Reno Hayek Symposium » National Debt

Marco Rubio’s Letter to Obama on Debt Limit

Tom — Fri, 13 Jan 2012 03:14:46 +0000

January 6, 2012

President Barack Obama
The White House
1600 Pennsylvania Avenue NW
Washington, D.C. 20500

Dear Mr. President

Any day now, news reports suggest you will ask Congress to approve yet another increase in the debt ceiling. The expected request is another $1.2 trillion, adding to a three year debt binge that has totaled $4.5 trillion on your watch and that has enabled our overall debt to surpass $15 trillion. Your latest request will push the federal debt limit well above $16 trillion.

This pending request will be the sixth time during your Presidency that Congress is being asked to keep allowing government and spending to grow at rates that are unsustainable. In other words, you have made it a routine part of your job to ask for more room to spend without any plan to reduce our debt.

Instead of making debt ceiling increases a routine Washington exercise, we need to make it routine to actually spend no more than we take in. Until then, I will oppose your request to continue borrowing and spending recklessly.

As I wrote in The Wall Street Journal in March 2011, I will oppose a debt ceiling increase unless such an authorization is accompanied by a real plan to tackle our debt. Ideally, such a plan would feature both pro-growth elements and spending restraints, including fundamental tax reform, regulatory reform, meaningful cuts to discretionary spending, a balanced-budget amendment, and reforms to save Social Security and Medicare.

If we had done this in mid-2011 when we last debated the debt ceiling, we could have set America on a path to economic growth and prosperity. This would have led to more jobs and, in turn, to more duly employed taxpayers generating more growth-driven revenue to help us pay down our debt. Instead, you failed to lead, punted the tough decisions and, in doing so, our credit rating was downgraded for the first time in our history. It’s a tragic reality but, on your watch, more and more people have come to believe that America is becoming a deadbeat nation inevitably heading toward a European-style debt crisis.

When you served in the Senate in 2006, you called raising the debt limit “a sign of leadership failure.” Using your own standard, this request will mark your sixth “sign of leadership failure” on the debt ceiling issue alone. Throughout our history, Americans have revered courageous leaders and celebrated them as profiles in courage. Unfortunately, the first three years of your presidency have been a profile in leadership failure. While you may choose to run your reelection campaign against a “Do-Nothing Congress,” your insistence on doing nothing to meaningfully tackle our debt poses a direct threat to America’s exceptional character and is leading us towards a diminished future.

America deserves leaders who will stand front and center, level with the American people about our challenges and offer real solutions to solve them. Instead of simply asking for another debt ceiling increase, I urge you to come forward with a real plan to tackle our debt in 2012.

Sincerely,

Marco Rubio
United States Senator

Debt Limit? What debt limit?

Tom — Sun, 08 Jan 2012 21:26:02 +0000

We will soon see a new Obama sponsored debt limit increase. Look for another replay of the last fiasco. Kyle Meintzer alerts us to this close to home video on debt limits:

For the U.S. cutting expenses is the only answer. Real cuts are necessary, not mere reductions in the rates of increasing government spending.

Time For Debate on the Role of Government

Tom — Tue, 03 Jan 2012 22:39:50 +0000

Considering our current state of affairs, I’m beginning to think that the only course of action is to force a national debate on the role of government. As the current president and his party are for big government, maximum entitlements and dependency, and generation choking deficits, the opposing candidate should present the exact opposite. The Republicans or Independents should nominate a pure candidate that presents clear issues and choice. A brokered Republican convention or third party candidate may provide a way to offer that debate. A centrist candidate will not offer the clear choice we need.

Consider the WSJ editorial, The Spenders Won in 2011. Republicans controlled the House yet failed to get any significant reduction in spending. Deficits generated by a Democrat controlled Congress were $2.98 Trillion in 2008, $3.52 Trillion in 2009, $3.45 Trillion in 2010; and even with a Republican House are $3.59 Trillion in 2011 and projected to be $3.65 Trillion in 2012. We are over $15 Trillion in national debt. This is debt that we will pass onto our children and grandchildren. How moral is that? We take handouts that our grandchildren will pay for!

There must be a debate on the role of government. It does everything as Obama, Pelosi and Reid propose. Or is is limited as our constitution suggests. If the nation opts for the “free lunch,” our nation will become another Greece. If the nation chooses the moral course of eliminating the “free lunch” our children and grandchildren will have a chance to live productive lives in this country.

Short of a moral decision in an election on that all-encompassing issue, those of us who want a better future for our children are left with only two options: revolution or individual expatriation! The only alternative is to continue on the current unsustainable path with either party in control or gridlocked by the other. This is Friedrich Hayek’s Road to Serfdom!

The centrist position, the middle ground, is what constantly gets us into trouble. In essence, Republicans equal Democrats; neither party can say no; neither can cut spending. We need to get off the treadmill. We are stealing from our grandchildren. This is immorality near its height.

“Bailout-er” of Last Resort–For Europe?

Tom — Wed, 28 Dec 2011 16:04:54 +0000

Jerry O’Driscoll penned a dynamite op-ed in today’s WSJ. It raises serious questions about the Fed’s role and is reprinted below:

The Federal Reserve’s Covert Bailout of Europe

When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.

By GERALD P. O’DRISCOLL JR.

America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman’s collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.

Getty Images

The Fed’s support is in addition to the ECB’s €489 billion ($638 billion) low-interest loans to 523 euro-zone banks last week. And if 2008 is any guide, the dollar swaps will again balloon to supplement the ECB’s euro lending.

This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.

The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed’s reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed’s Swap Operations report, and the ECB website.)

No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.

First, the Fed has no authority for a bailout of Europe. My source for that judgment? Fed Chairman Ben Bernanke met with Republican senators on Dec. 14 to brief them on the European situation. After the meeting, Sen. Lindsey Graham told reporters that Mr. Bernanke himself said the Fed did not have “the intention or the authority” to bail out Europe. The week Mr. Bernanke promised no bailout, however, the size of the swap lines to the ECB ballooned by around $52 billion.

Second, these Federal Reserve swap arrangements foster the moral hazards and distortions that government credit allocation entails. Allowing the ECB to do the initial credit allocation—to favored banks and then, some hope, through further lending to spendthrift EU governments—does not make the problem better.

Third, the nontransparency of the swap arrangements is troublesome in a democracy. To his credit, Mr. Bernanke has promised more openness and better communication of the Fed’s monetary policy goals. The swap arrangements are at odds with his promise. It is time for the Fed chairman to provide an honest accounting to Congress of what is going on.

Mr. O’Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.

O’Driscoll Post: End of Euro?

Tom — Wed, 09 Nov 2011 22:36:39 +0000

Jerry O’Driscoll”s post on the Cato blog today will get your attention; it follows verbatim:

“Global equity markets are falling, with the Dow Jones Industrial Average down around 250pts. A benchmark 10-year Italian government bond is yielding 7.4%. Every country whose sovereign debt went over the 7%-mark has required a bailout. I was in Italy a month ago, and the yield was under 6% (still pricey for a developed country).

A bailout of a country Italy’s size would be a gargantuan task — probably a larger effort than heretofore. It is beyond the capacity of the EU. Italy’s debt is just too large. I doubt China would purchase any real assets until labor-market reforms and pension reforms were enacted. China actually wants a return on its investments.

If the IMF gets involved, it would require massive new funds for which the US taxpayer would be on the hook for around 18%. I wonder how that would go over in the US House or even the Senate? That doesn’t mean the Obama administration won’t try to organize a rescue. The Fed has been backstopping the EU banks for some time.

Will the Euro survive? Will the global financial system survive?”

Jerry’s email answer to the last two questions was: “probably and possibly!” I’m not sure of the order he intended.

But see Italy Bond Attack Breaches Euro Defenses today on Bloomberg.com. The simple answer is that monetary governance without fiscal governance does not work. The sooner that is realized, the sooner sovereign bailouts will stop, and the sooner the European nations can begin a healthy recovery.

Boomerang–A Great Read

Tom — Sat, 05 Nov 2011 17:56:19 +0000

I just finished Michael Lewis’s latest, Boomerang and can highly recommend it. As a non-economist reporter he tells the story of a world awash in cheap money and easy credit and tells it with reference to a few developed countries. Starting with Iceland, the first to go belly up when its fishermen decided to become investment bankers with credit advanced by European banks, he goes to the current zombie Greece. The Greeks borrowed not to invest but just to take exorbitant salaries and long vacations. Now the Irish, bless them, decided to become real estate developers in Ireland this with the funds borrowed from Irish and European banks; unfortunately the government decided to guarantee the banks against horrendous losses on the worthless real estate developments. Onto Germany whose citizens are disciplined not to over borrow or over spend, but whose banks were perfectly willing to lend to the Greeks and Irish without proper credit evaluation.

When he heads home to the US he focuses on his home state of California which is essentially bankrupt. First to fail though will not be the state government but the local municipalities the worst of which is Vallejo which filed for bankruptcy in May of 2008. There is, of course, more to come. Here’s a brief interview with the author:

S&P Downgrade Is Merely a Symptom

Tom — Tue, 09 Aug 2011 05:43:36 +0000

Despite today’s worldwide market plunge and the pundits attributing it to the loss of the U.S. AAA rating, that loss is only a symptom of the underlying disease: major deficits for as far as the eye can see, resulting accumulated debt as an increasing percentage of GDP, and staggering unfunded (and undisclosed) liabilities. The U.S. is basically headed toward bankruptcy. If downgrades continue bond purchasers will demand more returns which in turn increase the deficits and debt.

On a macro basis we have two major customer economies in the dumps, Europe and the U.S., and one major exporter and lender, China, all suffering. Europe is of greater concern than the U.S., even though neither has cogent plans for a solution; it’s just that the U.S. has a better political structure to affect an eventual solution.

So, forgetting about the market, the real economy is facing a recession. Joe Morabito CEO of an international executive relocation business reports that the typical summer peak time has turned into a downer. Gene Humphrey CEO of a chip technology company reports that industry leaders are forecasting a downturn for the next two quarters because consumers have retreated from the market. This is “real economy” evidence that we are looking at a probable double dip, a second recession.

Politically, the parties blame one another. But the tea party gets the most blame. In fact, the tea party should get the most credit. Someone must yell from the rooftops STOP, CUT BIG GOVERNMENT!

Serious cuts in entitlements must start now. Gen involved. Call your representatives Convince your neighbors. Save your grandchildren.

From the Greatest to the Worst Generation?

Tom — Sun, 07 Aug 2011 02:42:28 +0000

Our fathers came home from WWII where they lost friends and limbs; they worked in jobs and completed their educations. They married their sweethearts and raised their families. Attended their churches or synagogues. They did not go on welfare. Healthcare was something they only used when necessary and when they used it, they paid for it. They saved mainly for their family but also for retirement. A family car was a luxury and there was only one. They read the newspapers and maybe a magazine. They were intent on providing a good life for their children, insisting on education. They were charitable, giving to those in need. They participated in the community social organizations, churches, county and city governments. As products of the depression, they were frugal and believed others should also be such. While superlatives are often misplaced, they were indeed a very great generation, a humble, independent, family oriented and charitable generation.

They paid taxes on their incomes; there were few who did not. They did not expect to receive social security, Roosevelt’s first insurance entitlement. They did not go on the dole, get welfare. There was no such thing as Medicare, Medicaid, or Obamacare.

Contrast my generation, now the so-called millennials and boomers, those born to that WWII generation: We were reared, nurtured, educated, helped and pushed to succeed. Pride and joy of the “greatest generation” we were urged to be greater yet. Our parents wanted better for us. They sacrificed to better our lot. We were the beneficiaries of their family focus and their support and charity. We enjoyed the benefits of their hard work and sacrifice.

Our military challenge, Viet Nam, paled in significance to Germany, Japan and Korea. Some of us honorably served, others ducked service. “Deferees” and “Dodgers” joined protestors to pillar the returning vets who courageously fought in an unpopular war. We lost our parents’ concept of patriotism and service. We were children of the sixties, the protesting, free-loving, pot-smoking, flower children, free of morality and constraint.

We are the pampered. We demand a government that provides everything, minimum wages, unemployment compensation, welfare, Medicaid, Medicare, Social Security, and yes now Obamacare! Fully half the population pays no taxes and likes it that way. Others should pay. What others do not pay we insist the government borrow. That borrowing has increased to 40 cents of every dollar spent. In essence we are borrowing money that we cannot repay. We will leave that debt to our children.

How do we rate vis a vis the next generation, no the next several generations? What will our children and grandchildren say about us? It’s patently obvious that we are borrowing money that we cannot pay back, to fund entitlements, to promote dependency for fully half of the population. We are loading this unsustainable debt on our children and grandchildren! We are in effect stealing from future generations! Will we be called the worst generation? Don Brookins’ video DOORBELL suggests the answer:

You can bet on it!

What Happens When the Euro Plumets?

Tom — Sun, 22 May 2011 04:17:16 +0000

The prime concern of knowledgable financial analysts has been the Euro, its probable collapse, the consequent effect on the EU and, in turn, the world economy. I read and heartedly recommend John Muldin whose last articles lay out the all too obvious concerns. (See http://www.johnmauldin.com/frontlinethoughts. The basic subscription is free and very good)

In sum, the situation is that the ECB has been buying debt of the bankrupt nations, Greece followed by Portugal, Ireland and perhaps Spain in order to support the EU and more to the point the banks in each EU nation, including those of France and Germany. If ECB support is withdrawn, the banks holding the worthless paper at par, will no longer be solvent! This is the equivalent of Lehman Brothers bankruptcy on steroids!

Assuming the worst for the sake of argument we must ponder the consequences in Europe. Runs on banks are real but probably unnecessary as the currency has no consistant value. Gold, diamonds and high value commodities work as mediums of ad hoc exchange. A barter economy ensues. Europe-dependent international trade at best slows and at worst pauses until enough mediums of exchange can be agreed upon.

The dollar, as the ready-albeit unjustified-medium surges to bubble proportions. US exports become dramatically more expensive for any remaining buyers. US export sales and production slow to deep recession levels. Layoffs ensue. GDP plumets. Federal and state government entitlement demands rise with no ready relief.

The Fed initiates QE3 flooding the economy with more (depreciated in real terms) dollars by buying increasingly worthless US debt.

Will the US which has enjoyed the dumb-fat luxury of being the world reserve currency since Bretton Woods follow the EU and fold? Will there be another substitute world reserve currency? Are all central banks becoming political animals or fiscal policy proxies? How will world trade right itself?

All that said, what’s the effect on your family, your business, your community, your nation and your investments? Is “guns and gold” the mantra of the day? Something to consider!

Lets Eat the Rich

Tom — Sat, 02 Apr 2011 15:56:12 +0000