The current proposed bailout is only a Band-Aid

September 28, 2008 | By | 4 Replies More

The real problem with the economy of the United States is massive debt.  Sooner or later, we’re going to have to change our ways, and it’s not going to be pretty.  How much work? Consider this description of the amount of debt, by Kevin Phillips:

We’re not just looking at a real estate mess. Over the last quarter century, the total of public and private credit market debt in the United States — most of it, in fact, is private — has more than quintupled from $8 to $48 trillion, the biggest such orgy in world history. Over that period, domestic financial debt – the money borrowed by the financial sector for expansion, consolidation, empire-building, leverage, exotic mortgages, gambling, you name it – swelled from just $1 trillion to some $14 trillion. Employing these economic steroids, the financial sector ballooned itself from 14-15% of what back in the mid-1980s was the Gross National Product to 20-21% in 2004 of the newer Gross Domestic Product calculation. In the meantime, the once-dominant manufacturing sector fell far behind, dropping to just 12% of GDP. In a nutshell, the economy has been hijacked in recent decades by the very groups who now purport to have remedies – Wall Street, from whence Paulson emerged, and the money-bubbling, don’t regulate the dangerous practices Federal Reserve Board, from whence Bernanke comes . . .

Will this bail-out solve the current mess? Of course not . . .  The leader of the hundred House Republican conservatives, Congressman Jeb Hensarling of Texas, summed it up quite neatly: “Enough is enough. It’s time to bail out the American taxpayers from bail-out mania.”

Phillips, a former Republican strategist, has been a political and economic commentator for more than three decades.

Frederick Deligne, Nice-Matin, France

Reprinted with permission from Cagle Cartoons

One more thought.  What if we had been handling our national budget responsibly for the past few decades?  What if we only owed a relatively small amount in national debt today, say “only” a trillion or two, we could handle this mess.  The problem, though, is illustrated by the many graphs and tables here.  We’re way over our heads and no responsible economist is suggesting that what we’re doing is safe for our economy.  No one thinks that it’s a good idea, for example, that we need to chop $400 Billion out of the national budget every year to pay for interest on existing obligations.  Hence, the terror in the eyes of the politicians who are cobbling together the current “bailout.”  Notice, further, that no one in a position of power is suggesting that the current bailout will be the final massive government bailout of a private entity, even this year.

Not to keep spreading bad economic news, but if you want to understand the extent to which American families have gone, from merely 30 years ago, Economist Elizabeth Warren has some incredibly bad information for you.  We’ve gone from a family that saved almost 11% of its annual income to a family that saves a negative 1% of its incomes and runs a credit card debt amounting to 15% of its annual income.  Watch what has happened to fixed costs, such as health care, mortgage and taxes–the average family now spends 75% of its income to these meet fixed costs.  All of this financial pressure has pushed many middle class families toward the need for two incomes, a much higher risk of not being able to pay their fixed costs and (as you’ll see at about 48:00) significantly higher risk of going through bankruptcy.   The causes:  Job loss, medical issues (especially health care costs) or family breakup (death or breakup of family).  More children now live in homes that is going through a bankruptcy than live in a home being affected by divorce (50:00).  Bankruptcy is a shameful thing for many people; Warren indicates that 85% of the families now filing for bankruptcy are hiding it from their extended family and friends.

This financial stress of the middle class has numerous detrimental repercussions, as Warren explains at 52:00.  Warren goes so far as to conclude that we are moving from a three class system to a two-class system.  This loss of the middle class threatens to damage our economy and our democracy itself.

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Category: Economy, Politics

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (4)

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  1. Erich Vieth says:

    Check out this pointed article by Rosa Brooks:

    Last week — even before Wall Street's latest collapse — 13 former finance ministers convened at the University of Virginia and agreed that you must fix your "broken financial system." Australia's Peter Costello noted that lately you've been "exporting instability" in world markets, and Yashwant Sinha, former finance minister of India, concluded, "The time has come. The U.S. should accept some monitoring by the IMF."

    We hope you won't feel embarrassed as we assess the stability of your economy and suggest needed changes. Remember, many other countries have been in your shoes. We've bailed out the economies of Argentina, Brazil, Indonesia and South Korea. But whether our work is in Sudan, Bangladesh or now the United States, our experts are committed to intervening in national economies with care and sensitivity.

    We thus want to acknowledge the progress you have made in your evolution from economic superpower to economic basket case. Normally, such a process might take 100 years or more. With your oscillation between free-market extremism and nationalization of private companies, however, you have successfully achieved, in a few short years, many of the key hallmarks of Third World economies.

    http://www.latimes.com/news/columnists/la-oe-broo

  2. Erich Vieth says:

    [T]he bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal."

    http://tpmcafe.talkingpointsmemo.com/2008/09/29/w

  3. Erich Vieth says:

    Want to know a real-life unemployment rate? 11.8% See: http://www.bls.gov/news.release/empsit.t12.htm

  4. Erich Vieth says:

    To the German radio presenter, the real news about the measures announced by Washington on Tuesday to jolt banks into lending again was not so much the astronomical costs, but a little-noticed comment in Hank Paulson’s statement.

    “Millions of Americans,” croaked the US Treasury secretary, were being denied credit or facing rising credit card rates, “making it more expensive for families to finance everyday purchases”. The notion that families should finance everyday purchases on credit, the anchor commented, “suggests Washington has still to understand what brought us there in the first place”.

    <a href="http://www.ft.com/cms/s/0c618e00-bd62-11dd-bba1-0000779fd18c,Authorised=false.html?_i_location=http%3A%2F%2 Fwww.ft.com%2Fcms%2Fs%2F0%2F0c618e00-bd62-11dd-bba1-0000779fd18c.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fcomment” target=”_blank”>http://www.ft.com/cms/s/0c618e00-bd62-11dd-bba1-0…” target=”_blank”>Fwww.ft.com%2Fcms%2Fs%2F0%2F0c618e00-bd62-11dd-bba1-0000779fd18c.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fcomment

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