After Monday’s European Union’s (“EU”) trillion dollar bailout, Zero Hedge’s headline encapsulated what had transpired: “Even Keynes Is Spinning in His Grave.” “Extend and pretend” is now official worldwide economic dogma, as embodied in this unprecedented bailout. Why extend and pretend? Has anything really changed?
Pretending as Public Policy
We live in an age of irresponsibility. We seem to be responding to all types of crises with sluggish denial and finger pointing. From Katrina to the Financial Crisis to the Deepwater Horizon oil rig disaster, government massages the news, assigns culprits and acts only when pushed by market events or an outraged public. Instead of thoughtful, real and comprehensive solutions the policy is “extend or pretend.” More plainly, the goal is to conjure a stop gap solution and pray that time and luck will save the day.
A History of Extend and Pretend
At the end of the Bush Administration, the financial crisis lent itself to “extend and pretend” policymaking. The fractious, polarized political culture made it ever easier to opt for this policy choice. Obama, if anything a master politician, has adhered to these same choices. Let’s look at how “extend and pretend” continues even now:
- Mark to Market Accounting – Facing pressure from the banks and Congress, in April 2009, the SEC suspended the mark to market accounting rules for bank assets. Given mounting foreclosures in the housing market, it is highly likely that the banks are not properly valuing these assets. Pundits believe that many major banks are insolvent.
- The Federal Reserve – Through the TARP and other bail out programs, as of March 31, 2010, the Federal Reserve balance sheet has expanded to over $2 trillion, mainly in dubious mortgage backed securities. Once again, analysts are questioning the worth of these securities and the Fed’s solvency.
- Government Sponsored Enterprises (“GSEs”) –We are ignoring the hapless Fannie Mae and Freddie Mac agencies in the midst of our stock market and banking dramas. Despite the vaunted financial reform efforts, we haven’t even considered crafting a solution to the GSE mess. Instead of reform, on Christmas Eve 2009, the Administration extended unlimited financial assistance to these businesses. Buried in our naïve enthusiasm for the ECB bailout is a painful reminder of taxpayer obligations. Fannie Mae posted a quarterly loss of $11.5b and needs at least $8.4b from the government to continue.
- General Motors – After proudly proclaiming in a national ad campaign that they had re-paid loans to the government, Senator Grassley found that the company merely tapped a US Treasury escrow account to repay its TARP loan.
Extend and Pretend Goes Global
Today’s EU trillion dollar bailout is more of the same. The three part program is to create a 750 billion Euro fiscal support program, buy bonds in dysfunctional markets (quantitative easing) and enter into swap lines with the Federal Reserve to obtain dollars. This is “extend and pretend” taken to an entirely new level. It is not even clear or sure whether the EU can obtain IMF approval to move forward. Problem countries will require austerity measures. In sum, this is exponential “extend and pretend,” as troubled governments pretend to have a program to calm their markets and citizens. And even if they enact these programs they do not deal with underlying structural issues in the EU, where too little income supports too much debt.
It All Comes Down to Honesty
The political elites in the US and Europe do not want to face the economic realities. Honesty and candor with electorates are in short supply. Instead of leaders we have a class of venal and calculating politicians. Happy to solve the problems of today with band aids, they invite greater calamities, where the patient may be lucky to make it out of intensive care and may yet succumb to massive infection.
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