Will Raising the Debt Ceiling Bail Out the Banks, Again?
By Greg Hunter’s USAWatchdog.com
Just after the first of the year, the Chairman of the U.S. Council of Economic Advisers, Austan Goolsbee, emphatically pushed for Congress to raise the debt ceiling. Goolsbee said on the ABC Sunday talk show, “This Week,” if it was not raised, the “impact on the economy would be catastrophic . . . “If we get to the point where we damage the full faith and credit of the United States, that would be the first default in history caused purely by insanity.”The debt ceiling currently stands at $14.3 trillion and has been raised nearly every year since the beginning of the new millennium.
I received an email from one of my regular readers concerned and confused over the alarming statements by Goolsbee. The reader who goes by the initials “NM” asked, “So, is he saying that if we can’t go deeper into debt we will default? i.e. the minute America can’t borrow more money, it will default on its debt obligations???? It doesn’t make sense. How many times are they going to keep raising the debt ceiling?” NM seems to have asked all the right questions. Yes, Goolsbee is saying the U.S. will default if we do not go deeper into debt. And, no, it really doesn’t make sense to regular people like you and me. As far as the question, “How many times are they going to keep raising the debt ceiling?” for that answer, I turn to Bill Gross, the founder of PIMCO, one of the world’s largest bond funds. On CNBC last week, he said, “We have a deficit in the $1 trillion plus arena, which means we must borrow at least a trillion dollars additional a year in order to fund the deficit. And, so, the debt ceiling currently at $14.3 trillion, which is 95% of GDP, has to go up by another trillion or so every 12 months.” (Click here to watch the entire interview.)
“Another trillion or so every 12 months!” Apparently, the debt ceiling needs to be raised every year for at least the foreseeable future. To put it another way, the debt ceiling, according to Mr. Gross, needs to be raised by more than $1,000 billion each and every year! Seems to me, not many people in the mainstream media are alarmed by this amount of debt accumulation or by the fact that if it is not raised, the U.S will default. That is the precise warning Treasury Secretary Tim Geithner gave when he wrote a letter to Congress last week saying if the U.S. did not go deeper into debt, “The Treasury would be forced to default on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.” Mr. Geithner also explained, “It is important to emphasize that changing the debt limit does not alter or increase the obligations we have as a nation; it simply permits the Treasury to fund those obligations Congress has already established.” (Click here to read the complete Geithner letter to Congress.)
“It simply permits the Treasury to fund those obligations Congress has already established.” Two of those already established “obligations” are failed mortgage giants Fannie Mae and Freddie Mac. They represent more than $5 trillion in liability to U.S. taxpayers. You might remember on Christmas Eve of 2009, Secretary Geithner lifted the caps on the amount of money the mortgage giants could lose. Just last week, you may remember that Bank of America settled a big lawsuit with Fannie and Freddie that let B of A off the hook for buying back $127 billion in toxic mortgage debt it sold to the mortgage giants. I wrote about it in a post called “B of A Settlement, Another Taxpayer Rip-off.” It has been reported that Mr. Geithner was one of the key players in the settlement. Other big Wall Street banks also packed Fannie and Freddie with sour debt and are also probably on the hook to buy back billions of dollars of bad debt. Do you think they will want the same deal B of A got? You bet! Do you think some of this new debt ceiling money will go to the banks via Fannie and Freddie to fund buy back forgiveness? How could it not.
There are many other reasons for raising the debt ceiling such as military spending on two wars, Social Security and extending tax cuts. How many times can the U.S. raise its debt ceiling? Who knows, but the world is not going to sit and watch America print money like candy wrappers and toilet paper forever.
I will close with a quote from 87 year old Harry Schultz. He is widely respected for his economic and market calls published in his newsletter. Schultz recently retired, but in his final post, he gave this warning: “Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that. And, alas, the courage & political will to recognize the mess & act wisely to reverse gears, is absent in U.S. leadership, where the problems were hatched & where the rot is by far the deepest.” (Click here to read more about Mr. Schultz from the EconomicPolicyJournal.com.)