Paulson Plan May Push National Debt to Post-World War II Levels By Matthew Benjamin Enlarge Image/Details
Sept. 23 (Bloomberg) -- Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds. The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated. ``This is sobering, absolutely sobering, even to someone who doesn't drink,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. At risk for the world's largest economy: a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan, and a diminished desire among international investors to add to their holdings. The dollar yesterday slid the most against the euro since the European currency's 1999 introduction. Paulson may be questioned on the borrowing impact of his plan at a hearing at the Senate Banking Committee today that begins at 9:30 a.m. He's asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion from the current $10.6 trillion. Treasuries fell in the past two trading days after Paulson signaled Sept. 18 a sweeping rescue was needed, with the 10-year note yield rising 29 basis points to 3.84 percent. The two-year note climbed 47 basis points on Sept. 19, the most in 23 years. A basis point is 0.01 percentage point. `Very Negative' ``The market is very, very negative because of the consequences of raising the debt ceiling and the increase in debt in general,'' Manfred Wolf, head of currency sales in New York for HVB America Inc., a unit of Germany's second-largest bank. ``Foreigners may not be that attracted anymore to U.S. assets.'' Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The Treasury is already borrowing to fund Federal Reserve efforts to inject liquidity into credit markets. Last week it announced sales of $200 billion in short-term debt. ``We've all used the phrase `uncharted waters' so often, yet we keep finding new uncharted waters,'' said Louis Crandall, chief economist of Wrightson ICAP, a research firm Jersey City, New Jersey. ``The fact that the Treasury's borrowing operations are now being affected on such an unprecedented scale adds new uncertainties'' to bond markets. Bad-Debt Purchases The Treasury's potential use of all $700 billion to purchase impaired assets would raise the country's debt to more than 70 percent of GDP. The last time American taxpayers owed as much was in 1954, when the nation was still paying down costs incurred during World War II. ``It's an alarming level of debt given that we're not fighting something like World War II,'' said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog group. The government reaching the requested debt limit would entail every man, woman and child in the U.S. owing more than $37,000 each. The median U.S. income last year was $50,233. ``We're putting a lot of debt on the books and people are going to be spending a lot of money paying that off for a long time,'' Bixby said. Deficit Forecasts If Treasury spends the entire amount next year, as some economists expect, it would drive next year's budget deficit, now projected to be around $500 billion, to $1 trillion or more. That would increase the annual shortfall to about 7 percent of GDP, a record level. The deficit rose to 6 percent of the economy in 1983, when then-President Ronald Reagan was ramping up Cold War-era defense spending and cutting taxes. Michael Feroli, an economist at JPMorgan Chase & Co. in New York, says the combination of the Paulson plan, additional government expenditures, and a slower economy, could swell the deficit to $1.5 trillion -- 10 percent of GDP. To be sure, several developed nations have debt levels far higher than that of the U.S., including Japan at 196 percent of GDP and Italy at 104 percent of GDP, according to the International Monetary Fund. The money for the Paulson plan will go to buy assets at prices that many market analysts say are depressed. Though it's still far from clear what price the Treasury would pay for them, it's possible those assets could increase in value as the crisis recedes and, as was the case with the government's 1979 bailout of Chrysler Corp., taxpayers could ultimately profit. ``This is not an outright expenditure,'' said William Cline, senior fellow at the Peterson Institute for International Economics in Washington and a former Treasury official. ``It is essentially the U.S. becoming a market investor, and the full expectation is to make money on this stuff.'' To contact the reporters on this story: Matthew Benjamin at [EMAIL PROTECTED] On Sep 23, 4:53 pm, Frank <[EMAIL PROTECTED]> wrote: > Obama demands deep cutbacks to pay for Wall Street bailout > By Bill Van Auken > 23 September 2008 > > As the Bush administration and Congress continued negotiations Monday > on a trillion-dollar bailout package for Wall Street, Democratic > presidential candidate Senator Barack Obama delivered a speech in > Green Bay, Wisconsin in which he promised to carry out sweeping cuts > in government spending and impose strict fiscal discipline on the US > government. > “If we hope to meet the challenges of our time, we must make difficult > choices,” Obama declared. “As president, I will go through the entire > federal budget, page by page, line by line, and I will eliminate the > programs that don’t work and aren’t needed.” > As with all of his speeches, Obama’s remarks were pitched > simultaneously to two audiences. In an appeal for popular support, he > laced his speech with demagogy about “addressing not just the crisis > on Wall Street, but the crisis on Main Street” along with > condemnations of greedy CEOs and unethical lobbyists. > > http://www.wsws.org/articles/2008/sep2008/obam-s23.shtml > > Paulson warns: No limits on CEO pay > By Barry Grey > 23 September 2008 > > Speaking on the “Fox News Sunday” program, US Treasury Secretary Henry > Paulson opposed proposals from some Democrats as well as Republicans > that the Bush administration’s plan for a massive taxpayer bailout of > the most powerful banks and financial institutions include provisions > limiting the pay of CEOs whose companies benefit from the government > handout. > Paulson, the former CEO of Goldman Sachs whose wealth is estimated at > $700 million, argued that including any such provision would result in > banks refusing to participate in the program. > As the New York Times reported Monday, “Mr. Paulson said that he was > concerned that imposing limits on the compensation of executives could > discourage companies from participating in the program. > “’If we design it so it’s punitive and so institutions aren’t going to > participate, this won’t work the way we need it to work,’ Mr. Paulson > said...” > > http://www.wsws.org/articles/2008/sep2008/ceo-s23.shtml > > Banks race to profit from US bailout > By Barry Grey > 23 September 2008 > > The announcement of a virtually open-ended government bailout of Wall > Street has set off a frenzied competition among the biggest banks and > financial firms to grab the lion’s share of the super profits to be > reaped from the program. > Banks, brokerage houses, insurance firms, mortgage lenders, private > equity companies and asset managers are furiously lobbying the Bush > administration and Congress to make sure that the legislation > authorizing the bailout gives them the biggest possible share in the > spoils. Behind the public speech-making and posturing by > administration officials, presidential candidates and congressmen, a > sordid campaign of influence-peddling and vote-buying is under way, > which will determine the details of the bailout law that is expected > to be passed either this week or next. > Tens of billions of dollars in corporate profits and billions more in > personal windfalls for senior executives and big investors are at > stake. The plan drawn up by Treasury Secretary Henry Paulson not only > allows the biggest financial firms to rid themselves of virtually > worthless assets that are driving down their stock and slashing their > profits, it provides vast opportunities for the winners in the money > race to realize huge gains from the management of the program and the > ultimate resale of the assets by the government. > > http://www.wsws.org/articles/2008/sep2008/fren-s23.shtml > > Who is Henry Paulson? > By Tom Eley > 23 September 2008 > The plan to rescue the US financial industry arrogates virtually > unlimited money and power over the financial affairs of the state to > the office of Treasury Secretary Henry Paulson. Paulson is a figure > with a long history of intimate connections to the political and > financial elite. > In 1970, fresh from the Masters program of the Harvard Business > School, Paulson entered the Nixon administration, working first as > staff assistant to the assistant secretary of defense. In 1972-73, > Paulson worked as office assistant to John Erlichman, assistant to the > president for domestic affairs. Erlichman was one of the key figures > involved in organizing President Richard Nixon’s notorious “plumbers” > unit that carried out illegal covert operations against the > president’s political opponents, including espionage, blackmail, and > revenge. Ehlichman resigned in 1973, and in 1975 he was convicted of > obstruction of justice, perjury, and conspiracy, and was imprisoned > for 18 months. > Utilizing his connections, Paulson went to work for Goldman Sachs in > 1974. In a 2007 feature, the British newspaper the Guardian wrote, > “Not only was he well connected enough to get the job [in the Nixon > White House], but well connected enough to resign in the thick of the > Watergate scandal without ever getting caught up in the fallout. He > went straight to Goldman back home in Illinois.” > > http://www.wsws.org/articles/2008/sep2008/paul-s23.shtml --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
