It is time for the business and governmental leadership of the United States to face economic reality and make the hard decisions necessary to put America's train back on track.
In a speech in Dallas, Federal Reserve Chairman Ben Bernanke bluntly noted that two giant fiscal waves were headed for the federal government, one atop the other. First comes the big deficit caused by the economic downturn. That will be followed immediately by ballooning costs for Baby Boomer retirees drawing Social Security and Medicare funds. "To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above," Mr. Bernanke said.
Here are eight news items of "what's happening now" that promise a darker tomorrow due to the lack of a U.S. strategic plan for the economy by corporate, government and citizen leadership to set things straight:
1. The number of U.S. workers filing new claims for jobless benefits rose unexpectedly last week. The Labor Department said in its weekly report Thursday that initial claims for jobless benefits increased 18,000 to 460,000 for the week of April 3.
2. State governments from New Jersey to California that are struggling to close budget deficits are skipping or deferring payments to already underfunded public employee pension plans. The moves could help ease today's budget pressures, but will make tomorrow's worse.
3. A bitter political dispute between the City of Los Angeles' elected leaders and its powerful municipal utility threatens to push the city into insolvency as early as next month.
Los Angeles City Controller Wendy Greuel warned this week that the city's general fund could run out of money and fall $10 million into the red by May 5 unless the Los Angeles Department of Water & Power transfers a planned $73.5 million payment it has so far said it would withhold. Without the payment, the city would need to dip into its reserve fund, leaving that contingency dangerously low in the event of other emergencies. The Los Angeles utility, the nation's largest municipal utility, said it wasn't making the payment because the city council earlier this month failed to approve substantial increases in electricity rates.
4. Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished. That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.
5. Minnesota businessman Thomas J. Peters was sentenced to 50 years in federal prison for orchestrating an elaborate, $3.7 billion Ponzi scheme that lured investors by claiming to buy surplus appliances and merchandising and resell them to retailers.
6. Robert Rubin, the former U.S. Treasury secretary who led Citigroup's executive committee, defiantly defended his role in decisions that led to gigantic losses at the bank. Thursday's hearing by the Financial Crisis Inquiry Commission broke the recent executive silence about the bank leadership's culpability for more than $58 billion in write-downs by Citigroup on assets tied to risky subprime mortgages and other financial instruments.
7. The rich and famous now have something in common with hundreds of thousands of middle and lower-class Americans: The bank is about to take their homes. Houses with loans of $5 million or more will likely see a sharp rise in foreclosures this year, according to a RealtyTrac study for The Wall Street Journal.
In February alone, 352 homes nationwide in this category were scheduled for foreclosure auction, the final step before a bank acquisition. That is the largest monthly number of these so-called notices of sale since the financial crisis began. By comparison, in all of 2009, there were 1,312 such notices. Economists say the super-wealthy are among the last to lose their homes in a mortgage crisis because they usually have high savings, better access to credit and other means for staving off foreclosure.
8. Anyone with knowledge of the South American country's financial crisis nine years ago will see parallels in this week's collapse in Greek bonds after reports emerged that Prime Minister George Papandreou was balking at what are likely to be tough financing conditions from the International Monetary Fund. Greece is caught in the same kind of financial and political trap that led Argentina down the path to the biggest sovereign default in history in December 2001.
Concern over a potential liquidity shortage at Greece's private-sector banks fueled a sharp selloff in Greek debt and equity markets Thursday. More alarmingly, investors drove the interest rate of the Greek two-year bond to 7.45% Thursday, 6.64 percentage points more than what Germany pays. This example illustrates that the market is the dog wagging its central bank tail, not the other way around.
Source: The Wall Street Journal, April 9, 2010