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The Debt Bubble Has Really Popped

Posted by Steve Markowitz on June 8, 2010

While many focus on the greed that played a part in creating the ongoing financial crisis, it was governmental interventions that allowed this crisis to occur in the first place.  These interventions also led to excessive debts in the private and public sectors.

One intervention that helped cause the housing bubble were changes made to Fannie Mae’s and Freddie Mac’s charters.  Instead of acting as facilitators for prudent mortgages as they were charted for decades, they became implementers of social policy; i.e. getting mortgages to people who could not afford the homes or the loans.

Another intervention with disastrous ramifications was the artificially low interest rates.  This was an enabler for Collateralized Debt Obligations (CDO’s) that were sliced and diced and sold to investors worldwide.  While “advertised” as being safe investments, they were only as safe as the housing market bubble that they helped create.

Finally, we have the cumulative effect of goventment entitlement programs that have been growing for years.  This includes the many unfunded promises such as Social Security and government workers’ pensions that are nothing more than massive Ponzi schemes.

When the housing bubble popped there was a worldwide devaluing of assets.  This led to huge amounts of private debt that could no longer be serviced.  Instead of acknowledging this reality and forcing the debt to be written off, governments worldwide, including the United States, merely moved the debt from the private sector to governments’ balance sheets.  While these bailouts at first felt good, as they supposedly avoided even worse problems, those “worse problems” are now beginning to occur with the challenges relating to sovereign debt.

As the Greece’s debt problem rolled into a greater European problem, the fallacy of resolving an excessive debt problem by adding still more debt has been exposed.  Germany has admitted that the party is over with the following statements:

  • Germany’s Chancellor Angela Merkel’s said as she went into a cabinet level meeting that Germany can no longer live beyond its means, insisting “we can only spend what we take in.”
  • Our citizens’ greatest concern is that public deficits could grow to become immense,” German Finance Minister Wolfgang Schaeuble indicated.

Germany is now reportedly considering cuts to public-service jobs, a reduction of handouts to new parents and new taxes on power providers.  However, Washington won’t stop drinking from the Kool-Aid, continuing to barrowing ever more funds to pay for programs that we cannot afford.  The recently passed healthcare bill will only add to America’s debt problem.

President Obama and his fellow Progressives often look to Europe for bold ideas.  Well here is one that Ms. Merkel has shared: we can only spend what we take in.

Bringing down America’s debt and deficits will not be a painless endeavor.  But, there are no alternatives.  With countries worldwide trimming their deficits it is only a matter of time before America’s bonds and currency come under attack unless we too accept the simple reality that we can only spend what we take in.

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One Response to “The Debt Bubble Has Really Popped”

  1. […] by Steve Markowitz on June 14, 2010 On June 8 this Blog posted an article titled “The Debt Bubble Has really Popped” that included Germany’s response Europe’s growing debt problems.  Germany committed itself […]

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