Negotiators working overtime through the weekend agreed on a compromise Wall Street bailout. It should be approved by Congress and signed by the President as soon as possible. Fundamental problems remain with key aspects of the bailout but sufficient improvements were incorporated to justify passage, especially given the critical need to unfreeze credit markets. Failing to enact the bailout risks a major plunge in the stock market, more bank failures and undermining future economic growth. That said, the $700 billion bail-out is only a short-term fix. It avoids assessing the regulatory failures and shady private sector actions that contributed to the immediate crisis, and it does nothing about the root causes of the economic crisis. Looming over it all are the enormous difficulties that will come if we are to free the nation from the grip of the debt monster upon which we have made ourselves dependent.
The root cause of the present crisis is the federal government’s insistence beginning with passage of the 1977 Community Reinvestment Act that private sector lenders loosen their credit rules in order to give mortgages to buyers who could not repay them. Then in the 1990s and thereafter, an ill-advised government policy was transformed into a financial toxin as Fannie Mae and Freddie Mac used their status as government-backed corporations to backstop millions of such sub-prime loans and to encourage their packaging in mortgage-backed securities as investment tools. Wall Street knew better than to build on such an economic house-of-cards, but did it anyway. The bottom-line remains that well-intentioned but ill-advised government policies are at the heart of the immediate economic crisis.
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But it is the debt monster that is by far the more serious long-term financial obstacle we face. The government doesn’t have $700 billion to pay for the bailout, so it will borrow the money instead of printing cheap but highly inflationary money. The nation’s national debt already approaches $10 trillion, including approximately $500 billion each to China and Japan. Add to those totals the $300 billion economic “stimulus” package passed earlier this year and now the $700 billion bailout. If those numbers seem daunting, consider this: The federal government owes more than $40 trillion more in entitlement benefits than it can realistically expect to receive in taxes in coming years. This shortfall hits with a vengeance beginning in 2011 when the first ranks of the Baby Boomers start drawing Social Security. Without hiking taxes to ruinous levels or slashing benefits millions of Americans are counting on, Washington must stop spending hundreds of billions of dollars and start paying down its debt. The ancient proverb – the debtor is slave to the lender – is as brutally true today as it was when Solomon first wrote it.
