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« How The FDIC Shuts Down Failed Banks - Official Video | Main | The judge who could kill Obamacare »

Sheila Bair: Next Debt Crisis May Start In Washington

Notice Larry Summers sleeping...

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Editorial from the Washington Post

Reprinted with permission.

Will the Next Fiscal Crisis Start in Washington?

By Sheila C. Bair

Two years ago the United States experienced its worst financial crisis since the 1930s. The crisis began on Wall Street, where misguided bets on risky mortgage loans resulted in enormous losses that few anticipated. More than 4 million jobs were lost in just six months after the peak of the crisis. There is hardly one Main Street in America not still feeling its effects.

Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That's more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.

Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today's dollars. Defense spending is similarly unsustainable, and our tax code is riddled with special-interest provisions that have little to do with our broader economic prosperity. Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.

Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations. Financial markets are already sending disquieting signals. The cost for bond investors and others to purchase insurance against a default by the U.S. government rose markedly during the financial crisis, from an annual premium of less than 2 basis points in January 2007 to 100 basis points in early 2009, before falling to the current level of 41 basis points.

With more than 70 percent of U.S. Treasury obligations held by private investors scheduled to mature in the next five years, an erosion of investor confidence would lead to sharp increases in government and private borrowing costs. And while we enjoy a uniquely favored status today - investors still view U.S. Treasury securities as a haven during crises - events in Greece and Ireland should serve as a warning. The yields on their long-term government securities have risen from rough parity with U.S. Treasury obligations in early 2007 to levels that are hundreds of basis points higher. If investors were to similarly lose confidence in U.S. public debt, we could expect high and volatile interest rates to impose losses on financial institutions that hold Treasury instruments, and to raise the funding costs of depository institutions, which can be highly vulnerable to interest-rate shocks. All of us would pay more for consumer and business credit, and our economy would suffer.

Recent proposals by the co-chairs of the National Commission on Fiscal Responsibility and Reform and by the Bipartisan Policy Center represent credible first steps toward recognizing and addressing the nation's fiscal problem. Both propose to reduce and cap discretionary spending, enact comprehensive tax reform, reduce mandatory spending on health care and other programs, and ensure the long-term solvency of Social Security.

Fixing these problems will require a bipartisan national commitment to a comprehensive package of spending cuts and tax increases over many years. Most of the needed changes will be unpopular, and they are likely to affect every interest group in some way. We will want to phase in these changes as the economy continues to recover from the effects of the financial crisis.

Establishing a comprehensive plan now would demonstrate a firm commitment to the type of long-term budget discipline that will be needed to preserve our nation's credibility in the global financial markets and a stable banking sector at home.

The quiet confidence of the American public in the FDIC's deposit insurance guarantee was one of the bulwarks that helped to stem the tide in the recent crisis and avert even greater economic calamity. But we must never take public or investor confidence for granted. In the end, that confidence is only as great as the resolve shown by our government in identifying emerging risks and taking concerted action to head them off. Excessive government borrowing poses a clear danger to our long-term financial stability. All of us must work together now as Americans, look beyond our narrow partisan interests and show the world that we are prepared to act boldly to secure our economic future.

The writer is chairman of the Federal Deposit Insurance Corp. 


Video - Harvard Kennedy School - Oct. 20, 2010

Sheila on public perception of the health of banks...


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Reader Comments (14)

You ain't seen nothing yet, I love the Austin Lounge Lizards!

A friend of mine was on jury duty today and a guy was convicted of stealing 5 dollars, and will get 5 years. If the bankers got convicted of their thefts, how many years would that be? The law defends the plunderer...

I heard a tidbit about mortgages "vacationing" in Mexico and becoming "lost" today, is this another fine example of outsourcing and offshoring? If so, hurry up and send mine on vacation.

How much do you think this "cost saving initiative" saved the noble banksters?
Dec 1, 2010 at 1:39 AM | Unregistered CommenterS. Gompers
A friend of mine was on jury duty today and a guy was convicted of stealing 5 dollars, and will get 5 years.


the bankers rage on with billions in stolen booty......
Dec 1, 2010 at 2:01 AM | Registered CommenterDailyBail
U.S. Securities and Exchange Commission attorneys felt pressured to pursue a speedy case over Bank of America's Merrill Lynch buyout and at first skipped more complex legal questions about the deal, a report from the SEC's Inspector General said on Tuesday.

In its semi-annual report to Congress, the SEC Inspector General's office said the securities regulator's staff initially focused on the bank's approval of 2008 bonuses to Merrill employees — rather than the extraordinary losses Merrill would report in the fourth quarter 2008 — because some officials doubted how successful pursuing those claims would be.

"The Enforcement staff felt pressure to bring a case against BofA promptly because of the internal interest in the case and its high-profile nature," the report stated.

Dec 1, 2010 at 2:12 AM | Registered CommenterDailyBail
Restaurants See Best Pickup in Business in 3 Years

Dec 1, 2010 at 2:13 AM | Registered CommenterDailyBail
@ Gompers,

5 years jail time costs the taxpayers 5 * 365 * $ 300.00 = $ 547,500.00

So the jury billed the taxpayers for half a million dollar because a petty thief stole $ 5.00.

May I as taxpayer thank the jury for their boundless benevolence.
Dec 1, 2010 at 2:42 PM | Unregistered Commenterfliteshare
Ms. Bair calls for an end to Washington’s drunken borrowing and prescribes sobriety in the form of spending cuts and tax increases. Most of us around the country are well aware that the entitlements we were promised are evaporating faster than Whiskey spilled down a wino’s shirt. The majority of Americans have left the party and sobered up to the fact that spending cuts and tax increases are inevitable. Washington, for its part, is still at the party pounding shot after shot offered to it by special interest groups and lobbyist enablers. Like a true alcoholic, Washington is in denial and will only make the hard choices after it hits rock bottom. Cheers.

Dec 1, 2010 at 9:48 PM | Unregistered CommenterAmy
well said amy...
Dec 1, 2010 at 11:46 PM | Registered CommenterDailyBail
@fliteshare...excellent point..it's just unfathomable logic on the part of the judge...
Dec 1, 2010 at 11:47 PM | Registered CommenterDailyBail
@ fliteshare

"So the jury billed the taxpayers for half a million dollar because a petty thief stole $ 5.00."

The jury convicted him a robbing a delivery guy with a pellet gun, he confessed. The judge of the estabished realm sentenced him to the taxpayer dime. The same judges of the store bought courts are helping the banksters pillage America, while the Goobermint passes the cost of the much larger crime onto the backs of the taxpayer.

Who do you really think the judges will side on with this tidbit. As I said many times before, the law defends the plunderer...


Outsourcing and offshoring, gonna save the "American plantation". In strawman court, if someone is suing you for money they say you owe them, They must prove you owe it beyond a shadow of a doubt, or it is dismissed. There are many unlawful aquisitions going on right now that the judges are aiding and abetting the crime. One mans house was taken by a bank and sold, and his house was already paid off.


We hang the petty thieves and appoint the great ones to public office.

Dec 2, 2010 at 2:46 AM | Unregistered CommenterS. Gompers
wouldn't surprise me if the judge has a financial relationship with a local prison or 2...wouldn't be the first time...
Dec 2, 2010 at 3:37 AM | Registered CommenterDailyBail
Of course you are referring to the private, for profit prisons aren't you?
Dec 2, 2010 at 9:29 AM | Unregistered CommenterS. Gompers
This illegal debt must not be paid. The American people have been swindled by the Banks (Goldman Sachs, Bank of America, Merrill Lynch, et al), the Federal Reserve, the US Treasury, the US Congress, a consortium of Rothschild controlled foreign banks and the Executive Branch of the US Government. Our Government has betrayed us--the hard working people of the United States! If the American people do not bring these criminals to account, the Republic deserves to die and the people deserve the coming tyranny.
Dec 3, 2010 at 7:02 AM | Unregistered CommenterCold Wind
Of course you are referring to the private, for profit prisons aren't you?

yes...i remember a judge in south carolina i think...
Dec 3, 2010 at 7:13 AM | Registered CommenterDailyBail
"yes...i remember a judge in south carolina i think... "

Big money to be made in backroom sweetheart deals with contractors at the taxpayers expense for the willing participants of the graft. Your state has a lot going on with these private prisons as well...

Both federal and state governments have utilized private firms to operate prisons, despite evidence of systematic failures. Privatization only increases the challenges faced by states, communities, and families dealing with the broken prison system. For example, the Florida Center for Fiscal and Economic Policy finds that there is no compelling evidence that prison privatization has led to savings, while the Private Corrections Institute analyzes several issues with privatization, which include “major riots, sex abuse scandals… improper billing by private prison companies… employment law violations, higher employer turnover rates, increased levels of prisoner-on-prisoner and prisoner-on-staff violence, lack of transparency and public accountability, and higher recidivism rates for inmates released from privately-operated prisons.”

When privatization involves prisons and detention centers, the profiteering comes at the expense of constitutional safeguards, democratic oversight, and public trust.
Dec 3, 2010 at 8:15 AM | Unregistered CommenterS. Gompers

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