Deficit Hawks Heard Calls For Action
Yesterday afternoon, an overflow audience at the Center for a Responsible Federal Budget conference heard:
Ben Bernanke say "...maintaining the status quo is not an option...I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job. Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation." His full remarks are here. He didn't take any questions.
Rep. Paul Ryan (R-OH) call for $6.2 trillion of spending cuts over the next 10 years versus the President's FY12 Budget ($5 trillion from the CBO baseline). He would "repair the rips in the social safety net" by moving Medicare to a premium support system for those under 55 today -- "It saves Medicare." His plan would bring the public debt down from a peak of 74.5% in 2015.
Senator Michael Bennet (D-CO) said "I'm mystified by the conversation that's going on in Washington... No constituent of mine at the local level would ever tolerate the conversation that we're having in Washington. When it came to the government shutdown question, at least by my math, the bid and the asked spread between the two sides in the last couple of weeks represented roughly 4 cents of the $20 meal at Applebee's that you might have for dinner."
Former Fed Governor and Bush economist Larry Lindsey say three "cost elements are underestimated by official estimates...If we normalized interest rates in 2013 [at the 5.7% historical average of the last 20 years], which I would say if we don't do it, the markets may force us to, would add around $400 billion in extra interest costs. Now, the Congress just struggled to find $37 billion in cuts in March. And here we're talking about a normalization of rates costing ten times that...I can tell you how we're going to fix it. The Fed is not going to let interest rates normalize. Now, that raises a whole host of other questions, meaning we're going to be printing a lot more money than we expect. I think when markets realize that's the option, we're in trouble. Official Washington is underestimating the size of the problem because we're living off of low interest rates...The total additional cost [over 10 years] is $5.4 trillion." "We are misestimating economic growth. We are far too optimistic." "The 10-year cost of one point less growth is $755 billion"...If we grow at 2.5% instead of the 4% plus assumed by President Obama in his budget, the Administration has underestimated the deficit by $2 trillion over the next 10 years. The reality of ObamaCare is that, according to a recent McKinsey study, employers would drop their plans covering about 30% of Americans, dumping about 40 million Americans onto the federal plan. "If McKinsey is right about this, the underscoring of ObamaCare is roughly equal to the cost of [the] Iraq and Afghanistan [wars]."
PIMCO's Neel Kashkari said "We don't [lend money to Treasury] [Laughter.]. The fundamentals are clear. Short term, Europe has it's own mess. We're just the strongest weakling today...Our political system responds to a crisis...The concern that I have is that if we wait until there is an acute crisis out there in the Treasury market, we may permanently undermine the gold standard that Treasury occupies today and permanently increase out nation's borrowing costs. Remember, in every finance textbook around the world, U.S. Treasury bonds are defined as the risk-free financial instrument. If we undermine that belief," we may look back on that as quaint just the way we do now on AAA subprime housing debt.
Barclay's Michael Pond said "If there's no deal, 9% of GDP goes away. That's a double-dip [recession] scenario...What we're particularly concerned about ... is the potential for a fall in the dollar, which then causes rating agency action, which then causes yields and interest rate costs to rise significantly."
Dozens of other speakers made excellent points, so the entire three hour 12 minute video is well worth watching, even if it is a downer. When I moved to the rooftop reception and talked with a friend, who repeated what a downer the session had been, I quipped, "That's why they put the bar near the shallow end of the pool." Then OMB Director Jack Lew arrived fresh from Biden group budget talks to say those negotiators were serious and respectful and working during this "critical time" to reach a deal. He concluded with a useful Washington insider observation, "No one has leaked anything yet, so it's going well."