Why the banks aren’t lending to businesses
Here is a business owner’s budget: How much revenue did we take in this quarter? And how much did it cost us to keep the doors open this quarter? How much is left over? Now we know how much we can spend — or save for the rainy day that always comes.
Here’s a politician’s budget: How much money is in the pot? What?! But my district needs three times that, so there’s certainly nothing left over for anyone else! What’s that you say? I didn’t come up with a proposal? Okay, we’ll build a bridge. To where? Who cares! Just build, baby, build! Votes, votes, votes! Oops, I mean jobs, jobs, jobs!
It should be lost on no American voter that the business of private enterprise is to remain in business and sock money away, taking steps to improve efficiency in order to maximize the difference between the revenues generated and what it costs to stay in business. The business of politics, meanwhile, is spending other people’s money to maximize the likelihood of getting re-elected. Please correct our thinking on this point if you find it flawed.
Right on cue last Friday, at the eleventh hour and fifty-ninth minute, our leaders once again proved they are every bit as capable of manipulating the public as the most seasoned Hollywood producer. Forget “cast of thousands” and the hundred million-dollar budget. Our drama had a cast in the hundreds of millions, and a budget in the trillions.
Earlier this year, Senate Majority Leader Harry Reid requested that the Treasury provide an estimate of how soon the debt limit will be reached, and “a description of the consequences of default by the United States.” Countering on cue, Secretary Timothy Geithner observed that the government only has “$335 billion of ‘headroom’ beneath the current limit” of $14.29 trillion.
One might think it odd that Geithner’s insights are being solicited on the possible closure of the federal government. After all, this is the same Tim Geithner who runs the printing press, that funds the Federal Reserve, that buys the bonds that Tim Geithner issues, that fund the government, that is asking Tim Geithner’s advice on whether to stop spending any more of Tim Geithner’s money and shut themselves down. In a burlesque of one of the worst financial blow-ups in recent memory, Geithner is the banker to Ben Bernanke’s Long-Term Capital Mismanagment. Bernanke, admitting what the world has known all along — that he is running the world’s largest hedge fund — has at last decided to do what every other hedge fund manager routinely does and hold a quarterly call with his investors. In this case, the entire world.
Geithner’s letter contains some interesting observations. He writes that increasing the debt limit “does not increase the obligations we have as a nation; it simply permits Treasury to fund those obligations that Congress has already established.” We agree that increasing the debt limit “does not increase the obligations” of the government. However, it does empower Congress to “increase the obligations of the Nation” by immediately instructing Geithner to issue more debt – the bulk of which will be dutifully purchased by Ben Bernanke’s Long Term Capital Mismanagement hedge fund, which will continue to buy Treasury debt for as long as his banker, Mr. Geithner, does not issue a margin call, which everyone knows he can’t because Congress is relying on this cash to fund its projects.
Taking a chainsaw to the budget
This cyclical sterilization of Treasury debt keeps the nation’s indebtedness growing, while keeping the interest rate artificially low. Yes, in the plain English meaning of the word, raising the debt ceiling does not increase that indebtedness; it is, nonetheless, the requisite condition precedent.
So now we know why the banks aren’t lending to business: they are dutifully buying the Treasury’s paper, helping to suck it out of the system as instructed by their friends at the Fed — their regulator. Treasury and the Fed have furiously pursued a closed monetary loop that purposely excludes all useful deployment of capital.
Enter Congressman Paul Ryan, whose budget proposal was written not with a No. 2 pencil, but with a chainsaw. Never mind the well-reasoned analyses that say Ryan’s budget will fail, and never mind that we disagree on certain fundamental aspects of his social policy objectives — increased spending for defense, not touching Social Security — the main thing is, someone has finally said the En-word: “En”-titlements. Why has it taken so long to let this pathetic genie out of the bottle?
We understand that past Congressional commitments are current expenditures, while tax revenues are tomorrow’s revenues. But if Congress makes all the rules, it can certainly make a rule saying Congress has the authority to halt spending while it reassesses projects to which it has previously committed. In this regard we could learn a thing or two from some of our Latin American neighbors. Since America is rapidly turning itself into a third-world nation, we could profit from analyzing the success of countries that have left their bananas behind and emerged as global financial powers.
Brazil’s President Dilma Rousseff has attempted to slam on the fiscal brakes by halting federal spending on projects awarded in the latter months of the Lula presidency. The program would hold up payments for projects that were approved, but have not yet been initiated, or on which work has been suspended for a significant period. The proposal is to reassess these projects — in essence, to put them through a renewed approval process.
Needless to say, the proposal is meeting a wall of opposition. Still, we should take a hard look at current levels of domestic US pork before we snicker over the venality of our neighbors south of the border. There is no reason Congress could not legislate a “Stop The Madness” provision that shuts down certain cherished government activities, without actually shutting down the government.
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