This time, the economic crisis is no one’s fault but the government’s

August 19, 2011

What the hell is going on? We thought the worst was behind us, but it wasn’t, thanks largely to fallout from the Standard & Poor’s downgrade of U.S. credit brought on us by the incompetence of our alleged national leaders.

Only three short years ago, the world financial system was on the brink of disaster after Lehman Brothers went broke in September 2008. Those scary times seemed to have disappeared in the spring of 2009. But now, things are even scarier.

Our current mess is different from the Lehman-related horror because it stems primarily from politics, not economics. The previous fear-fest came about because Lehman’s bankruptcy disrupted financial markets in unanticipated ways. Today’s crisis was completely avoidable. You can blame it directly on the fools who brought our country to the brink of defaulting on its debts in the name of saving us from . . . I’m not sure what.

Yes, the tea party types bear primary responsibility — but they couldn’t have done it without the cowardice and incompetence of the Obama administration, which let things get way out of hand. This whole fiasco just enrages me. And it ought to enrage anyone who wants the United States to act like a real country rather than some third-rate failed state run by fanatical factions that hate one another.

So why do I say today is scarier than 2008-09? Because this time not only have we got troubled financial institutions to deal with, but we have serious, substantial countries facing possible default on their debts. Including, heaven help us, this one.

Things were already bad because of fear and financial fragility afflicting Europe. But the problems took a quantum leap because of fallout from S&P’s totally justifiable Aug. 5 downgrade of U.S. long-term debt. The U.S. economy was listless enough, with gross domestic product barely growing — and maybe even shrinking — plus record long-term unemployment. (One telling statistic: The percentage of U.S. adults with jobs is down to 58.1 percent, from 64.7 percent in 2000, according to the St. Louis Fed. That, my friends, isn’t good.) The fear, loathing and political divisiveness are going to make things worse, not better.

Now, a few facts. The S&P downgrade is not — as some hate-filled knuckleheads inside the Beltway and in the hinterlands keep repeating — from fear that the nation is “broke” or lacks the financial ability to meet its obligations. S&P’s primary worry is that the United States might not summon up the political will to pay its debts. (Read the analysis for yourself at standardandpoors.com/ratings/us-rating-action/en/us.)

The escalation of our problems can’t be attributed to Angelo Mozilo of Countrywide Financial, a favorite villain. You can’t blame it on the other favorite bad guy, Goldman Sachs, or on the other usual suspects: Wall Street in general, greedy lenders and speculators, irresponsible borrowers seeking a free lunch by taking out mortgages they had no chance of repaying.

The root of our current problem is that there are no grown-ups in positions of serious power in Washington. I’ve never felt this way before — and I’ve written business stories for more than 40 years, and about national finances for more than 20.

Look, I certainly don’t worship Washington institutions. I called former Federal Reserve chairman Alan Greenspan the “Wizard of Oz” when he was known as the “Maestro.” I’ve said for more than a decade that the Social Security trust fund had no economic value and would be useless when the system’s cash flow turned negative — which I also predicted. But despite being an irreverent professional skeptic, I never felt there was a total absence of adult supervision in our nation’s capital. Now I do.

Parade of fools

I spent July on family leave, not writing columns, and watching with increasing horror as market-illiterate know-nothings, abetted by the craven leaders of the Republican Party (from which I’m about to resign) and the unspeakable ineptness of President Obama and his minions, brought our country to within an inch of defaulting on its debts.

Washington’s foolish politicians thought they’d reassured everyone when they stepped back from the brink of default with a deficit-trimming deal that’s so absurd that you have to laugh when you think hard about it. Then S&P did what it had previously warned it would do when it became clear that the United States might decide not to pay its debts. It downgraded our country’s credit. AAA credits are supposed to be rock solid. If there’s more than a remote chance of default, a security shouldn’t be AAA. End of story.

I have no love for S&P or its competitors Moody’s and Fitch, whose influence vastly exceeds their competence; they should have been stripped of their special regulatory standing because of the AAA ratings they bestowed on trashy mortgage-backed securities that contributed so much to the financial meltdown.

But I respect S&P for standing up and alerting investors to the idea that the once unthinkable — a default by the United States, the only country in the world that can use its own currency to pay external creditors — has become thinkable. Fitch and Moody’s have kept the U.S. debt rated AAA, which I sure wouldn’t have done.

Adding to the current sense of foreboding, at least for me, is the fact that the Federal Reserve, which rode to the rescue last time, is legally constrained by provisions of Dodd-Frank legislation that are little recognized outside the world of regulators and financial techies.

Back in 2007, the Fed could invent programs to bail out solvent but illiquid institutions. It could also turn investment banks like Goldman Sachs and Morgan Stanley into bank holding companies with access to unlimited Fed funding — and even infuse cash into non-bank basket case AIG directly and indirectly to forestall an uncontrolled collapse that could have made the Lehman Brothers disaster look like a mere rounding error.

The Fed’s actions begat their own set of problems (such as penalizing prudent savers by imposing ultra-low interest rates in order to help imprudent borrowers and the overall economy), which I’ve written about at length. But once the Fed began acting in summer 2007, you knew there was an institution around that could bail out the world, if needed. Now, at least in theory, the only government institution that’s supposed to do this kind of thing is the Federal Deposit Insurance Corp.

I respect the FDIC, which I forgot to mention in my previous column about the folly of expecting institutions’ “living wills” to end the need for financial bailouts. (Sorry about that.) However, the FDIC has nothing like the Fed’s power and international clout.

We’ve got this problem because our alleged leaders rolled over for too-big-to-fail companies rather than doing the right thing by breaking them up into pieces small enough to be allowed to fail.

If I sound angry, it’s because I am. Think of me as an angry moderate who has finally gotten fed up with the lunacy and incompetence of our alleged national leaders — and with people stirring up trouble from which they hope to benefit politically or financially.

Some policies and statements you hear from tea party types about the economy and the debt markets are utterly insane. Any competent economics instructor would give you an F if you asserted the same sort of nonsense on an exam. But all that aside, at least the tea party people have a story and a message. The Obama people have none — at least none that I’ve been able to discern. They don’t even know how to spread good news, which actually does exist. One example: This spring I was assigned to figure out how much taxpayers would lose on the Troubled Assets Relief Program — the much-maligned TARP, that supposed financial sinkhole. To my surprise, I discovered that TARP actually stands to make money for taxpayers.

During my research, I found that the Treasury had reached a similar conclusion but had put the information into the public domain in such a low-profile way that few people saw it. Why wasn’t the Obama administration spreading the word that taxpayers had made money saving the world financial system? Beats me.

The one saving grace we have is that the rest of the world seems to be run by midgets, too. I don’t want to think what would happen if the United States, in its current disarray, had to deal with the likes of Mao, Hitler or Stalin at the height of their powers. Maybe there is some divine power watching over us.

The solution

Now that I’ve finished venting, let me make one more attempt to be reasonable — and show how relatively easy it would be to solve our problems while allowing both the tea party and the left wing to claim victory and go home. This requires (1) that we survive the 2012 election cycle (boy, that’s going to be a blast) and (2) that the winners recognize that our current federal income tax rules and rates, Social Security benefit formula and Medicare provisions are historical and political accidents rather than holy writ handed down to Moses by the Lord on Mount Sinai.

We need more jobs, more growth and more tax revenue. Note that I said more revenue, not higher rates. There are lots of proposals kicking around that would cut rates, eliminate the alternative minimum tax and broaden the tax base by drastically reducing itemized deductions.

Only about a third of taxpayers, primarily higher-income types, itemize deductions, so only they would be affected. Do this right, and you end up with more tax revenue from high-income people (which allows the “tax the rich” types to be happy) but lower rates (which lets the tea party folks claim victory).

On the entitlement front, we modify Social Security and Medicare formulas, imposing higher costs on higher-end retirees (which would include me, should I ever retire). What’s in it for the right-wing fanatics? Those programs’ projected costs drop. For liberal wing nuts? They can claim victory because people are living longer than when these programs were introduced and will collect more benefits over their lifetime than originally intended.

Yes, rationality is out of style, and fanaticism is the new normal. But do we really want a national life like the one we’ve had the past few years? All shrieking and no thinking? Today’s problems are horrible, but what are they compared with the Civil War, the Great Depression and World War II?

Enough screaming. As for me, I’m going back to the beach to finish my vacation.

Sloan is Fortune magazine’s senior editor at large.

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