American idiots: How Washington is destroying
the economy
By Allan Sloan, senior editor-at-large August 18, 2011: 5:00 AM ET
This article is from the
September 5, 2011 issue of Fortune.
What's ailing us? It's not just unemployment. It's not
just Europe's debt woes. And, no, it's not
Wall Street this time. It's the takeover of the economic debate by fanatics who
are up to no good. Fix that -- and maybe you fix the economy.
FORTUNE -- What the hell is going on?
Standard & Poor's, the
bond-rating agency, downgrades the U.S., and the world trembles. The
markets here go nuts on the first trading day after the downgrade, losing $1
trillion in value. European Union finance chiefs are playing Whac-a-Mole with members' debt problems. And England … England was literally burning.
Only three short years ago we
were all terrified when our financial system was on the brink of disaster after
Lehman Brothers went broke in September of 2008.
Those scary times seemed to have disappeared in the spring of 2009. But now
those fears are back -- and things are even scarier, the stock market's
"green" days notwithstanding.
Our current mess is different
from the Lehman-related horror because it stems primarily from politics, not
economics. The previous fear-fest came about because Lehman's bankruptcy
disrupted financial markets in unanticipated ways. Today's crisis was completely
avoidable. You can blame it directly on the fools who brought our country to
the brink of defaulting on its debts in the name of saving us from … I'm not
sure what. Yes, the Tea Party types bear primary responsibility -- but they
couldn't have done it without the cowardice and incompetence of the Obama administration, which let things get way out of hand.
This whole fiasco just enrages me. And it ought to enrage anyone who wants the U.S. to act
like a real country rather than some third-rate failed state run by fanatical
factions that hate one another.
So why is today scarier than
2008-09? Because this time not only have we got troubled financial institutions
to deal with, but we have serious, substantial countries facing possible
default on their debts. Including, heaven help us, the U.S.
Things were already bad because
of fear and financial fragility afflicting Europe.
But the problems took a quantum leap because of fallout from Standard &
Poor's totally justifiable Aug. 5 downgrade of U.S. long-term debt. The U.S. economy
was already listless enough, with gross domestic product barely growing -- and
maybe even shrinking -- plus record long-term unemployment. (One telling
statistic: The percentage of U.S.
adults with jobs is down to 58.1%, from 64.7% in 2000, according to the St. Louis Fed. That, my
friends, isn't good -- see chart below.) The fear, loathing, and political
divisiveness are going to make things worse, not better.
Now, a few facts. The S&P downgrade is not -- as some hate-filled
knuckleheads inside the Beltway and in the hinterlands keep repeating --
from fear that the U.S.
is "broke" or lacks the financial ability to meet its obligations. S&P's primary worry is that the U.S. may not
summon up the political will to pay its debts. (Read the analysis for yourself here.)
The escalation of our problems
can't be attributed to Angelo Mozilo of Countrywide
Financial, a favorite villain. You can't blame it on the other
favorite bad guy, Goldman Sachs (GS),
or on the other usual suspects: Wall Street in general, greedy lenders and
speculators, irresponsible borrowers seeking a free lunch by taking out
mortgages they had no chance of repaying.
The root of our current problem
is that there are no grownups in positions of serious power in Washington. I've never
felt this way before -- and I've written business stories for more than 40 years, and about national finances for more than 20. Look, I
certainly don't worship Washington
institutions. I called former Federal Reserve chairman Alan Greenspan the
"Wizard of Oz" when he was known as the "Maestro." I've
said for more than a decade that the Social Security trust fund had no economic value
and would be useless when the system's cash flow turned negative -- which I
also predicted. But despite being an irreverent professional skeptic, I never
felt there was a total absence of adult supervision in our nation's capital.
Now I do.
I spent July on family leave,
not writing columns, and watching with increasing horror as market-illiterate
know-nothings, abetted by the craven leaders of the Republican Party (from
which I'm about to resign) and the unspeakable ineptness of Obama
and his minions, brought our country to within an inch of defaulting on its
debts.
Washington's foolish politicians thought they'd reassured everyone when they stepped
back from the brink of default with a deficit-trimming deal that's so absurd that you
have to laugh when you think hard about it. Then S&P did what it had
previously warned it would do when it became clear that the U.S. might
decide not to pay its debts. It downgraded our country's credit. Triple-A
credits are supposed to be rock solid. If there's a more than remote chance of
default, a security shouldn't be AAA. End of story. I have no love for S&P
or its competitors Moody's (MCO)
and Fitch, whose influence vastly exceeds their competence; they should have
been stripped of their special regulatory standing because of the AAA ratings
they bestowed on trashy mortgage-backed securities. But I respect S&P for
standing up and alerting investors to the idea that the once unthinkable -- a
default by the U.S., the only country in the world that can use its own
currency to pay external creditors -- has become thinkable. Fitch and Moody's have kept the U.S. debt triple-A,
which I sure wouldn't have done.
Graphic: Anatomy of a soft economy
Adding to the current sense of
foreboding, at least for me, is the fact that the Federal Reserve, which rode
to the rescue last time, is legally constrained by provisions of Dodd-Frank
legislation little recognized outside the world of regulators and financial
techies. Back in 2007, the Fed could invent programs to bail out solvent but
illiquid institutions. It could also turn investment banks like Goldman Sachs
and Morgan Stanley (MS) into bank holding companies with access to
unlimited Fed funding -- and even infuse cash into nonbank
basket case AIG (AIG) directly and indirectly to forestall an
uncontrolled collapse, which could have made the Lehman Brothers disaster look
like a mere rounding error.
The Fed's actions had their own set of problems, which I've written about at
length. But once the Fed began acting in the summer of 2007, you knew there was
an institution around that could bail out the world, if needed. Now, at least
in theory, the only government institution that's supposed to do this kind of
thing is the Federal Deposit Insurance Corp. I respect the FDIC, but it's got
nothing like the Fed's power and international clout. We've got this problem
because our leaders rolled over to pressure from big companies instead of
breaking them up into pieces small enough to be allowed to fail.
If I sound angry, it's because
I am. Think of me as an angry moderate who's finally fed up with the lunacy and
incompetence of our alleged national leaders -- and with people stirring up
trouble from which they hope to benefit politically or financially. Some
policies and statements you hear from Tea Party types about the economy
and the debt markets are utterly insane. Any competent economics instructor
would give you an F if you asserted the same sort of nonsense on an exam.
But all that aside, at least
the Tea Party people have a story and a message. The Obama
people have none -- at least none that I've been able to discern. They don't
even know how to spread good news, which actually does exist. One example: This
spring I was assigned to figure out how much taxpayers would lose on the
Troubled Asset Relief Program -- the much-maligned TARP, that
supposed financial sinkhole. To my surprise, I discovered that TARP actually stands to make money for taxpayers.
During my research, I found that the Treasury had reached a similar conclusion,
but had put the information into the public domain in such a low-profile way
that few people saw it. Why wasn't the Obama
administration spreading the word that taxpayers had made money saving the
world financial system? Beats me.
The one saving grace we have is
that the rest of the world seems to be run by midgets too. I don't want to
think what would happen if the U.S.,
in its current disarray, had to deal with the likes of Mao, Hitler, or Stalin
at the height of their powers. Maybe there is some divine power watching over
us.
Now that I've finished venting
, let me make one more attempt to be reasonable -- and show how relatively easy
it would be to solve our problems while allowing both the Tea Party and the
left wing to claim victory and go home. This requires (1) that we survive the
2012 election cycle (boy, that's going to be a blast) and (2) that the winners
recognize that our current federal income tax rules and rates, Social Security
benefit formula, and Medicare provisions are historical and political accidents
rather than holy writ handed down to Moses by the Lord on Mount Sinai.
We need more jobs, more growth,
and more tax revenue. Note that I said more revenue, not higher rates. There
are lots of proposals kicking around that would cut rates, eliminate the alternative minimum tax, and
broaden the tax base by drastically reducing itemized deductions. Only about a
third of taxpayers, primarily higher-income types, itemize deductions, so only they
would be affected. Do this right, and you end up with more tax revenue from
high-income people (which allows the "tax the rich" types to be
happy) but lower rates (which lets the Tea Party folks claim victory). Making
the system fairer should be doable.
On the entitlement front, we
modify Social Security and Medicare formulas, imposing higher costs on
higher-end retirees (which would include me, should I ever retire). What's in
it for the right-wing fanatics? Those programs' projected costs drop. For liberal wingnuts? They can
claim victory because people are living longer than when these programs were
introduced and will collect more benefits over their lifetime than originally
intended.
Yes, rationality is out of
style, and fanaticism is the new normal. But do we really want a national life
like the one we've had the past few years? All shrieking and
no thinking? Today's problems are horrible, but what are they compared
to the Civil War, the Great Depression, and World War II? Enough
screaming. As for me, I'm going back to the beach to finish my vacation.
http://finance.fortune.cnn.com/2011/08/18/how-washington-is-destroying-the-economy/