Sheila Bair was one of the heroes of the Great Financial Crisis and to this day her approach to straight talk is reminiscent of Harry Truman's comment when a supporter shouted "Give 'em [Republicans] Hell, Harry!" Truman replied, "I don't give them Hell. I just tell the truth about them, and they think it's Hell."
From Barron's, October 30
About the author: Sheila Bair is former chair of the Federal Deposit Insurance Corp. and founding chair of the CFA Institute Systemic Risk Council.
I have seen more than my fair share of financial crises during my time in the U.S. government. I was the assistant secretary of the U.S. Treasury for financial institutions during the 9/11 terrorist attacks and chair of the Federal Deposit Insurance Corp. during the 2007-2008 financial crisis. The U.S. government resorted to deficit-financed spending and tax relief to these crises, and to the pandemic. Those decisions were right.
Unfortunately, once the crises passed, we just kept spending as if nothing had changed. Now, the resulting overhang of federal debt could itself be the cause of a future crisis.
Our gross national debt exceeds $35 trillion. This puts the federal debt held by the public at a staggering 99% of U.S. gross domestic product, nearly as high as its peak at the end of World War II. After the war, our “greatest generation” of political leadership steadily restored our nation’s finances, bringing the debt down to about 31% of GDP by 1981.
Unfortunately, more recent political leadership has concluded that deficits do not matter. Both Republicans and Democrats have settled on deficits as the easiest way to pay for politically popular initiatives, be they lower taxes (Republicans) or higher spending (Democrats). Elected officials are wary of braving the political pain of deficit reduction, knowing their successors could easily squander those hard-fought battles with more deficit-financed spending and tax cuts.
Case in point is the current election. Both presidential candidates are proposing tax and spending giveaways to curry favor with voters. The nonpartisan Committee for a Responsible Federal Budget projects
that Vice President Kamala Harris’ proposals will increase the debt by $3.95 trillion over the next 10 years, which pales in comparison to Donald Trump’s plans, which will increase it by $7.75 trillion. Neither candidate is talking seriously about our unsustainable fiscal position, much less the related issue of projected funding shortfalls in two of our most important safety net programs, Social Security and Medicare. Based on current projections, the Social Security trust fund will run out by 2035, while Medicare’s Hospital Insurance fund will be depleted by 2036. Absent reforms to shore up these programs—and avoid automatic cuts—funding gaps will have to be filled with hundreds of billions in new deficit financing each year.
The dollar’s privileged status as the world’s reserve currency enables our fiscal indulgences. As the late Sen. Alan Simpson (R., Wyo.) once famously said, investors keep buying our debt because we are “the best-looking horse in the glue factory.” But as we continue to climb in the rankings of the world’s most indebted nations—we rank 4th among the other advanced economies in the Organization for Cooperation and Development—that perception could easily change.
There are hints that our privileged status is already eroding. Foreign ownership of U.S. Treasuries has fallen from 34% in 2012 to 28% in 2024. The dollar’s share of global reserves has fallen from more than 70% in 2000 to 58% today.
Make no mistake, if we continue on this path, investors will eventually lose confidence in our debt. The change could be gradual or sudden, but the consequences will be painful, no matter the pace. The federal government’s interest costs, already at $892 billion for 2024, will increase dramatically, as investors demand a higher risk premium. That will force painful tax hikes or spending cuts. Private sector borrowing costs tied to Treasury rates will also spike, damaging economic growth. Banks, managed funds, insurance companies, pensions, and other investors will be exposed to trillions of dollars in market losses as the Treasuries they hold lose value, precipitating widespread distress in our financial system...
....MUCH MORE
Using the word debt is a shorthand for explaining where the problem will first become impossible to avoid: The interest on the debt and the rate of interest required as a clearing price for that debt. Where it gets really interesting is if the Fed steps in to buy the paper the Treasury is floating to keep the interest rate from spiraling ever higher.
This Financial Repression will result in the Fed directly monetizing the deficit which results in liquidation of the debt by means of inflation. The only other choice is repudiation of the debt and there is no politician in the U.S., or anywhere in the world for that matter, brave enough to even mention that type of Jubilee, much less enact it.
Previously on/from Ms. Bair:
March 2023 - Former FDIC Head Sheila Bair Says The Feds Had Better Explain Exactly Why They Decided To Bail Out Uninsured Depositors At SVB and SignatureWe are fans of Ms, Bair, she's a very clear thinker and not shy about sharing those thoughts.
"Fix income inequality with $10 million loans for everyone!"
File under: Things you don't expect from former regulators--humor, satire, pokes at former colleagues/bosses.
Sheila Bair is a former chairman of the Federal Deposit Insurance Corp.
