Monday, September 21, 2009

The National Debt and TARP - Your Money?

Back to serious matters. There have been so many questions about the banks and the bailout money and the Federal Deficit -- your money?

First, since there is such attack on Obama and Democrats right now, I'd like to talk about the national debt in graphic form. If you look right now at the graph of the National Debt from 1940 to the present, you'll see a modest increase during WWII, and then it's almost flat until the Viet Nam War. From 1975 to 1980, it begins to go up. This is the period of Gerald Ford to Jimmy Carter. Gerald Ford came into office during double digit inflation (topping 12% in 1974), high oil prices, and low confidence in government as a result of post Viet Nam, and post Watergate and Richard Nixon's resignation. By March of 1980, inflation and interest rates were topping 18%. Even so, the debt went up moderately, and if you look at the other chart comparing it to GDP, the debt continued a down trend through Carter's presidency.

Then, came Reaganomics, and top-down Supply Side Economics, and huge tax cuts for the rich. Look at the two big rises in National Debt as compared against GDP. Both rises were during the big tax cuts of Reagan and both Bush's. Clinton took back some of the giveaway and reduced the budget still constrained by pay-as-you-go, and the National Debt was greatly curbed. Compared against GDP, it was reduced.

At the beginning of Reagan's term, the National Debt was about $1 trillion. By the time a Democrat was back in the White House, it had climbed to over $3 trillion. Clinton kept it below $6 trillion, tapering off significantly during his last 4 years. Bush lowered taxes again, raising the National Debt to $10.6 trillion by the time he left office.

Now, let's look at the National Debt as compared to GDP, and you'll see that the differences are even more pronounced. National Debt goes down during Democratic control, and up during Reaganomics and the Bush eras.

Finally, the graph from Emmanuel Saez (below) showing the income share of the top .01% of earners, that Paul Krugman published in August of this year. As Thom Hartman keeps saying, tax breaks for the rich result in bubbles which inevitably pop. The dot-com bubble caused by the excitment of a new industry increased incomes across the board, but also created some tremendously wealthy entrepreneurs. The stock market decrease approaching 2000, the end of Clinton's term, lowered the top income from 5% to 3% of total income share and lower than it was in 1986 when Reagan lowered the income tax for the top incomes from 50% to 28% and raised the lower level taxes from 11% to 15%.

George Bush came into office and again lowered taxes every chance he got until we have another serious recession, bordering on depression, and the highest spread of income ever -- at 6%. The peak in 1928-29 resulted in the Great Depression. A peak in 1986 was followed in 1987 by Black Monday and a stock market crash. Again, as Thom Hartmann points out, tax reductions for the rich results in a bubble that pops. This was repeated in 2000 when the stock market crashed again after the .com bubble.

And, this has come to that: The Bank Bailout

There's a list of recipient banks here: at CNN
which shows that about $200 billion was borrowed and about $70 billion has been paid back so far.

Now, where did the money come from in the first place? It was called the Capital Purchase Program and the effort was to prop up capital and make available additional money for lending. It didn't come from the taxpayer. It was part of TARP.

The TARP (Troubled Asset Relief Program) allowed the US Treasury Department to buy preferred (non-voting) shares of hundreds of banks. The US taxpayer was told that there would be a modest return including a 5% quarterly dividend. To date, we've seen better than expected profits of 15% or a total of $334 million in profit from the large banks who have repaid their debts and an additional $35 million from 14 smaller banks.

However, to stay realistic, Citigroup and Bank of America are still troubled, and neither is going to repay their bailout money soon. Their stocks have surged this summer, but they are both still sitting on mortgages that don't look good.

Will the Paybacks happen soon enough?

The US Treasury is subject to a Congressional debt limit. In February it was raised to $12.1 trillion. It currently stands at $11.7 trillion and was scheduled to hit the limit in mid-October. There are steps it can take short term to free up cash but none of them are long term solutions. Some of them are an avoidance of investing in Federal employees pension or G fund, or in the Civil Service Retirement and Disability Fund. Payments to this fund are normally $5.63 billion every month.

The Fed has been one of the biggest buyers of US Treasury's and government backed mortgage debt. What does this mean? The regional banks comprising the Federal Reserve System have agreed to buy the debt of their weaker brothers. In the second quarter, the Fed bought $164 billion of the $339 billion in new Treasurys. The Fed has been buying upward of 80% of the bonds issued by Freddie Mac and Fannie Mae. This has propped up the Real Estate market, but in October the Fed is scheduled to stop buying those bonds.

Luckily, US Households have been buying US Treasurys at an unusual rate. Is this because they are unsure about their local banks? This week, the government is auctioning a record $112 billion in debt. If the US citizen continues to buy our national debt, we can at least keep our debt out of foreign hands.

US Debt of George Bush: From $5.6 trillion to $10.6 trillion 1/20/09.

US Debt during year 2009: From $10.6 trillion to $11.8 trillion.

Obama has returned to pay-as-you-go which created the dip in National Debt that we saw during the Clinton years. Please support this practice as it seems to be the only way to constrain the lawmakers. Additionally, the top tax rates are now below what they were during the 1950's and the Eisenhower presidency. This is not helpful. A return even to the Reagan tax rates would greatly reduce the National Debt.

There is a myth being perpetrated that Republicans handle the Nation's money better. Not so. It would seem that they handle their money and our money better while the Nation goes deeper into debt!


sj said...

"and if you look at the other chart comparing it to GDP, the debt continued a down trend through Carter's presidency."

"Now, let's look at the National Debt as compared to GDP..."

1. Comparing National Debt to GDP from one period to another period is neither here nor there because domestic production in the U.S. has significantly changed over the past few decades.

2. Where is the chart that shows National Debt from previous years in 2009 dollars? Inflation over all the years takes its toll and even slowing inflation isn't the same as eliminating inflation. Therefore the charts showing upward migration of National Debt do not paint an accurate picture.

3. Watching the national debt increase to grow the private sector and provide opportunity for everyone is preferable to watching the national debt grow at a break-neck pace, while private sector, jobs, and opportunity are destroyed and the size of government expanded. There's a way to reduce the national debt with the former, irreparable damage may be occurring from the latter.

4. It's not tax cuts for the rich that is growing the national debt. It's the obscene amount of government programs and spending. How do you reduce the national debt? Cut spending.

sj said...

W. Bush was not a fiscal conservative. Do not include him in examples that refer to Reagan's economic policy. Though they are both Republican, they could not be further apart in their approach to (small) government.

Nancy from said...

SJ, you got me thinking, and that is always a good thing!

Please see the next post.

Thank you.