Sheila C. Bair - Will the next fiscal crisis start in Washington?

Sheila Bair, probably one of the most competent people in the US central government today when it comes to financial matters, has this to say about government expenditures and worries that the next financial crisis will come from an engorged on debt Washington D.C.....

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.

On entitlements: The nation will not be able to pay for the healthcare and monthly retirement checks of these baby boom seniors despite collecting taxes and making these promises to these people for their entrire lifetimes.
On defense: The nation will be unable to pay (we should be unwilling to pay unless it is in our interest) for the defense of every other western and developed society on the planet.
On market values of government debt: As the debt piles on, the cost of insuring this debt against default has risen. At 41 basis points, this implies that it costs and people are willing to pay, $41,000 per year to insure $1 million of debt with the full faith and credit of the US central government.
Subsidies: Tax subsidies on housing and healthcare will continue to miss-allocate resources to these sectors and away from other productive investments leading to lower long-term national wealth creation.

The financial markets will never tolerate the US central government borrowing so much money and this will precipitate a financial crisis unlike any one that we have ever seen in modern times barring war.


Sheila C. Bair - Will the next fiscal crisis start in Washington?