Eliot Spitzer is back to making sense in Slate, bringing us this:
Sure, forcing $1 trillion of taxpayer money—in direct capital, guarantees, and diminished cost of borrowing—into the banking sector has permitted the major banks to claim solvency for the moment. Yet we should not forget that this solvency has come not through a much needed deleveraging of the banking sector but rather from a massive transfer of the obligations of private banks to the public, with the debt accruing to future generations…
It’s a terrible mistake to confuse the momentary solvency of the financial sector and the long-term health of our economy.
Deficit spending on the order we have undertaken – indeed, contingent liability absorbtion on the level we have undertaken – strikes me as a bit like the carry trade: it works until it doesn’t. For years you’re short yen and long krona and it’s like you have discovered a perpetual money machine. And there’s no point in arguing about whether this relationship requires Iceland to somehow reinvest its entire balance sheet at ever-more-ludicrous rates of return; it’s dark up there, the girls are pretty, the horses tiny – why expect some economics textbook to matter. Then one day you’re…inverted.
In fall we heard plenty of noises that with borrowing costs near zero for the Treasury, we would be crazy not to run up a huge bill. Which would make perfect sense if we otherwise could operate at a surplus; borrow a trillion dollars on thirty year terms, and screw the rest of the world if they can’t take a joke later on.
Problem is, we are chronically unable to live within our means. We borrow in good times and bad. And this puts a very different set of constraints on us – we not only have to consider our situation trying to service the massive amount of debt we have undertaken, we need to figure out how to get all of the additional debt we will need to raise in the future when we are already encumbered by the massive amount of debt taken so far.
Furthermore, the money we borrowed did not go into productive investments; rather, it went fairly indiscriminately to discharge claims against existing assets. When we bailed out AIG and put the taxpayer on the hook, we didn’t do much to improve the quality of AIG assets (which might have been the case if one believed that AIG’s problems were purely liquidity-driven, as opposed to solvency-based); we just ended up shipping billions of dollars to a bunch of counterparties who may or may not have needed it but who did not give the taxpayer any claims in exchange for the money.
What are we going to do when someday the world isn’t hungry for more of our promises?
To go back to the Spitz:
Second, why not take an amount equal to the AIG bailout (more than $180 billion) and invest in a product that would be truly worthwhile: high-speed rail along our major economic corridors? If we transform the L.A.-San Francisco corridor with high-speed rail, and D.C.-Boston similarly, the savings and technological advances would be enormous. The $8 billion dedicated to high-speed rail in the stimulus package will accomplish little.
I am more agnostic about high-speed rail in the US. We are talking about a revolution in passenger transport, after all, not freight. The East Coast line, should it ever happen, would not change living patterns or much of anything, except possibly to make Hartford and/or Providence nicer places to live if they had stops (I am assuming something like DC-Baltimore-Wilmington-Philadelphia-Newark-NY-Hartford-Providence-Boston, which gives each state one stop and tries to keep the end-to-end journey within reason). The major benefit would be to the nation’s air travel grid – you eliminate most of the flights and attendant delays among the cities served, which has a ripple effect nationwide – which is funny in that the main folks who object to spending the money are the Tom Coburns of the world who cannot understand how Tulsa-Dallas flights can be affected by the disaster at LGA.
The West Coast line would be more transformational, since it would all of a sudden connect chunks of the Central Valley with SF and LA and encourage massive amounts of sprawl. On the other hand, it has the obvious problem that there is no “there” in Southern California. Wherever the train ends up in LA or San Diego will need the mother of all car rental facilities, unless someone figures out an efficient loading mechanism that can transport cars on the train at speed and still get them on and off the train under the control of California drivers.
At least the Spitz is asking the question about alternative uses of money. The challenge is that right now the money would be purely additive; no one is suggesting taking GM off the Federal dole (or removing the commercial paper guarantees) to free up the funds. And that’s what we need from Eliot. He could have been a serious presidential candidate, and when he was mentioned in those terms, he was a grandstanding prick. Now, his aspirations somewhat lowered, he’s just a guy who sees the predicament we are in and writes about it on the Internet. Thanks, Ashley Dupree:
Couldn’t have just cheated on your wife with any of the women in NY who would have slept with you for free, could you, Spitz? You’re a young governor, the heir to a fortune, and you had to toss your political career for someone from Girls Gone Wild?
