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WSJ finds some adults like George Shultz, Michael Boskin, etc. to outline our dire financial straits.
Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear.
Where are we now?
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.
The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.
The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008. …
George Will says some of the FED’s governors are not very happy with current policy.
Fortunately, not everything is up to date in Kansas City. Esther George, president of the regional Federal Reserve Bank here, is refreshingly retrograde regarding what less circumspect people welcome as the modernizing of the nation’s central bank into a central economic planner. She has concerns, both prudential and philosophical, about the transformation of the Fed in ways that erase the distinction between monetary policy, which is the Fed’s proper business, and fiscal policy, which is inherently political.
The basic interest rate — i.e., the federal funds rate minus the inflation rate — was negative during about 40 percent of the disastrous 1970s and the 2000s, which ended disastrously. Because today’s rate is negative, the Fed’s stimulus repertoire is reduced to “quantitative easing.” That phrase, which is how government speaks when trying not to be understood, means printing money. Except printing is so 20th century. Nowadays, the Fed gives banks digital transfusions of money to lower long-term interest rates, which result in . . .
Not much bang for trillions of bucks. With corporations holding upward of $2 trillion in cash, and 30-year mortgages at 3.5 percent, George, speaking several weeks before this week’s meeting of the Federal Open Market Committee, asked: “Is there anyone not borrowing today or purchasing a house because interest rates aren’t low enough? Do we expect that businesses will hire if their long-term rates are lower?”
Very low interest rates discourage saving, punish retirees living off interest-bearing assets and, George says, “incent people into riskier assets.” These include commodities, farm land (for the first time on record, prices of cropland in George’s district have risen more than 20 percent for two consecutive years) and equities. …
Glenn Reynolds on the Obama generation of twenty somethings stuck in their parents’ homes.
A couple of weeks ago, I wrote in these pages about the way senior citizens are being squeezed by rising costs for food and gasoline on the one hand, and reduced income from abysmally low interest rates on the other.
That “senior squeeze” is real enough, but seniors aren’t the only ones being squeezed. At the other end of the demographic spectrum, young workers are having a dreadful time of it, too. Call that the “junior squeeze.”
Young people younger than 30 are “desperate for jobs,” as their cohort faces the worst unemployment prospects in decades. According to The Atlantic, last months’ jobs report was an awful jobs report for young people because it demonstrated that new jobs just aren’t being created at a sufficient rate to absorb all the young people entering the jobs market from high school and college. Wrote The Atlantic’s Jordan Weissmann, “In short, there are a lot more young adults still sitting at their computers scrounging around jobs boards for work than there should be at this point in the year.”
There are. And it gets worse. Because of the senior squeeze mentioned earlier, older “gray-collar” workers are staying in, or re-entering, the jobs market to make up for the income they’re losing due to lower interest rates, and to offset higher costs of living. These older workers, because of their already established track records, might be out-competing younger workers even in such entry-level areas as food-service jobs. …
You would think Washington got the message about the mistaken policies of forcing banks to make mortgages to sub-prime risks, but not Eric Holder’s department. WSJ Editors have the story.
Banks have been widely castigated for causing the housing bust by lending too much to borrowers who couldn’t repay, but now Eric Holder’s Department of Justice has taken its antidiscrimination campaign to new lengths by whacking a bank for having been too prudent.
In a complaint filed Wednesday and settled the same day, Justice claimed that California-based Luther Burbank Savings violated the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act by setting a policy that had a “disparate impact” on minorities. Between 2006 and mid-2011, 5.2% of Luther’s single-family residential mortgage loans went to African-Americans and Hispanics, compared to an average of 41.7% for other lenders in the area. The complaint doesn’t cite evidence of intentional discrimination because there wasn’t any. …
Debra Saunders on college affordability.
“No family should have to set aside a college acceptance letter because they don’t have the money,” President Obama told the Democratic National Convention as he accepted his party’s nomination in Charlotte, N.C., this month.
That sentence – key in Obama’s “college affordability” agenda – says everything about this administration’s approach to selling itself to the American voter.
What’s wrong with the message? Let me count the ways.
– It ignores reality. There is no reason a qualified poor kid cannot get into college in the United States simply because of money. Richard J. Vedder, director of Ohio University‘s Center for College Affordability and Productivity, told me that Obama is correct, “people might get an acceptance at a relatively expensive private school that they can’t afford to go to.” But if students are accepted into one college, they can get into another, more affordable college, such as a community college, where Pell Grants cover tuition. …
Andrew Malcolm with late night humor.
Fallon: President Obama says he’ll win reelection if the turnout is anything like it was in 2008. While voters said he’d win reelection if he was anything like he was in 2008.
Fallon: 7-Eleven is trying to predict the election results with blue coffee cups if you support Obama and red cups for Romney. Both will be filled with coffee brewed during the Reagan administration.
Fallon: A South Carolina man says his dog walked 500 miles home after being left in Virginia. His dog responded, “Don’t flatter yourself — I’m just here to get my stuff.”
Fallon: A new survey finds 34% of Americans do not have a Facebook or Twitter account. There’s even a name for these people: “Productive.”