dwot (99.56)

Loose Lending Was Not Enough

January 08, 2008 – Comments (7)

I continue to be shocked by the degree of incompetence and fiscal irresponsibility that I read about, the latest from  Nouriel Roubini.

 "In 2000 the US was running a large fiscal surplus – about $300 billion or 2.5% of GDP; by 2004 – after two large and unsustainable tax cuts and massive defense and national security spending increase - that surplus had evaporated into a 3.5% of GDP deficit. And while the overall deficit shrank after 2004, on a cyclically adjusted basis the structural deficit is very large now. So, unlike 2001 the US cannot afford now a massive  - 6% of GDP - fiscal stimulus like the 2001-2004 one. Even the Summers proposal adds up to less than 1% of GDP.   That unsustainable and reckless fiscal and monetary (Fed Funds down from 6.5% to 1%) policy stimulus in 2001-2004 was sarcastically referred to as “best recovery that money can buy” by the sensible and brilliant Ken Rogoff (a “Republican” economist who was at the time the chief economist of the IMF)."

 Add to this that the loose lending standards leveraged the problem of running a deficit budget.  That's how you end up with Americans spending 130% of their income for 5 years.

This is a disaster of unprecedented levels...

What erks me is that who ever the next President of the USA is will probably be blamed in the minds of the uninformed, rather than holding Bush responsible.  I remember a discussion I had with Dave Barrett once, one of our former Premieres of British Columbia in the 70s.   He was going on and on about Trudeau being the best Prime Minister Canada ever had, yet Trudeau is the single individual most responsible for the enormous difference in changing lifestyle that I was on the top end of receiving.  He had practically no debt when he entered office and and when he left back in the early 80s program spending exceeded taxes by $40 billion per year, excluding debt servicing. No wonder there were unprecedented good times in the 70s.

When I glance quickly at the US numbers, Canada was pretty much in the same place with our federal government debt as the US currently is, however, we didn't also have negligent levels of consumer debt.

The debt rises more under the person trying to control it than the person who created it because you can't fix that kind of deficit all at once and debt servicing costs at first go up faster than the cuts to spending and increases in taxes that must happen.  There is no choice in this matter.  There is a limit to the amount of money that can be borrowed and I would suggest that the US has exceeded that limit, only the lenders were asleep at watching their investments and they are only now realising their losses. 

The spending spree is over and I can't see how the US recovery isn't harder than what I feel like I have lived through for Canada to get its debt back under control.