America is supposed to be the world’s economic and financial leader. How much more will we discredit ourselves before President Obama does his job: lead us out of a historic crisis that is gnawing through our growth, instead of digging us deeper?
The “discredit” is literal. Standard & Poor’s on Friday slashed its rating on America’s debt from AAA to AA+. The analysts noted that government debt (up 48 percent in three years) is jumping from 74 percent of GDP now to 85 percent in a decade, and maybe higher, to 101 percent.
And S&P doesn’t see the current crew in Washington as able to change this course. Its analysts note that any progress — “especially on entitlements” and taxes — will be “contentious and fitful.”
Hard to disagree. But the downgrade was still a shock — the unthinkable happened. American bonds are — were? — the gold standard. Bankers “know” that Treasury securities are “risk-free” — and measure other assets, from Brazilian bonds to Swedish stocks, in relation to this guide.
What changed? Ever since the 2008 collapse of the real-estate and financial bubbles, the government’s been using its credit card to stop bad companies (arguably including S&P itself) from paying the ultimate price for their failures in the run up to that crisis.
Since he took office, Obama’s strategy has been to double down on the nation’s failed financial elite, from Fannie Mae and Freddie Mac to AIG to Bank of America.
In a free market, these companies would be kaput. And no matter if they were doing what the government wanted them to do — lend too much: That willingness to kowtow should have put them out of business.
Instead, Obama — with help from the Federal Reserve — has been nursing these companies back to superficial “health.”
You want examples? The Fed keeps tens of billions of toxic mortgage-related securities on its books. This keeps markets from pushing these securities down to their real levels, which would force lenders to admit that trillions in bad housing debt will never be repaid. Meanwhile, the administration lets regulators look the other way when it comes to banks’ incompetence in handling foreclosures — which also delays recognition of bad debt.
All these delays in admitting reality stall growth — because we keep throwing good money after bad, rather than letting investment go to where it really can show a profit and create new jobs.
It would cost $200 billion a year for 30 years to pay down the hangover of bubble-era mortgage debt — debt that should largely disappear, since lenders were just as wrong on their appraisals as borrowers.
Mortgage debt doubled, from $5 trillion in 2000 to $10 trillion in ’07. House prices are back down to 2003 levels — but we’ve got $3 trillion more in mortgages than we did then.
We’re digging deeper, too. Obama (via Fannie, Freddie and the Federal Housing Administration) has enticed new homebuyers to buy with just 3.5 percent down. As house prices slide, these buyers join those trapped under housing debt. It’s all an effort to prevent old homebuyers and lenders from having to to take their losses — but it just locks more victims into the mess.
It’s not just housing. The Dodd-Frank financial-regulation law makes it clear that big financial firms will never have to play by free-market rules: It just makes “too big to fail” official, while relying on regulators to somehow be smarter about seeing the next bubble coming.
Fannie and Freddie live on in limbo, too — running up new (bad) obligations that the taxpayers will have to eat. But housing prices can’t reach their “bottom,” and start recovering, until the fate of the two housing-finance giants is resolved.
Politicians have ignored this mess for three years now, because they fear the sharp short-term pain of confronting it. But getting past that pain is the only way to a real recovery; putting it off just adds to the eventual price (in pain and in cash).
As long as we don’t make borrowers and lenders accept the consequences of bad decisions, we can’t grow. Shielding people from accountability sucks up all of our extra economic resources, public and private.
And growth is critical to deal with the problems S&P cites. People with jobs and savings could accept entitlement changes. People terrified of where they will be in a year, not so much.
This isn’t about morality or national pride: It’s about what works — and our strategy hasn’t. Markets will win, anyway, once they’ve gone through all of the bailout resources that the government can muster. We’re just forcing the markets to do it the hard way — and it will be harder for us, too, in the long run.
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.