our seven children, five grandchildren and three great grandchildren, that's 17 people.
There are as of this morning about 304 million people living in the United States if you count everyone from new-born babes to the terminally ill. Divide $53 trillion by 304 million and you get a per-person share of those unfunded obligations of $174,342 per person. Multiply that by our family of 17 and you get a . . .
. . . family share of that national debt of $2,963,815!
I don't know about your family, but when I see the Chinese government's REPO Man coming up the walk to knock on the door I'm going to know that this family is in deep, deep trouble.
Talk about "our chickens coming home to roost"!
How much does your family owe the Chinese?
Isn't it about time we insist our public officials -- city council members granting TIFs as well as Congress bailing out wealthy shareholders -- heed Secretary Paulson's wisdom: "Market discipline is best served when shareholders bear both the risk and the reward of their investment.”
Now this bailout is being sold as in the consumer's best interest, making mortgages and car loans once again available at more reasonable rates and terms. It's pointed out that the shareholders of Fannie Mae and Freddie Mac have seen a real reduction in the value of their stock. True enough.
But what about the millions of profit that have already been made by the CEOs of Wall Street firms, by banks, mortgage companies, realtors; what about the future income that will now be coming their way? Those responsible for their profits -- and everyone else's losses -- aren't paying any of those costs. The taxpayers are. And that's wrong.
(Note that all we're talking about here are the "bailouts." That's only one aspect of our system of "socialism for the rich and free private enterprise for the poor." See, e.g., Nicholas Johnson, "Who's The Reason?" September 5, 2008. There are also the tax breaks, subsidies, defense contracts, tariffs, price supports, earmarks and other dozens of ways government functions to transfer taxpayer money to the political parties' largest contributors.)
It's not like this was some big surprise, like critics weren't pointing out that "their huge portfolios posed enormous risks to the financial system." Those profiting from those risks showed little concern for the rest of us until they, too, began to suffer some losses -- at which point they wanted the taxpayers to bear the risk and the loss.
Once we permit firms to reach such a size that a reasonable argument can be made they cannot be allowed to fail because of the far reaching consequences for our economy it's already too late.
No firm should be permitted to reach a size such that Secretary Paulson's wisdom -- "Market discipline is best served when shareholders bear both the risk and the reward of their investment.” -- can no longer be applied.
