December 2, 2022

Greenspan Revisionist Babble

Debt Is The Greenspan Legacy

Alan Greenspan, former Federal Reserve Chairman, today expressed his concern about the level of the US national debt.

Sept. 16 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said he’s worried that lawmakers will hamper U.S. central bank efforts to rein in its monetary stimulus, and that inflation might “swamp” the bond market.

The former Fed chief, who counts Deutsche Bank among his clients, also warned that the U.S. must rein in its “very dangerous” level of debt, citing the threat of increased issuance of Treasuries undermining the dollar.

Greenspan said one threat to Treasuries is the “very dangerous” level of U.S. national debt. “We’ve got to confront that issue immediately,” he said.

Mr Greenspan’s sudden concern about the buildup of the US national debt seem to imply that this situation occurred after his long tenure (1987 – 2006) as Federal Reserve Chairman.  The facts speak otherwise.  During the Greenspan era of easy money and easy credit, the US national debt had already spiraled out of control, increasing from approximately $1 trillion to $9 trillion.

Did Mr Greenspan not notice what was happening during his two decade reign at the Federal Reserve?  Mr Greenspan’s  current concerns about the explosion of US debt seem to be a disingenuous attempt at historical revisionism to obfuscate his central role in the creation of the greatest debt bubble in history.   For Mr Greenspan to suggest that he had nothing to do with fostering the current “very dangerous” level of US  national debt is like trying to argue that Hitler had nothing to do with World War II.

federal-debt-dollars

Mr Greenspan also commented on the potential risk of inflation:

“It’s the politics in the United States that worries me, whether the Congress will basically feel comfortable” with the Fed withdrawing its stimulus, Greenspan said in a broadcast to Tokyo clients of Deutsche Bank Securities Inc. today. He later said that “if inflation rears its head, it will swamp long-term markets,” referring to bonds.

Greenspan, speaking via videoconference from Washington, indicated that successor Ben S. Bernanke and his fellow Fed policy makers have until next year before inflation will present a danger.

Based on Greenspan’s past poor record of not recognizing the inherent dangers of overleverage, it is highly likely that he is now missing the big picture again.  We are now experiencing a post bubble credit collapse of epic proportions.  The deleveraging process that we are now witnessing will not unwind 20 years of reckless credit expansion in one year.   If Greenspan fears inflation, it’s a good bet that the real danger is the continuation of a deepening deflation.

Commenting on the need for a systemic risk regulator, Mr Greenspan noted that “I’m not in favor of a systemic-risk regulator because I don’t think it’s feasible.  I think we have to recognize that there are limits to what we can do.”  No argument with that statement Mr Greenspan.

Artificial Mortgage Rates Drop To 4.75%

Fed Manipulation Of Mortgage Rates Continues

Mortgage rates continue their downward trend with the perfect borrower now able to obtain a rate of 4.75% with a two point buy-down on a 30 year fixed rate mortgage.  As expected, with mortgage rates now back in the 4% range, mortgage applications have increased.   The latest stats from the The Mortgage Bankers Association show large increases in mortgage activity, with refinances accounting for almost 60% of total mortgage applications.

The Market Composite Index, a measure of mortgage loan application volume, increased 17.0 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 15.8 percent compared with the previous week and 64.5 percent compared with the same week one year earlier.

While fluctuations in mortgage rates are historically based on many factors, the biggest factor affecting mortgage rates today are the manipulations by the Federal Reserve.   With the mortgage market dominated by the government, it is difficult to determine where rates would be in a free market but indications are that rates would be much higher.  For example, non agency lenders who do not sell mortgage loans to the government agencies but portfolio them instead, are currently quoting 30 year fixed rates at around 6 to 6.5% depending on credit and loan to value (obviously, the non agency lenders are not doing much conforming loan business).

Fed Price Fixing Efforts With Mortgages Will Fail

So what’s the problem with having low mortgage rates?  The  government manipulations in the mortgage market allow homeowners to refinance and buy at low rates.   If mortgage rates drop low enough, perhaps the government will succeed in its objective of re-inflating housing prices.  There just might be a few problems with the government’s manic quest to keep mortgage rates low.

  • How long will investors continue to buy securities backed by mortgages on which payments are guaranteed by the government?  Perhaps forever, but perceptions of the value of a “government guarantee” may diminish as the financial condition of the US Government continues to erode.  At some point, rational buyers will give little credence to the guarantee of a government that needs to borrow 40% of its year outlays while running multi trillion dollar yearly deficits.
  • How long can the Federal Reserve continue to purchase mortgage backed securities and treasury debt with printed money?  It may not seem to be causing a problem in this country (yet) but some of the USA’s largest foreign creditors are getting very nervous – See China Alarmed By US Money Printing.

Banks Load Up On Mortgages

Theoretically, the Federal Reserve can buy every mortgage backed security in existence but at what point does the bond market react with higher rates based on the risk that the Fed is going to monetize debt on a colossal scale?  Fed purchases of mortgage backed securities are fast approaching the announced goal of $1.25 trillion.

Courtesy wsj

Courtesy wsj

As it turns out, the Fed has a willing and able partner in the purchase of mortgage backed securities.  With the banking industry facing massive losses on defaulting mortgages, how is this for irony? – Banks Load Up On Mortgages.

As of June 30, the roughly 8,500 federally insured banks and thrifts were holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier, according to a Wall Street Journal analysis of bank financial disclosures. It is the largest amount that banks have reported holding since at least 1994.

Banks, sometimes with the blessing of federal regulators, have been loading up on Ginnie securities for one main reason: They make their balance sheets look healthier. Since the securities are guaranteed by the government, federal banking regulators have deemed them risk-free, meaning that adding them to a bank’s investment portfolio, or replacing assets deemed riskier, lowers the overall risk of the portfolio in the eyes of regulators.

Some banks have used government cash infusions under the Troubled Asset Relief Program to buy Ginnie Mae bonds.

Holding Ginnie bonds help banks look better because federal bank-capital guidelines give the Ginnie securities a “risk weighting” of 0%. That means banks don’t have to hold any cash in reserve to protect against losses.

At the same time that the banks are choking on defaulted mortgages and reluctant to lend, they are purchasing vast quantities of government guaranteed mortgages to shore up their capital ratios, sometimes using TARP funds.

The Great Unwind

The Fed fostered the bubble in the housing market with easy money, leaving us with collapsed housing prices and oceans of defaulted mortgage debt.  The Fed is now inviting a similar disaster in the mortgage market, again with super easy monetary policies.

The massive purchases by the Fed and the banks of mortgage backed securities is artificially inflating the prices of mortgage backed securities, consequently curtailing purchases by private investors.  This leaves the Fed and the banks as the only (irrational) buyers.

At some point mortgage rates will rise regardless of the Fed’s manipulations.  The taxpayers will be stuck with massive losses on the Fed’s mortgage backed securities as yields climb and prices plunge.  Banks, as always, will be heavily invested in the wrong asset at the wrong time.  Due to the magic of FASB accounting rules, the banks won’t have to take losses if they do not sell their mortgage backed securities; but neither will they be able to increase lending with capital frozen in underwater mortgages.

The government’s obsession with housing has resulted in the misallocation of untold trillions of dollars.   Meanwhile, urgent human and infrastructure needs of the country are left unfunded.   With the mortgage markets now completely dominated by the government, we can look forward to a continuation of the same failed policies.

“Liar Loans” – RIP – October 1, 2009

Liar Loans To Be Prohibited

No income verification and stated income mortgage loans have been available to borrowers for many years.   As originally conceived, a no income verification loan was a sound product, offering highly qualified borrowers the ability to purchase or refinance a home quickly with minimal documentation.  Stated income mortgages are still being offered today to highly qualified borrowers by lenders such as Emigrant Mortgage.

What was once a legitimate mortgage product, however, morphed into the worst type of irresponsible lending during the national housing/mortgage frenzy of the past decade.  “Liar loans” became a product of destruction that allowed millions of totally unqualified people to borrow money who had little or no ability to service the loan.

Due to the mortgage industry’s excesses and irresponsible behavior, the “liar loans” are scheduled for legislative extinction on October 1, 2009.  The new regulations will apply to a newly defined category “of higher-priced mortgages” and the following restrictions will apply:

Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.

Require creditors to verify the income and assets they rely upon to determine repayment ability.

The rule’s definition of “higher-priced mortgage loans” will capture virtually all loans in the subprime market, but generally exclude loans in the prime market.  To provide an index, the Federal Reserve Board will publish the “average prime offer rate,” based on a survey currently published by Freddie Mac.  A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index…

The new rules take effect on October 1, 2009

No Income Loans To Become Niche Product

The new rules  severely limit the interest rate that can be charged on a stated income prime loan to only 1.5% above the average rate on a prime mortgage.  Given the higher lending risk involved in approving a mortgage without income verification, I would expect that after October 1st, stated income loans will become a niche product, offered by only a few lenders to highly qualified borrowers.

The new rules will make it much more difficult to borrow for those who cannot verify income.   Considering the financial havoc that can result from liar loans, the mortgage industry should welcome the new restrictions which impose proper responsibilities on both lender and borrower.

Mortgage Refinances Drop 11% As Rates Remain Low

Refinances Decline as Rates Stabilize

The latest weekly survey from the Mortgage Bankers Association showed a decrease of 6.3% in mortgage loan applications.   Application volume compared to the previous year increased by 16%.

The interesting aspect of the latest weekly numbers is the decline of 10.9%  in the number of mortgage refinances.  The percentage of refinances to total mortgage applications declined by 2.9% to 53% of total mortgage applications.  With rates hovering at close to all time lows, reduced refinance activity seems to indicate that most borrowers have already taken advantage of the current low mortgage rates.

Have Mortgage Rates Bottomed?

The perfect mortgage borrower can still obtain a rate of around 5% on a thirty year fixed rate mortgage.  In addition, borrowers have had numerous opportunities over the past four years to refinance in the high 4’s or low 5% range.  Unless a borrower is applying for a cash out refinance, there would be little benefit to refinance a mortgage today with a rate of 5.5% or less.

If mortgage rates remain in the low 5% range, expect to see continued declines in the refinance sector of the mortgage market.  In January of this year, the amount of refinances hit a peak of 85% of total mortgage applications as borrowers rushed to take advantage of low rates .

Since it is usually not worth the time and cost of refinancing unless the mortgage rate can be lowered by at least a point, I would not expect to see another mortgage refinance boom unless mortgage rates decline to the low 4% range.  Considering the recent Federal Reserve report which indicates a slower pace of economic decline and an unchanged Fed monetary policy, mortgage rates may have bottomed at this point.

The Fed’s Contribution To Ponzi Schemes

12% Returns – “Guaranteed”

You don’t know whether to laugh or cry every time another Ponzi scheme comes to light.

July 28 (Bloomberg) — The U.S. Securities and Exchange Commission said it halted a $50 million Ponzi scheme near Detroit that raised money for a real-estate investment fund and targeted the elderly.

A federal judge in Michigan agreed to freeze assets after the SEC sued John Bravata, 41, and Richard Trabulsy, 26, claiming they lured more than 400 investors by promising 8 percent to 12 percent annual returns, the agency said today in a statement. Of $50 million raised since May 2006, less than $20.7 million was spent on real estate, the SEC said.

“Investors thought they were investing in a safe and profitable real-estate investment fund, but instead their money was being used to pay for luxury homes, exotic vacations and gambling debts,” said Merri Jo Gillette, director of the SEC’s regional office in Chicago.

The defendants allegedly lured investors by saying the fund offered “safer returns” for individual retirement accounts. More than half the proceeds raised by BBC Equities were conversions from investors’ IRAs, the regulator said.

This should sound very familiar since all Ponzi schemes rely on the same ridiculous promises – very high rates of return with virtually no risk.  The promoters of this latest Ponzi scheme promised returns 1200% higher than what is available on a 2 year treasury note with virtually no risk.  400 hundred “investors” took the bait, apparently believing that 12% returns were available with little risk.

Knowing exactly how many potential investors had to be solicited in order to get 400 to sign up would provide some interesting insights on investor behavior.  Do a significant percentage of individuals fall prey to smooth talking con men promising returns that would normally imply high risk?   As we have seen from the Madoff Ponzi scheme, many wealthy and sophisticated investors succumbed to the lure of high returns with low risk.

Desperate Search For Yield Due To Fed ZIRP Policy

This latest Ponzi scheme may be unique in that the perpetrators targeted the elderly.  Con men have a natural instinct to prey upon the most vulnerable and offer them what they need the most.  Many elderly investors who previously depended on interest income from savings have seen their incomes reduced to virtually zero as the Fed has forced rates at the short end to near zero.

Super low cost funding from saver deposits have resulted in huge lending spread profits for the banks.   A Fed zero interest rate policy (ZIRP) is the silent unpublicized part of the bank bailout.   In this zero sum game, the banks are the winners and the savers the losers.  How many financially prudent savers have been forced by the Fed’s policy of zero rates to take high risks (in search of yield) that has resulted in catastrophic losses?

Savers who must have income to survive have been forced by the Fed to assume more risk with longer maturity and/or riskier asset classes.  Some savers, in their desperate search for yield, have wound up losing everything to Ponzi scheme operators.

For retired savers searching for higher yields and who can tolerate price fluctuations, consider allocating some assets into a diversified selection of blue chip companies that pay dividends.  Here are some companies to consider, with stock symbol and dividend yield listed.

Altria Group                           MO              7.2%
Kraft                                    KFT              4.1%
Merck                                   MRK            5.1%
Home Depot                          HD              3.5%
AT&T                                   T                   6.4%
Philip Morris Intl                  PMI              4.6%

Disclosures:  No Positions

Time Shares – Another Shattered Dream

Vacation Turns Into Financial Nightmare

Anyone who has vacationed to a tropical resort cannot be blamed for thinking how great it would be to own a piece of paradise.  Those who succumbed to the charms of the omnipresent time share salesmen may now be having deep second thoughts.  Consider the plight of the time share industry:

Major time-share developers, led by Wyndham Worldwide Inc., Marriott International Inc., Starwood Hotels & Resorts Inc. and others, are scaling back their time-share business as investors in time-share loans demand higher interest rates, buyers become more scarce and resales of time shares put downward pressure on prices and demand for new units.

The pullback will reshape some large time-share players. Wyndham, which owns 150 resorts globally and counts 830,000 time-share owners, intends to whittle its time-share business by 40% this year to an annual sales rate of $1.2 billion. That is a big reduction for Wyndham as a whole; its time-share division provided 53% of Wyndham’s revenue last year and 42% of earnings before interest, taxes, depreciation and amortization.

Meanwhile, sales of new time shares have been depressed by a rise in the pool of time shares listed for resale as the foundering economy forces some owners to try to unload their time-share debts and maintenance fees. Carrie Stinchcomb, a sales associate at A Time-share Broker in Orlando, said her office’s listings have increased 30% from last year. However, sales have fallen roughly by half because there are fewer buyers, she said.

Delinquencies on securities backed by time-share loans topped 5% in the first quarter, up from 3% a year earlier, according to Fitch. Starwood, which operates 26 time-share resorts, reported an estimated average default rate of 7.9% at the end of last year on time-share loans it originated.

The hurt that time share developers are feeling may be nothing compared to the plight of those who actually “invested” in time shares.   As an “investment class”, the only apparent rationale for purchasing a time share seemed to be easy financing and the belief that resale prices would increase relentlessly.   Now that values are plunging investors are reflecting on the negative side of time share ownership –  huge upfront sales commissions,  increased yearly maintenance fees, cost of traveling to the timeshare and the cost and complexity of unloading a timeshare in the secondary market.

The default rates on time shares may rise much higher as owners come to grips with the massive price declines that have occurred in time share values.   Many owners may not yet realize the extent to which the value of their investment has declined.  Time shares can often be found on EBay for literally a couple of dollars – eager sellers simply want to dump a unit that carries high yearly maintenance fees.

Here’s a Maui bargain at the Westin in Kaanapali:

STAROPTIONS Westin Kaanapali MAUI Hawaii TIME…

Current Bid: US $17,097.00
Units similar to the one above were being marketed in the 2005 era for $50,000.   Annual maintenance fees are $2,000.

If  you prefer Mexico, here’s another bargain at 92% off the original price.


Playa Del Sol, Los Cabos, Mexico – Buy It Now Price $997, Yearly Maintenance $424
Here is your chance to own a Membership Property (Does Not Expire) at a fraction of the developer price! Studio, One Bathroom (sleeps two),complimentary week! Maintenance fees are billed on odd years only. This club membership allows you to travel to any one of Playa Del Sol’s Resorts. Purchase this exact ownership NOW at a fraction of the original price ($13,500)!! This item is a NO Reserve auction and will be sold to the highest bidder!!

Buying At The Bottom?

Any one trying to sell their time share today is looking at big losses. Those who believe that the Federal Reserve can re-inflate the burst real estate bubble should be buying with both hands.
Disclosures: No positions

Will Mortgage Rates Soar As Fed Programs Wind Down?

Fed Support No Longer Unlimited

There seems to be near unanimous agreement at all levels of government that a recovery in housing prices is essential for economic stabilization and future growth.   The Federal Reserve has supported this effort by driving short term interest rates to near zero and initiating a program to purchase as much as $1.75 trillion in mortgage debt and treasuries.  As of mid year, the Fed had purchased over a half trillion dollars of mortgage-backed securities and housing agency debt in an attempt to keep mortgage rates low.

How much longer will unlimited Fed support for the housing market continue and will mortgage rates increase when Fed support is withdrawn?  The Federal Reserve has indicated that the credit markets have stabilized.  The Federal Reserve’s balance sheet has been shrinking for weeks and is now below the $2 trillion level reached in March.   With financial Armageddon apparently no longer an immediate threat, the Fed also seems to be responding to political pressure to reduce various emergency lending programs.

In response to pointed warnings from foreign creditors about monetizing US debt,  Chairman Bernanke said:

WSJ – “We absolutely will not monetize the debt,” Mr. Bernanke says, using economist-speak that means he won’t let the Fed become the government’s source of cash for deficits. Fed-fueled deficits would be inflationary. Mr. Bernanke says, “we will not abandon price stability.”

In addition, the Fed faces a full assault on its authority from Ron Paul who is attempting to introduce legislation to audit the Fed.  Many other members of Congress have also been critical of the cost and secrecy of Federal Reserve programs and bailouts.

WSJ – As Mr. Bernanke heads to Capitol Hill today for two days of testimony on the economy, the central bank is fending off attacks on many fronts from critics who want to rein in its power and autonomy.

Rallying one charge is Ron Paul, an iconoclastic Texas Republican who wants to abolish the central bank entirely.

Still, Mr. Paul has persuaded nearly two-thirds of the House to co-sponsor a bill requiring far-reaching congressional audits of the Fed. Audits would show “that it’s the Fed that has caused all the mischief” in the U.S. economy, Mr. Paul says.

Mr. Bernanke will face a tough audience in his semiannual report to Congress Tuesday and Wednesday. The Fed “went too far in bailing out companies and exposing taxpayers” to the costs, says Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee. “They utterly failed the American people as a bank regulator.”

Outlook For Mortgage Rates

With the credit markets stabilized and the Fed under political pressure to reduce its multi trillion dollar financial  commitments, how will mortgage rates respond as the Fed reduces its programs to keep rates low?  Two top rated bond managers at Pimco and American Beacon Advisors have similar opinions.

July 20 (Bloomberg) — Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt last month and added to cash and equivalent securities.

Gross cut the $161 billion Total Return Fund’s investment in mortgage bonds to 54 percent of assets, the lowest in almost two years, from 61 percent in May, according to a report on Pimco’s Web site.  Gross trimmed holdings of government-related bonds to 24 percent of assets, the least since February, from 25 percent.

Gross has been selling mortgage-backed securities over the past few months after loading up on them last summer in the midst of the financial crisis, which started with the collapse of the U.S. property market in 2007.

AMERICAN BEACON ADVISORS’ BOND MAVENS, Kirk Brown and Patrick Sporl, have done an admirable job of flying their respective fixed-income funds, AB Treasury Inflation Protected and AB Intermediate Bond, through the credit-market turbulence of the past two years.

He thinks that stagflation — the dreaded combination of a stagnant economy and inflation — is more of a possibility now than at any time since the 1970s.

AB Intermediate Bond, meanwhile, is underweight mortgage-backed securities and overweight corporates.

A reduction of the Fed’s massive intervention in the mortgage market is certain to result in higher mortgage rates, but will not be the disaster that some fear.   The real disaster has already occurred based on the Fed’s past policy of ultra low interest rates to increase lending and inflate housing prices.

Disclosures: No positions

Regulatory Reform Implies Cause and Solution To Financial Meltdown The Same

The Federal Reserve failed miserably in preventing the meltdown of the American financial system.  Worse yet, the Fed’s loose credit and monetary policies and failure to properly regulate the financial system was arguably one of the biggest causes of the financial meltdown.  Now, based on the Fed’s sterling record of failure, Washington’s answer is to give absolute power to the Fed – what are these nitwits in Washington thinking?

Back in the U.S.S.A. – Peter Schiff

Harry Browne, the former Libertarian Party candidate for president, used to say: “the government is great at breaking your leg, handing you a crutch, and saying ‘You see, without me you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed this week by the Obama Administration.

In seeking to undo the damage inflicted over the past decade by misguided government policies, the new regulatory regime would ensure that the problems underlying our financial system will only get worse.

The underlying problem is that the excessive risk taking which brought about the crisis was not market-driven, but a direct consequence of government interference with risk-inhibiting market forces. Rather than learning from its mistakes and allowing market forces to once again control risks and efficiently allocate resources, the government is merely repeating its mistakes on a grander scale – thereby sowing the seeds for an even greater crisis in the future.

Obama proposes to entrust the critical job of “systemic risk regulator” to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA.

Given the Federal Reserve’s disastrous monetary policy over the past decade, any attempt to expand the Fed’s role should be vigorously opposed. Through decades of short-sighted interest rate decisions, the Fed has proven time and again that it is only able to close the barn door after the entire herd has escaped. If setting interest rates had been left to the free market, none of the excesses we have seen in the credit market would have been remotely possible.

The perverse result will be that our government and the Fed gain more power as a direct result of their own incompetence.

With the transition now fully under way, I propose we end the pretense and rename our country: “The United Socialist States of America.” In fact, given all the czars already in Washington, we might as well go with the Russian theme completely: appoint a Politburo, move into dilapidated housing blocks, and parade our missiles in the streets. On the bright side, there’s always the borscht.

ship-of-fools-titanic2Courtesy: The Liberty Voice

Washington constantly employs the same failed tactics to a problem and expects different results and only those outside of Washington understand the implications of such thinking.  Instead of expanding Federal Reserve powers, serious thought should be given to severely restricting the Fed’s ability to destroy what’s left of the American free enterprise system.

More on this topic:

What The Fed Chairman Said At The Onset Of The Credit Bubble

Fiscal Discipline – Endorsed By All, Practiced By None

Has anyone noticed the correlation  of “fiscal discipline” chatter to rising interest rates?  Efforts by the Fed to manipulate rates lower through the outright purchases of treasuries and mortgage securities seem to be failing as the long end of the yield curve continues to steepen.  Is the fiscal discipline talk simply an effort to calm bond investors or is the plan deeper?

Consider some recent comments by the President and the Fed Chairman.

Obama Urges Congress To Pass Law Enforcing Fiscal Discipline

(Bloomberg) — President Barack Obama said he is committed to imposing fiscal discipline on the government and called on Congress to pass a law requiring any new spending be matched by higher taxes or cuts elsewhere. Obama, in his weekly radio and Internet address, said that while his initiatives to confront the economic crisis have deepened the country’s debt,

“We need to adhere to the basic principle that new tax or entitlement policies should be paid for,” Obama said.

“We cannot sustain deficits that mortgage our children’s future, nor tolerate wasteful inefficiency,” Obama said.

Earlier this week, Obama was criticized as doing too little to confront the deficit when he ordered his Cabinet to cut $100 million out of the budget

And right on cue, Mr Bernanke followed up with  sobering remarks on the perils of deficit financing and fiscal imbalances.

Fed Chief Calls For Plan To Curb Budget Deficits

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more.

Why Bernanke is Right to be Worried

Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”

These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns.

Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar.

It’s Your Problem, Bernanke Tells Congress

Congress and the people who elected it must decide how much government they want to afford, Bernanke said. Stating the obvious, he went on to say: “Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run.”

Unfortunately, Congress and the people have seldom gotten the balance right. We want the benefits of a large government without paying the costs, just as we wanted a loftier personal living standard than our income could support.

The current economic crisis — which demanded “strong and timely actions,” in Bernanke’s view — has accelerated the day of reckoning for our public and private debt…

Both Obama and Bernanke are intelligent men.  I doubt that either one truly believes that unlimited borrowing or printed money create enduring economic prosperity.   The bailouts, guarantees and deficit spending were necessary to prevent the economic crisis from turning into something much worse, but the cost has  accerlerated  the “day of debt reckoning”.

Now that the crisis seems contained and rates are rising,  the emphasis by both Obama and Bernanke is on ‘balancing spending with revenues”.   Since neither man  mentions reduced  spending, what exactly do they have in mind?

The way this plays out should be interesting.  The President wants his numerous costly programs implemented and Bernanke, a “student of the depression” will be loathe to endorse tax increases on a still very fragile economy.  Bernanke tells Congress that paying the bills is their problem and Obama states that new entitlements should be paid for.  So what is the solution? 

The solution is the only one it has ever been-  defer any meaningful action to the next administration, defer the unwinding of the excesses to the next business cycle, and defer  the debts to the next generation.  The “solution”  will keep on working until it doesn’t.