Wednesday, November 17, 2010
"If only we had sold our stocks a few weeks ago." "If only I'd had the brakes checked before she drove up to the mountains."
There are few sadder words than those of regret at letting time pass until the catastrophe hits. Neither individuals, nor armies, nor nations are exempt from the human tendency to wait too long before acting -- and paying a terrible price for the delay.
These thoughts, among others, crossed my mind as I have watched politicians across the ideological spectrum react to the deficit commission's report last week.
Whatever substantive view of the proposal the various politicians had -- I didn't see a single senior player express the desire to take the report as an opportunity to immediately throw all our effort into developing and passing into law a workable proposal.
What we did see was the predictable criticisms being muttered while all sides seemed to be preparing for a long blocking campaign.
This fits into the emerging Washington mentality regarding most topics: that we are set for gridlock and the long slog of the 2012 campaign before anything significant is likely to be passed into law sometime in 2013 or beyond.
Even as Greece, Spain and Ireland raise the specter of sovereign debt crises, even as France and Britain take bold action to bring their excessive spending under control (at the price of major street violence in their capital cities) American politicians focus on the general unacceptability of a proposal that includes anything that doesn't quite fit their ideological predilections. If they can't have it exactly their way, then they don't want it at all. They are prepared to just coast forward at multi-trillion dollar yearly deficits, leaving only a string of condemnatory press releases in their wake.
But there are Cassandras out there warning against such delays. This spring, Fed Chairman Bernanke warned Congress that the United States could soon face a debt crisis like the one in Greece.
"It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability (of yearly deficits over $1 trillion), and we may find ourselves facing higher interest rates even today."
Just last weekend, the former Fed Chairman Alan Greenspan spoke on NBC's "Meet the Press," saying he believed "something equivalent to what Bowles and Simpson put out is going to be approved by Congress. But the only question is whether it is before or after a crisis in the bond market."
He said the risk is that the deficit, which hit $1.3 trillion this year, could spook the bond market. That would result in long-term interest rates moving up rapidly and could lead to a double-dip recession.
The Fed chairs are not alone. According to Bloomberg News, earlier this year, New York University professor Nouriel Roubini, who predicted that last crash, said that "the U.S. may fall victim to bond "vigilantes" targeting indebted nations from the U.K. to Japan in a potential second "The chances are, they are going to wake up in the United States in the next three years and say, 'this is unsustainable.'"
Roubini suggested that "the public debt burden incurred after the 2008 bank panic may now cause the financial crisis to metamorphose.
"There is now a massive re-leveraging of the public sector, with budget deficits on the order of 10 percent" of gross domestic product "in a number of countries," Roubini said. "History would suggest that maybe this crisis is not really over. We just finished the first stage and there's a risk of ending up in the second stage of this financial crisis."
Of course, we may get lucky. But the sad thing is that we don't even have to fully implement a ten-year deficit reduction plan to vastly reduce the risk of a bond crisis. If we were to enact a serious, credible plan -- even if it didn't begin to bite for a few years, that would probably assure the bond market that we are taking care of the problem.
By immediate action, I mean that Congress and the president go into intense negotiations this coming January and keep at it until we have a plan that brings us back to fiscal probity and is reflected in a budget resolution and the early appropriation and authorization bills. It will take about six months of intense, good faith work.
And let me just add that a corollary to my call for immediate action (more of which in a future column) requires all sides to concede some points of principle -- as neither side has the votes to pass something without the support of the other. We can't concede too much -- but perfect adherence to principle assures failure -- and risks catastrophe.
Of course, the stronger we can make our case to the public for fuller application of our principles, the less we will have to concede. Let the battle of ideas commence, but let it lead to results-and safety.
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