Lessons from the Other ‘Fiscal Cliff’

Nov. 22, 2012 - PRLog -- The infamous morning of Black Sunday, April 14, 1935 began as a bright sunny day filled with the hope that a three-year drought was finally coming to an end, but by evening, one of the most damaging dust storms in American history charged through the open landscape like a raging bull removing over 300 million tons of topsoil from the prairies, causing economic and agricultural devastation across the Midwest. It came at a low point during the Dust Bowl of the ‘30‘s when food and jobs were already scarce. By 1935 Congress initiated policies, incentives, and legislation that helped the economy to bounce back and its farmers to develop preventive measures that would save the Nation from what was then considered ‘the end of the world’.

Nearly 77 years later, another bowl of devastation is heading our way loosely referred to as the ‘Fiscal Cliff of 2013’.  Its similarities to the Dust Bowl are truly striking, with one exception. the Dust Bowl of the 1930‘s was a natural phenomena caused by Mother Nature while the ‘Debt Bowl’ of today will have been self-inflicted by the US Congress.

During a recent PBS Documentary, the narrator quoted one of the families who had lived through the Dust Bowl era as saying that despite their efforts to plug every crack in their home, the dust still managed to get in. I could not help but think how, for the past decade, easy credit had similarly crept into every household in America the same way that dust had during the Dust Bowl. No matter how frugal one chooses to live today, Americans will be liable for not only their collective personal debt, but also their share of the rapidly growing National Debt. Like dust, our National Debt has infiltrated every American household for generations to come.

Washington Ideas Forum
Recently, The Atlantic Magazine, a political/business/entertainment publication, held their fourth annual Washington Ideas Forum at the Newseum in Washington DC where they conducted a series of live interviews with a Who’s Who list of Washington politicos including Senator Marco Rubio, Sheila Bair, Chris Matthews, Gene Sperling, and David Rubenstein. When asked to comment on the ‘Fiscal Cliff’, their combined assessments were bleak.  All of them agreed on the need to avoid the ‘Fiscal Cliff’, if at all possible, but like the example from the Dust Bowl era, they could not see any sure way to avoid the inevitable. The following is a recount of what they had to say.

Sheila Bair on the true Amount of Debt
Sheila Bair, the former head of the FDIC during the economic crisis of 2009, clocked the unsustainable size of US private debt at 160% of GDP, which she claimed was twice the size of the US public debt (80% of GDP). She noted that the size of the private debt had become a quiet secret that no one in Congress seemed eager to discuss. The private debt that goes unpaid, as we are seeing today with the recent unraveling of unpaid FHA loans, will eventually wind up on the US Government’s balance sheet and become every citizen’s concern. When added together, the aggregate public and private debt is truly astounding.  Bair has always preferred a ‘rip- off the band-aid quickly’ approach to the crisis and reminds her colleagues that banks should have taken a full hit early on to allow for a faster economic recovery. According to her intended strategy, banks that received government loans were expected to use the funds to realign their portfolio of home mortgages.  Instead they used the borrowed funds to increase their reserves and improve their capital ratios leaving home-owners with ‘underwater mortgages’ to their own devices.

Gene Sperling on Preserving a Tax Revenue Framework
Gene Sperling, one of Obama’s economic advisers, focused on the greater potential damage that could result from a surge in negative investor sentiment if Congress waits too long to act. Also present, David Rubenstein, a billionaire philanthropist, agreed.  Rubenstein felt that political uncertainty can create far more economic damage by holding businesses back from investing in their business and hiring new employees.

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