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Saturday, July 31, 2010

Stockman: We're Turning Greek

Former Reagan Administration budget director David Stockman outlines four cogent theories for the nation's looming fiscal crisis in this op-ed column to appear in the Sunday, August 1st New York Times..
 
The column harkens back to a philosophy -- if not a time -- when fiscal conservatism could be boiled down to two simple theories:  Don't spend what you don't have, and don't borrow from future generations.
 
Stockman writes:  "The nation's public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That's a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice."
 
My other favorite phrase from Stockman's article: "borrowed prosperity."
 
The fiscal recklessness of the federal government -- and really, government at all levels -- will be accelerated by the moral hazards that have increasingly coursed through our economy and society during the Great Recession.  We have seen government bailouts of failing businesses.  We have seen irresponsible corporate managements rewarded with bonuses, funded through TARP.  
 
Perhaps most distressingly, we have seen an erosion of the belief in the sanctity of the contract.  Courts at all levels are routinely modifying mortgages and other financial instruments, imposing haircuts on hapless creditors while bestowing an illegitimate "victim" status upon the most irresponsible deadbeats -- er, debtors -- among us.  These developments are encouraging some disreputable -- yet economically rational -- behavior, such as people rushing to exercise credit while it remains available, the strategic mortgage defaults and defaults on all manner of other business and personal loans, and others who are incurring debt with no intent to repay it on the assumption that they can outrun their creditors or deceive a judge with a victim sob story.
 
What will happen when creditors, lenders and financiers lose faith that their contracts with borrowers will be honored by the courts?  When this class stops trusting borrowers to repay loans or courts to enforce the most basic of financial obligations, we could see a credit crunch that will dwarf what was feared in 2008.  In fact, we could see a total shutdown of the financial system.   After all, our economy is based on trust -- and when that evaporates, look out below.
 
And that's no baklava.
 
Eric Dixon is a New York lawyer and commentator.  He specializes in investigative matters, corporate due diligence and strategic analysis.  He can be reached for comment at edixon@NYBusinessCounsel.com and 917-696-2442.
 


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