Posted on 05/13/2009 5:44:19 AM PDT by SeekAndFind
Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.
That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.
Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.
The US, despite the downturn, has the resources, expertise and resilience to restore its economy and meet its obligations. Moreover, many of the trillions of dollars recently funnelled into the financial system will hopefully rescue it and stimulate our economy.
The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.
First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.
Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.
For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.
How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?
I have fought on the front lines of the war for fiscal responsibility for almost six years. We should have been more wary of tax cuts in 2001 without matching spending cuts that would have prevented the budget going deeply into deficit. That mistake was compounded in 2003, when President George W. Bush proposed expanding Medicare to include a prescription drug benefit. We must learn from past mistakes.
Fiscal irresponsibility comes in two primary forms – acts of commission and of omission. Both are in danger of undermining our future.
First, Washington is about to embark on another major healthcare reform debate, this time over the need for comprehensive healthcare reform. The debate is driven, in large part, by the recognition that healthcare costs are the single largest contributor to our nation’s fiscal imbalance. It also recognises that the US is the only large industrialised nation without some level of guaranteed health coverage.
There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.
One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.
Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.
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David Walker is chief executive of the Peter G. Peterson Foundation and former comptroller general of the US
We are a lot closer to this eventuality than many Americans realize.
What a pity. What stupidity.
I think a lot of people who voted for Mr. Obama are surprised to learn that “hope” and “change” could be so expensive.
“We are the ones we’ve been waiting for.” -BHO
That sounds like a line from “Seinfeld.”
God help us.
The author is either an idiot or a schemer. Arguing for national health care under more prudent federal control is a pipedream, similar to the ones that bought us Social Security and Medicare. It’s just begging for a more future form of failure.
Is the United States government too big to fail?
Now get that nose back to the grinding wheel.
It’s already not AAA. Who would buy 30 year Treasuries, at a meagre 3% yield, with half of it being financed with Fed money-printing, with the Gov’t planning 10 Trillion of deficits in 4 years, and with Medicare and Soc. Sec. moving towards insolvency?
I kind of remember a president trying to give people more control over Social Security not too long ago. And he was opposed by Nancy Pelosi and other friends of BO.
No.
And the bigger they are, the harder they fall.
When we hit the deck, the whole planet's going to shake.
Buy guns. Buy ammo.
““We are the ones we’ve been waiting for.” -BHO
That sounds like a line from “Seinfeld.”
Would make a great bumper sticker!
Let that sink in a minute or two.
Yes it would!
Actual bumpersticker:
“So, how’s that ‘hope’ and ‘change’ thing working out?”
“It’s already not AAA. Who would buy 30 year Treasuries, at a meagre 3% yield”
The Federal Reserve would, of course. By monetizing it. You know, Ron Paul used to sound crazy to me when he talked about this stuff, but they ARE doing it now!!!
Are there set time frames for review of the rating, say quarterly, or annually, or can a rating change happen at any time?
The U.S. can either repudiate social spending or it’s economy can crater. Don’t see a third option.
Theoretically, it can happen anytime. However, the issuer is often notified by the reviewing agency that their debt is “under credit review.” It may also add that the review is ongoing with a “negative” or “positive” implications.
We’ve seen tons of this since the early fall of 2007 when the banking crisis really began to blossom.
For example, many insured tax free bonds were downgraded because the bond insurers’ stocks were getting creamed.
Naturally, I pray US debt does not get downgraded. That would be a nightmare. But the more money we spend - that we DON’T have - the closer we step toward the edge of that ratings cliff.
Yup.
Chances are, I fear, that unemployment will reach well into the double-digit area inside the next year.
According to government stress test material. Over the rest of this year and to the end of 2010, estimated losses uncovered by the stress tests will total one-point-seven TRILLION dollars...and that’s just SEVEN big banks! Those losses are greater than the PREVIOUS year and a half.
The road has only begun to tilt downwards. Tie a knot in the end of your line and hang on!
All a part of the Obama agenda to destroy this country and spread chaos in the earth.
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