Anybody Blameless? "Fiscal Conservatives" Dodge $10 Trillion Debt (In Search of False Issues Like Social Security & Medicare Theft) & BP Steals More?

You won't find a better source of information on the current economic condition than Simon Johnson today.

Fiscal Conservatives Dodge $10 Trillion Debt Simon Johnson Apr 19, 2011 Bloomberg Opinion Washington is filled with self- congratulation this week, with Republicans claiming that they have opened serious discussion of the U.S. budget deficit and President Barack Obama’s proponents arguing that his counterblast last Wednesday will win the day. The reality is that neither side has come to grips with the most basic of our harsh fiscal realities. Start with the facts as provided by the nonpartisan Congressional Budget Office. Compare the CBO’s budget forecast for January 2008, before the outbreak of serious financial crisis in the fall of that year, with its latest version from January 2011. The relevant line is “debt held by the public at the end of the year,” meaning net federal government debt held by the private sector, which excludes government agency holdings of government debt. In early 2008, the CBO projected that debt as a percent of gross domestic product would fall from 36.8 percent to 22.6 percent at the end of 2018. In contrast, the latest CBO forecast has debt soaring to 75.3 percent of GDP in 2018. What caused this stunning reversal, which in dollar terms works out to a $10 trillion swing for end-year 2018 debt, from $5.1 trillion to $15.8 trillion? Almost all of this increase is due to the severe recession that followed the financial crisis of late 2008. This lowered output and employment, and therefore reduced tax revenue. Revenue Drought For example, look at the tax revenue numbers for 2011, as a percent of GDP. The earlier expectation for 2011 was that the federal government would collect revenue equal to 19.3 percent of GDP. The forecast now is for revenue of 14.8 percent of GDP. Whatever you think about the fiscal stimulus of 2008 (at President George W. Bush’s instigation) or 2009 (from Obama), those had relatively little impact compared with the automatic stabilizers, such as unemployment benefits, that are triggered by deep recession. Why did we have a severe recession with such a crippling fiscal consequences? On this issue, most politicians from both sides of the aisle fall silent. What isn’t in doubt is that this was a financial-sector crisis of classic proportions. In terms of the negative fiscal repercussion, it reads like an episode straight from Ken Rogoff and Carmen Reinhart’s “This Time Is Different,” a history of financial crises. But the political elite that now profess to be bothered by the fiscal deficit made no serious effort to make the financial sector any safer after the events of September-October 2008. Three Responses When you press politicians and their advisers on this, you will hear three kinds of responses in candid moments. First is the notion that banking crises are rare. This is a favorite of the Treasury Department. Perhaps that was true in the past, but our big banks have become bigger, and too-big-to- fail banks have major incentives to take on very high levels of risk. After all, the downside isn’t their problem. Second is the idea that we fixed it with the Dodd-Frank Act, a line heard most often from Democrats on Capitol Hill. Almost no one holds to that view, including William Dudley, president of the New York Federal Reserve, and Sheila Bair, head of the Federal Deposit Insurance Corp. Both have expressed concerns that the roadmap for closing a large troubled bank remains elusive. And the idea that new international rules will force banks to increase their capital enough to reduce the risk of systemic crisis is regarded as ludicrous, at least by leading independent finance experts, such as Anat Admati of Stanford’s Graduate School of Business. Forcing banks to raise more equity in an appropriate way would lower risk, strengthening the financial system at little or no cost to the broader economy, according to Admati. ‘Markets Evolve’ Third, “Let the markets evolve the way the markets evolve.” This was a recent quote from Anthony Santomero, former president of the Philadelphia Fed and current Citigroup Inc. director. Citigroup has blown up repeatedly in the past 30 years, not surprising for a complex and unwieldy megabank with 260,000 employees worldwide. Each time, it was saved through some form of external assistance, usually from the government, in part because responsible policy makers feared what Citigroup’s collapse would do the broader economy. Do we really think that the next time a bank with 200 million clients worldwide gets in trouble that the U.S. will let it go bankrupt, regardless of the consequences? Is that what Vikram Pandit, the chief executive officer, or Timothy Geithner, the Treasury secretary, argued for in 2008 or will argue for next time? Right Way The right way to think about future budget deficits is in a probability-based fashion: What is the chance something bad will happen, and how bad will that be for debt levels? The odds of another major financial calamity next year are small, but the risk over a 10- to 20-year period is high. That’s the right time horizon to use in the coming budget debate. The impact of a new financial crisis on the U.S. public balance sheet would be huge. Anyone who wants to be taken seriously as a fiscal conservative must stop dodging this issue and start proposing solutions. (Simon Johnson, co-author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown” and a professor at MIT’s Sloan School of Management, is a Bloomberg News columnist. The opinions expressed are his own.)

From our observant buddy at Why Now? (emphasis marks added - Ed.): About All The Money That BP Promised

The $20 billion dollar fund is mostly intact. About 90% of the research funding, hasn’t been spent. There is no rhyme nor reason for who gets money and who doesn’t. The Local Puppy Trainer reports that a Downtown legend may close its doors: Staff’s says oil spill may seal its fate FORT WALTON BEACH — Staff’s Restaurant has been a fixture downtown for nearly 100 years. These days it doesn’t look like it will make it to its centennial. Fifth generation family members blame the Deepwater Horizon oil spill, a long wait for claims money from BP and fewer customers for putting them on the brink of closure. “We’ve been through the Great Depression, hurricanes and economic hard times, but the oil spill is what will shut us down,” said restaurant co-owner Martha Garvie. “To think this is what’s going to wipe us out . . . . We’ve used all possible revenue that we could beg, borrow and steal, so to speak.” No final decision has been made to close, but indicators point to that option. They applied for BP money in January, and were told they would hear in April. In April they were told it would be another 90 days. In the meantime the deadline for filing will pass. No one is loaning money for a small business, and the rising cost of gasoline has depressed the local tourism business. The high unemployment and general uncertainty have kept locals out of restaurants, so there is no time left to “weather this storm”. Well, at least they don’t have to worry about estate taxes, thanks to the Republicants. Low taxes and no services – that’s the ticket. NPR reports that a ‘Quagmire Of Bureaucracy’ Stifles Gulf Spill Research. BP says it wants to fund research and sets up a fund, which spends more time arguing about “the shape of the conference table” than making grants for research, and the first year of the spill has been lost. It is almost as if the process was designed to prevent research from taking place … but, of course BP would never do that [yeah, right]. Geoff Pender of the Biloxi Sun Herald has a look at local politicians in his piece, Government officials defend questionable use of BP oil spill grants. Gee, Mississippi politicians spending other people’s money in extravagant ways which don’t seem to correspond to the purpose behind the money. It’s like those lifeguard towers that FEMA paid to replace a few hurricanes ago. Not only does no one ever remember seeing a lifeguard tower on the beach, there is no record of that county ever hiring a lifeguard for the beach. They did spend money on signs saying “Swim at your own risk – no lifeguard”. There’s nothing quite like a fiscally conservative Southern politician. Don’t ever get between them and food, or “free” Federal money.

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