that the rise in government spending and debt is a ticking time bomb. What contributes to the debt explosion is the rise in entitlement programs.

From Disciplined Approach To Investing, one view of the US Debt/Deficit :

"U.S. Government Debt/Deficit A Disaster In The Making?

For the U.S. government's fiscal year ending September 30, 2008 the total federal debt level reached $10 trillion. Michael Pakko, an economist with the Federal Reserve Bank of St. Louis, notes in a recent article that the rise in government spending and debt is a ticking time bomb. What contributes to the debt explosion is the rise in entitlement programs.

All told, the shortfall for government social insurance programs (Social Security, unfunded obligations of Medicare Part A & B and Medicare Part D-prescription drug coverage) comes to a present value of $40.9 trillion. This is the government’s official estimate—some private sector economists suggest that the total burden is even greater. Economist Lawrence Kotlikoff has recently estimated the total unfunded liabilities of current federal programs at $70 trillion.

Recent bailout actions are also contributing to the rise in obligations that will need to be repaid by U.S. taxpayers. Forecasts from the Government Accountability Office show the growth of the debt obligations if entitlement reforms are note undertaken. The below graph depicts the growth in expenses compared to total revenue as a percent of GDP out to 2080.

(click to enlarge)

and the resulting growth in the government's debt:

(click to enlarge)

The ballooning deficits and debt levels are issues that will need to be addressed sooner versus later in order to ensure healthy economic growth in the long run. Michael Pakko concludes:

Current measures of the federal deficit and the national debt, as dismal as they might appear, fail to reflect full consequences of current-law fiscal policy. The unfunded future liabilities of government entitlement programs imply rising deficits and a ballooning public debt far larger than today’s shortfalls. And debates about the immediate economic impact of government deficits on private savings and interest rates, while of academic interest, fail to address the full importance of these long-run consequences. Fundamental reform of entitlement programs is critical for putting U.S. fiscal policy on a long-run sustainable path.

Take the Fed's Flash Poll:

• What would you do to trim the debt and deficit?

Source:

Deficits, Debt and Looming Disaster: Reform of Entitlement Programs May Be the Only Hope
The Regional Economist
By: Michael Pakko
January 2009
http://www.stlouisfed.org/publications/re/2009/a/pages/debts.html
Sphere: Related Content

Posted by David Templeton, CFA at 9:30 PM

"His frequent changes of direction are not only embarrassing, they also upset the very markets this program was designed to calm."

Alan Blinder was my choice for Treasury Secretary, which tells you something about me because I'm going to disagree with him here in the NY Times:

"Missing the Target With $700 Billion

By ALAN S. BLINDER

“First you say you do, and then you don’t. And then you say you will, and then you won’t. You’re undecided now, so what are you gonna do?”

— “Undecided,” by Sid Robin and Charlie Shavers

UNFORTUNATELY, Treasury Secretary Henry M. Paulson Jr. has turned this old song into the unofficial theme of the Troubled Assets Relief Program, the $700 billion bailout. His frequent changes of direction are not only embarrassing, they also upset the very markets this program was designed to calm.( VERY TRUE )

It pains me to say this, because I was among the first to call upon Congress to create two institutions to deal with the financial crisis: one to buy and refinance home mortgages, the other to buy what came to be called “troubled assets.” The legislation signed in October empowered the TARP to do both. Sadly and amazingly, it has done neither( I WAS FOR TAKING OVER THE BANKS ).

Regarding mortgages, Mr. Paulson is in a tong war with Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, who wants to deploy( THAT WORD AGAIN ) a small fraction of the TARP money to refinance millions of mortgages. Her plan may not be perfect — whose is? — but she’s pushing in the right direction. But he, apparently, disagrees and has devoted no money to this purpose( TRUE, BUT THE FED HAS ).

Regarding mortgage-related securities — the “troubled assets” themselves — Mr. Paulson stunned markets on Nov. 12 by announcing that he wouldn’t spend a dime on that purpose, either. Oh? As one of my students asked me the next morning, shouldn’t they at least change the name?

Instead, taxpayer money has been used mainly to recapitalize ailing banks. To be sure, this use of the TARP is perfectly legal. The legislation gives the secretary broad authority to buy “any other financial instrument” that he deems “necessary to promote financial market stability.” That certainly includes buying bank stock. ( VERY TRUE )

The question is not one of legality, but of judgment. Old-fashioned believers in democracy may recall that a reluctant Congress was sold on the idea of buying troubled assets, not on injecting capital into banks. No wonder members are crying foul. ( I AGREE. )

In fairness, Mr. Paulson was not alone in advocating capital injections. Many economists and financial experts agreed. But I doubt that many of them intended for the government to buy preferred stock with no control rights, at above-market prices and with no public-purpose strings attached( I HOPE NOT ). The automakers are not being treated this way in their $13.4 billion loan ( FUNNY THING ).

Because about half of the $700 billion remains uncommitted, let’s review the arguments supporting the three main uses of the TARP:

MORTGAGES The financial crisis began with falling home prices and fears of rampant mortgage defaults — fears that are now coming true. Those fears depressed the values of securities based on mortgages, making them “troubled.” Foreclosures are painful and costly events that destroy real estate values and force fire sales of homes — which depress prices further. It is hard to see a way out of this mess without seriously reducing foreclosures( THIS IS VERY HARD TO DO ). Understanding that, Congress directed the Treasury secretary to use the TARP to get mortgages refinanced. But he has not.

MORTGAGE-RELATED SECURITIES There were several rationales for buying troubled mortgage-backed securities. First, panic had virtually shut down the markets for these securities — markets that must be restarted to restore our system of mortgage finance. Second, one source of that panic was that nobody knew what the securities were worth. A functioning market would establish objective valuations. Third, many mortgages are buried in complex securities. Buying the securities would let government refinance the underlying mortgages.( I STILL DON'T SEE WHY THE GOVERNMENT NEEDS TO DO THIS. IN FACT, BY HOLDING OUT THE POSSIBILITY THAT THIS MIGHT HAPPEN, IT ENCOURAGED OWNERS OF THESE TROUBLED ASSETS TO BE RECALCITRANT AND HOLD OUT FOR A BETTER DEAL. WHEN IT DIDN'T LOOK LIKE IT WOULD HAPPEN, THESE ASSETS FELL IN PRICE AND SOME OF THEM ARE NOW BEING PRIVATELY BOUGHT. THIS LEADS ME TO BELIEVE THAT MY POINT IS CORRECT )

Mr. Paulson says he changed his mind about buying troubled assets because the facts changed. I’m sure that many facts changed. But what new facts invalidate the rationales above?

Furthermore, there are clear synergies among the main uses: Buying mortgage-backed securities helps the government acquire mortgages to refinance, refinancing mortgages to avert foreclosures enhances the values of these securities, and both policies support the one position that Mr. Paulson has embraced wholeheartedly, bolstering the finances of banks ( IT MIGHT WORK, WITH THE RIGHT PEOPLE RUNNING IT ).

RECAPITALIZING BANKS Granting the secretary catch-all authority to buy “any other financial instrument” was a sensible addendum to the law. It offered much-needed flexibility to respond to unforeseen circumstances — an auto bailout, for example. But whoever imagined that the addendum would consume nearly all the TARP money, leaving nothing for its two stated purposes? ( THE BANKS )

But suppose you believe (though I don’t) that recapitalizing banks was the best use of all the money. Even then, the secretary’s execution leaves much to be desired. Never mind the lack of transparency and the management issues recently cited by the Government Accountability Office. Think about this:

Treasury has bought preferred stock with no control rights. The 5 percent dividend rate that taxpayers will generally receive is half what Warren Buffett got from Goldman Sachs. Banks receiving capital injections through the front door are generally allowed to pay dividends out the back door. And there are no public-purpose quid pro quos, such as a minimal lending requirement. So banks can just sit on the capital, which is what most of them have done, or use it to make acquisitions, as a few have. ( THAT'S IT. HOWEVER, THAT'S THE NATURE OF A HYBRID PLAN, SINCE THE GOVERNMENT AND BANKS DO NOT HAVE THE SAME INTERESTS )

Clearly, Mr. Paulson bent over backward to make the terms attractive to banks. He contended that wide participation was essential in order to avoid stigma. To that end, he even forced money on several bankers who didn’t want it( STIGMA ONE ). Naturally, the strong banks that didn’t want the money made that fact known to the markets immediately ( THE STIGMA EXPLANATION NEVER REALLY PASSED MUSTER ). Throwing taxpayer money where it was not needed wasted a precious resource.

So here we are, looking at an all-too-familiar story. The administration that brought you the Iraq war and the Katrina response is locking in another disaster before it leaves town. What to do?( WAIT FOR THEM TO LEAVE. I ACTUALLY BELIEVE THAT THE PERCEPTION OF THE BUSH ADMINISTRATION IS A CAUSE OF THIS CRISIS. MAYBE THIRD, AFTER GOVERNMENT GUARANTEES AND FRAUD )

Fortunately, the TARP legislation authorized a first tranche of $350 billion but wisely gave Congress a mechanism for blocking release of the second $350 billion. With the first tranche now committed, Mr. Paulson said he would soon request release of the second. Based on his performance to date, Congress should reject that request unless he agrees to spend most of the next installment on TARP’s two stated purposes.( DON'T LET HIM SPEND IT )

Failing that, we can wait a month for the new Treasury secretary, Timothy Geithner. ( LET'S WAIT )

Even Blinder's version of the Hybrid Plan would go sideways in practice.

"The question du jour is why does the US have such a phobia regarding nationalization. "

Yves Smith asks the question that maddens many of us who were for nationalizing the banks and taking over other financial supplicants. What exactly is the fear? I can think of two responses that people who object to nationalization have:
1) It won't work, but it will hang around and end up causing a ratcheting up of government intervention in the economy in general
2) It will work, thereby leading people to favor more and more government intervention
I don't accept either.

Here's Yves Smith:

"One of the most pervasive findings in social science, although it is seldom codified this way, is how suggestible people are. Numerous studies in behavioral economics have found that the same underlying bet elicits very different take-up rates when framed as a wager versus as insurance. Even worse, humans are susceptible to obviously exogenous influence.

One oft-repeated test that yields consistent results is to ask a group in a classroom setting to (among other things) to write their best estimate of the number of countries in the world. To show how to fill out the form, the leader spins a wheel of fortune, and takes the chosen number, (say 550) and uses it to illustrate how to record the estimate. Invariably, high results on the wheel of fortune, clearly an arbitrary figure, lead to markedly higher average estimates on the form.

The question du jour is why does the US have such a phobia regarding nationalization. Per the lead-in, I suspect it has a great deal more to do with social conditioning than a case-by-case assessment of possible gains and losses."

The evidence is rather strong that this Hybrid Approach is costly, inefficient, impossible to assess, subject to the influence of lobbying, cronyism, etc. One just need read the GAO report on TARP.

"While the initial (correct) reflex is that undue government interference in a well-functioning private sector is not a good idea, the industries in question (financial services and automobiles) have top players that are now abject failures on taxpayer life support. These companies have been exempted from market discipline (aka bankruptcy) thanks to state intervention."

They are essentially government guaranteed entities, and people are disingenuous who say that they didn't know that.

"The very fact that they operated with minimal government oversight, drove themselves to the verge of bankruptcy, and managed to make themselves so essential that they cannot be permitted to collapse says they cannot be left in their former hands (incumbent management is either colossal incompetent, amazingly corrupt and scheming, or both)."

Yes, that's all true. Plus, you really need personal responsibility to fall on these actors for Moral Hazard to work as intended.

"But unlike the UK, and Sweden during its early 1990s crisis (widely touted as best practice) which were both ready to assume control of banks that wrecked themselves, the US continues to rationalize, nay, promote, the worst of all possible worlds: socialization of losses, the bozo management teams still largely (often entirely, as in the case of Citigroup) intact, inadequate to no supervision (where are the board seats?) and no upside participation, not even much explanation of what they intend to do with the dough (well, now great theater is being made of the auto industry, because it is easy to pick on guys from the grubby Midwest, but the banking crowd, which did far more damage and has gotten much bigger handouts and no unpleasant questions)."

That's the system people are actually defending, unless they're Kantians telling us how the world should be, were humans not in it, but some other similar beings free of our peculiarities that seem to cause us so much grief.

"I saw a simpleminded but compelling explanation for this phenomenon: Europeans consume more government services than Americans do, and are pretty happy with it (they think we are barbarians for having private health care and, among other things, little state support of the arts). Why? They are reported to be better at it than we are. They deliver government services efficiently (relatively speaking, and healthcare provides some proof) and because they do a good job, the citizenry is willing to deploy tax dollars to these ends."

I think that this view undervalues the power and influence and interconnectedness between business and government in this country, which talks a lot about government abuse while engineering a system whereby government favors and guarantees these established businesses.

"That is a long-winded way of saying that government inefficiency and incompetence is not a given, as is often depicted in the US. The demonization of government service has probably discouraged able people from seeking public sector jobs. Even so, some areas still get high marks (the FDIC). And the continued disparagement of government serves as cover for those who want subsidies and rescues but hope to avoid the demands that should properly go with them."

That's their plan, yes, and it's worked well so far for them.

"This New York Times article deals with the Obama team's reluctance †o be seen as "nationalizing". I see. So we would rather pander to the bankrupt ideology that helped create this mess, let the perps continue to get undeserved princely pay, and stick the hapless sop taxpayer with the guaranteed-to-be-rotten fruit of this exercise rather than demonstrate leadership and reframe the issues. The hesitation to demand even modest quid pro quos is beyond belief. No private sector negotiator would ever accept such a deal."

Yves, it pains me to read that you're this shocked.

"Is this "Change We Can Believe In?" Looks like the same old crap to me, with better salesmen in charge. "

Now, here I disagree. It's better salesman and a better breed of crap, as well.

"The golden rule is that he who provides the gold, makes the rules. Time to get over prostrating before the private sector when it has abjectly screwed up."

They would beg to differ.

"Key excerpts from the New York Times:

When President-elect Barack Obama talked on Sunday about realigning the American automobile industry he was quick to offer a caution, lest he sound more like the incoming leader of France, or perhaps Japan.

“We don’t want government to run companies,” Mr. Obama told Tom Brokaw on “Meet the Press.” “Generally, government historically hasn’t done that very well.”

Yves here, Rubbish. Sweden did a great job with its bank takeovers. The Australian air control system is so good they have marketed the technology (and Australia also has a government applied science think tank which has provided considerable tangible support to industry). The US may not be good at overseeing private businesses, but that does not mean that government control and rationalization when industry has failed is always and ever a disaster. But if you have low expectations, you are pretty unlikely to exceed them."

Yves is correct. President Obama was merely mouthing a nostrum.

"Back to the Times:

But what Mr. Obama went on to describe was a long-term bailout that would be conditioned on federal oversight. It could mean that the government would mandate, or at least heavily influence, what kind of cars companies make, what mileage...It all sounds perilously close to a word that no one in Mr. Obama’s camp wants to be caught uttering: nationalization....

The fact that there is so little protest in the air now — certainly less than Mr. Truman heard — reflects the desperation of the moment. But it is a strategy fraught with risks.

The first, of course, is the one the president-elect himself highlighted. Government’s record as a corporate manager is miserable, which is why the world has been on a three-decade-long privatization kick, turning national railroads, national airlines and national defense industries into private companies.

I have not made a systematic study, but ample anecdotal reports suggest that Bush era efforts at privatization lead to much higher costs and no improvement in service delivery. So the simple-minded view that the private sector is ever and always more efficient bears some examining. "

What we had during the Bush Era was Cronyism. It was a rather foul breed of Government/Private Hybrid. Um, we still have it.

"Mind you, I am NOT saying that nationalization should be a first choice, merely that being squeemish where it is clearly the logical action is silly. The article similarly raises straw men: Who would have the insight to fix the industry? Please. This is a reflection of a lack of will. The toughest issues are political: how to share the pain among the executives, the dealers, the shareholders, the creditors, and the employees/unions. The US did build a hydrogen bomb by marshaling fractious, world class scientists, and once upon a time did send a man to the moon, This is not as difficult, but cleaning an Augean stable does not get a lot of plaudits, so the right resources are not likely to be deployed. "

I always mind you, Yves. The problem is that we have far too many people who can't understand the place of Paradox and Pragmatism in Government, and, indeed, of human life. Too many Kantians and Platonists with their little pet theories that they preen themselves with, mouthing words and equations that they can't quite explain but are damned sure that they should work.

I've written so much on why the Swedish Plan would have been preferable, especially for anyone who wanted government uninvolved in the financial sector sooner rather than later on planet earth.

As Robert Frost wrote:

They must be pierced by flowers and put
Beneath the feet of dancing flowers.
However it is in some other world
I know that this is the way in ours.

“Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency”.

I'm planning a closer reading ( not my usual line by line, because it's too tedious and repetitive ) of the GAO report on TARP, which I've read, but here's a first taste from my response to Stacy-Marie Ishmael on Alphaville:

"Government Accountablity Office has just published its take on the Tarp, which can be summed up in ten of the GAO’s own words: “Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency”.

The GAO report is a multi-pronged review, covering:

the activities that have been undertaken through TARP as of November 25, 2008; the structure of OFS, its use of contractors, and its system of internal controls; and preliminary indicators of TARP’s performance.

In other words, it’s a long, dense document (running to 72 pages). We’ve read it, so you don’t have to.

Methodology:

GAO reviewed documents related to TARP, including contracts, agreements, guidance, and rules. GAO also met with OFS, contractors, federal agencies, and officials from some participating institutions.

The Treasury must:

work with the bank regulators to establish a systematic means of determining and reporting in a timely manner whether financial institutions’ activities are generally consistent with the purposes of CPP and help ensure an appropriate level of accountability and transparency

develop a means to ensure that institutions participating in CPP comply with key program requirements (e.g., executive compensation, dividend payments, and the repurchase of stock)

formalize the existing communication strategy to ensure that external stakeholders, including Congress, are informed about the program’s current strategy and activities and understand the rationale for changes in this strategy to avoid information gaps and surprises

facilitate a smooth transition to the new administration by building on and formalizing ongoing activities, including ensuring that key OFS leadership positions are filled during and after the transition

expedite OFS’s hiring efforts to ensure that Treasury has the personnel needed to carry out and oversee TARP

ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for Contracts priced on a time and materials basis, and move toward fixed-price arrangements whenever possible

continue to develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance that are robust enough to protect taxpayers interests and ensure that the program objectives are being met

issue final regulations on conflicts of interest quickly and review and renegotiate mitigation plans to enhance specificity and compliance

institute a system to effectively manage and monitor the mitigation of conflicts of interest

That is quite a list, and reviewing it does little to inspire confidence in the Treasury’s initial plan. The GAO is saying, in effect, that Paulson, Kashkari et al need to sit down and seriously think through some quite fundamental issues.

An assessment with which the Treasury largely agrees:

In written comments, Treasury generally agreed with the report and eight of the nine recommendations

The point of dissension? Per Neel Kashkari’s response via letter, included in the GAO report, the Treasury has a “different perspective on what is needed to evaluate how individual institutions participating in the CPP are spending the funds they receive under the program.”

The GAO, for its part, “believes that monitoring aggregate information across the participants would help ensure an appropriate level of transparency and accountability.”

At least interim assistant secretary Kashkari is open to suggestions, noting that the Treasury “

welcomes further discussion on general metrics for evaluating the overall success of the capital purchase program.”

“We believe that Treasury has made significant efforts to ensure transparency and good communication with our external stakeholders, but more can and will be done in these areas,” he added.

Which is helpful, since:

GAO plans to continue to monitor these and other issues including future and ongoing capital purchases, other transactions undertaken as part of TARP (e.g., capital purchases in Citigroup and American International Group), and the status of other aspects of TARP.

Actually, we take it back. You should read the report in full, because it provides a wealth of detail on the various acronyms currently deployed to save the financial world, as well as lots of useful numbers (like table 1: “Amount of Capital Investment and Characteristics of the Qualified Financial Institutions Participating in the Capital Purchase Program, as of November 25, 2008″)."

Good job.

Here's my take, on first reading:

Dec 03 03:22Posted by Don the libertarian Democrat [report]

1. "We spoke with representatives of the eight large institutions that initially received funds under CPP, and they told us that their institutions intended to use the funds in a manner consistent with the goals of CPP. Generally, the institutions stated that CPP capital would not be viewed any differently from their other capital—that is, the additional capital would be used to strengthen their capital bases, make business investments and acquisitions, and lend to individuals and businesses. With the exception of two institutions, institution officials noted that money is fungible and that they did not intend to track or report CPP capital separately. We will continue to monitor the activities of these institutions as well as the plans of others in future reports as well as any oversight provided by Treasury and its agents or the regulators. The banking regulators indicated that they had not yet developed any additional supervisory steps, such as requiring more frequent provision of certain call report data for participating institutions, to monitor participating institutions’ activities.26 For example, it is unclear whether Treasury plans to leverage bank regulators, which in the case of the largest institutions have bank examiners on site, to conduct any oversight or monitoring related to CPP requirements. However, unless Treasury does additional monitoring and regular reporting, Treasury’s ability to help ensure an appropriate level of accountability and transparency will be limited."

   CPP=Capital Purchase Program

   How could you do anything other than an aggregate monitoring given that you don't know exactly what the money was used for?

   Let's be real: The money has been given to the banks to use as they see fit. The government has no real control over it, and aggregate monitoring, presumably, will just tell you if someone is lagging in lending in certain areas, etc. But so what? There's no going back.

   The only real question is how well these banks do for themselves. We sure don't want them losing a lot of money. That's why this program doesn't work. On the one hand,the bank's interests ( solvency and profits ) and the government's interests ( please loan now ) aren't necessarily the same. On the other hand, since we've loaned them a bunch of cash, we want them focusing on their bottom line so we don't lose money on the deal. There is no one set of agreed upon standards to judge the program on. Given that, the next report won't be much clearer, if at all.