Obsession with government debt overlooks real issue

December 27, 2010|By Charlie Cooper

Debt is at the heart of our economic crisis, but the current furor over federal government debt is disproportionate, given the need to get people working. The hypnotic trance of the media on this topic betrays and breeds a woeful ignorance of how money changers exploited nearly everyone and created the economic crisis.

Let's look at how debt exploded from 1980 — when President Ronald Reagan won election on a platform of deregulation and (wink, wink!) balanced budgets — to 2007, the eve of the Great Recession.

Combined federal and state debt rose from $2.3 trillion to $11.2 trillion, almost quintupling. It rose 4 percent slower over the 27-year period than did the gross domestic product, the single figure economists use most often to calculate the total output of the economy.

According to the Federal Reserve Board, government debt was the slowest-growing kind of debt during this period. Household debt (including consumer debt and mortgages) rose 95 percent faster than GDP to $13.8 trillion — $120,000 per household. Business debt rose 42 percent faster than GDP to $10.6 trillion.

But the real key to our current woes lies in debt owed by financial institutions: banks, investment firms and hedge funds. It grew more than 51/2 times as fast as the economy, to $16.2 trillion. Have the media shone any light on this rotten underbelly of our economy? Even as a financial panic scuttled the world economy, this phenomenon has gone unexamined.

We, the people, looked the other way, while Congress fell increasingly under the death grip of the financial speculators, with their lobbyists and political contributions. In 2009 alone, bankers spent $450 million on federal election campaigns.

Since 1980, the federal government dropped limits on interest rates, unwisely gave tax breaks for home equity loans, allowed banks and other financial firms to expand without limit, and revoked the separation between investment (risky) banks and commercial banks that are insured by government. Congress not only authorized irresponsible derivative trading — which would normally be considered gambling — but it pre-empted the states from prosecuting the gamblers under state laws.

For the coup de grace, the Federal Reserve Board and other regulators looked the other way while the mortgage industry went psychopathic and speculators drove the prices of commodities such as wheat and oil through the roof.

Executives who run big financial firms borrow lots of money, do a ton of deals while a bubble (be it tech stocks, real estate, or commodities) is inflating, collect fees and investment profits for the firm and huge compensation packages for themselves, and then come crying to their paid-for friends in government when it bursts. Neither Republicans nor Democrats have the guts to hold them accountable. The executive makes a killing whether his firm wins or loses.

The use of so many trillions for speculation and outright gambling on asset bubbles is a big part of why most families have been under economic stress for decades. If a fraction of those funds had been used to meet long-term needs for water systems, transportation, school facilities, communication, manufacturing, commercial development and environmental preservation, life for the middle class would be much better, and the resulting debt would have been backed by real assets.

Financial system debt, however, was heavily toxic. Much of it consisted of borrowing to place bets on fluctuations in the prices of currency, interest rates, stocks or bonds. The other forms of debt in our economy contained very dangerous elements also:

•Much of the business debt was incurred in mergers and acquisitions. In that process, profitable businesses are bought by big operators who then put the business in hock and take out huge fees and bonuses for themselves.

•Too much of the government debt was used for futile wars, for tax cuts for the rich, and to pay twice as much for health care as any other nation pays (without any benefit in health outcomes)

•Much of the household debt — well, you know what happened there.

We used to make money in this country by growing crops, building infrastructure, manufacturing useful items and providing needed services. The parasitic growth of the financial industry has cost us jobs and led to the greatest level of inequality this nation has seen. The top 1 percent now control nearly one-quarter of all household income; they certainly don't supply one-quarter of the real economic value.

Since the financial crisis of 2008, government debt has, indeed, grown rapidly. Partly, the government took on the debt of the financial firms. Most of the additional government debt results from lower federal revenues caused by the loss of jobs.

Reducing federal debt, however, will not bring jobs back. In the short term, it would prove catastrophic. The entire economy — not just the public sector — must find a way to function effectively with a lower debt burden. That can only happen if the people rise up and force Congress to rebuff the financial institutions and restrain speculation.

Charlie Cooper is a member of the Baltimore MoveOn Council. His e-mail is charlie.coop@verizon.net.

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