In unprepared remarks given at a Wall Street conference hosted by The Economistmagazine yesterday, Treasury Secretary Timothy Geithner delivered this eye-brow-raising comment: “We've got unsustainable deficits over a five- to 10-year window.”
The statement came at a time when the White House and Congress are under fire for their massive, unconventional deficit spending to rescue the economy.
The US dollar is fluctuating dramatically against the euro and other currencies, and world leaders are increasingly demanding that world trade, notably in oil, be executed in another currency besides the US dollar, which economists forecast will weaken further.
Economists have also projected this outsized deficit spending—a $3.6 tn budget, a $787 bn stimulus plan, and health reform veering towards $1 tn over a period of years--is putting the country on track to join Zimbabwe, Italy, and Japan when it comes to rising debt-to-GDP ratios.
The White House and Congress have been under fire for choosing to devalue their way out of the recent economic crisis. "We are living through a gradual shift away from a dollar-centric system," noted Niall Ferguson, Laurence A. Tisch professor of history at Harvard University and the William Ziegler professor of business administration at Harvard Business school.
Geithner also said the US economy is slowly recovering, but the markets should not expect a V-shaped recovery, as the healing process will take a bit longer. The US is due for a “slower than typical recovery,” he said.
Geithner made the comments in a candid Q&A session at the Buttonwood Gathering at Pace University in downtown Manhattan, a two-day event that also featured FDIC chairman Sheila Bair, White House economic adviser Lawrence Summers (who says the US supports a stronger dollar), and TARP overseer Elizabeth Warren.
In unprepared remarks, Geithner also said that “major economies look soft” but that the “emerging world will be a much stronger source of strength, it is showing resurging strength that will support us.”
This, despite the fact that the GDP of the BRIC countries (Brazil, Russia, India and China) are about a third that of the US and Europe, which also largely remains in a slump. In addition, the purchasing power of consumers in the US and Europe is about seven times that of consumers in the BRIC countries.
Geithner also noted that the meltdown on Wall Street showed that the government was “too late to act' and without the “tools to manage it, the moral hazard has presented too great a burden on taxpayers” leading to a “tremendous loss of faith in institutions.”
The fear now is that the US government will overstay its welcome in the economy, while other economists point out the government cannot tear away the oxygen mask too soon without risking a protracted downturn, as happened in the thirties and in Japan in its zombie decade in the ‘90s.
The US government, however, owns stakes in about 600 banks, two car companies, has effectively nationalized an insurance conglomerate, AIG, and has nationalized housing finance giants Fannie Mae and Freddie Mac, both of which have combined balance sheets veering toward half the GDP of the US, once off balance sheet items are included.
At the same time, the Federal Reserve is propping up the mortgage and consumer borrowing markets in an effort to keep rates low with massive purchases of debt securities. Estimates show that the Fed is on track to own 17% of the $10.4 tn market for mortgage debt securities, Treasury debt, and debt issued by Fannie and Freddie.
The Buttonwood Gathering also featured two government regulators who have not seen eye to eye, Geithner and Bair, and have taken different views on how to rescue the economy and the financial markets. Bair has noted in recent speeches that if a company is “no longer viable,” it should “fail,” while Geithner has warned the economy can't risk letting a systemically large company fail “without touching off an inferno” in the markets.
Geithner and his executive team fear a collapse of a sizable, intrinsically significant bank or company could trigger a meltdown due to unstable derivatives, now amounting to about 13 times the GDP of the US.
Top commercial banks own derivatives that amount to more than $200 tn in notional value, according to the Office of the Comptroller of the Currency. JPMorgan Chase tops the list with about $70 tn in notional derivatives, with Goldman Sachs exposed to $31 tn. Executives say this is a gross figure, and that via successful hedging, the amounts are actually smaller.
Exit strategies were high on the agenda at the Buttonwood gathering, as the Obama Administration may be on track to conceivably appoint six of the seven Federal Reserve governors by 2012, due to retirements and vacancies.
As unemployment is set to rise higher than 10%, the fear is that the president's popularity will continue to come down, so pressure may be brought to bear on the central bank to keep rates low for too long, igniting yet another bubble that many market watchers say is already ballooning due to the Fed's unorthodox interventions and colossal quantitative easing programs to rescue the economy.
FDIC chairman Sheila Bair remains highly concerned about the possibility that banks will continue to fail through 2012.
Many economists and analysts now say the government should resurrect the Glass Steagall act, abolished in 1999, which kept a firewall between the utility operation of a bank's deposit-taking units from the casino that are a bank's trading desks (bringing back the firewall may also naturally bring down bonuses now earned on risky market bets). "Insured deposits are being used in ways that I don't like to see," Bair said.
Top White House economic adviser Lawrence Summers noted you can't legislate out of existence human behavior, including "ignorance and stupidity," and that regulators won't succeed if they continue to ignore regulatory models that don't take into account these factors, and instead chiefly rely on after-the-fact refereeing and reform from the bully pulpit of handwringing, high-level commissions.
Top economist Stephen Roach, now chairman of Morgan Stanley Asia and a renowned bear, also said he feared that “there is no exit strategy” when it comes to the Fed's quantitative easing programs, later adding “we're stuck” in a hamster wheel of “bubbles perpetuating bubbles” and that the country needs a central bank that “actively prevents asset bubbles.” With mid-term elections approaching in the US, Roach also fears a populist-fueled trade war with China if unemployment continues to rise.