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U.S. heading for another crash, debt crisis looms: top economists
1 of 2. Sheila Bair testifies before the Senate Banking Committee hearing on oversight of Dodd-Frank Wall Street reform and consumer protection implementation, on Capitol Hill in Washington May 12, 2011.
Credit: Reuters/Jonathan Ernst
SANTA MONICA, Calif |
SANTA MONICA, Calif (Reuters) - Two leading U.S. economists expressed deep pessimism on Friday that politicians in Washington will be able to strike a deal to rein in America's soaring national debt.
Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation, and Stephen Roach, a veteran economist at Yale University's School of Management, also said the Federal Reserve was creating another catastrophic financial bubble with attempts to stimulate the economy through its policy known as quantitative easing.
The two were speaking at a conference on global risks sponsored by the Rand Corporation and Thomson Reuters, at Rand headquarters in Santa Monica, California.
Bair, who stepped down as head of the FDIC in July 2011, said the Federal Reserve's policy of pumping money into the economy, combined with an unprecedented period of historically low interest rates, was creating "the mother of all bond bubbles."
Bair said she believed the United States was heading for a financial crash on the scale seen when the housing market collapsed six years ago, but this time because of investors who were looking for higher and riskier returns in other asset classes.
Roach called the Federal Reserve policy of low interest rates and quantitative easing a "ticking time bomb that keeps on ticking."
The two spoke as congressional leaders in Washington met with Obama to try to find common ground on taxes and spending that will allow them to head off a looming "fiscal cliff" that could push the U.S. economy back into recession.
About $600 billion worth of tax increases and spending cuts begin to kick in on January 1 unless Congress can find a way to replace them with less severe deficit-reducing measures before then.
Bair and Roach both said they believed Congress will find some way to "kick the can down the road" on the question of the fiscal cliff. Neither believes Washington will pass the fundamental structural reforms necessary to deal with America's long-term debt crisis.
The United States has been running annual deficits of over $1 trillion for several years. National debt now tops $16 trillion.
A series of panels and commissions last year recommended a mix of revenue increases and spending cuts as a way to pay down the debt. Efforts by Obama and John Boehner, the Republican House Speaker, to reach a "grand bargain" on debt reduction collapsed amid acrimony last year.
"It's not hard to figure this out," Bair said. " it's lack of leadership that doesn't get us here. I just don't see that sort of leadership anymore."
Roach said: "I am not optimistic we will get a grand deal that will really solve our long-term problems."
(Reporting by Tim Reid; editing by Prudence Crowther)
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Aside from this hyperbole, it is difficult to imagine what Quantitative Easing has to do with the fiscal cliff or even a recession.
QE is intended to assume bank bad-debt (yes, the Toxic Waste kind) in order for to improve its balance sheet thus making it both easier to borrow money and lend it.
It is in this last aspect, the lending, where QE is failing. It is, of course, necessary for a credit-based economy to provide such facilities to consumers. How, ever, would we foster a shop-till-you-drop materialism without it?
But the problem with consumers today is their propensity to spend, which is the psychological motor that quick-starts their desire to consume. When a people go through a period of heightened tension produced by the real menace of losing one’s job (because unemployment rates are so high), they automatically reduce their spending habits. They tend to focus upon the necessities and save whatever may be left over. In fact, savings in the US has recovered remarkably well over the past four years since recession was provoked by the Credit Mechanism Seizure on Wall Street in the fall of 2008.
So, banks may be flush with funds, but not that much consumer propensity to spend is there to employ credit in order to increase consumption. And what the mounting national debt has to do in that equation is even more difficult to see.
The Fed can print its way out this mess, if it wanted to do so. That is by increasing the supply of money. We must reduce the debt for reasons other than any negative impact it may have on consumer spending. Because its maintenance requires a higher level of tax revenues, which lower the net income of households and therefore restrains their ability to consume. Meaning lower spending habits.
We have been kicking the proverbial can (of debt maintenance) down the road for decades and that must now stop. We need to learn how to balance national and state budgets prudently.
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