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The Real Fiscal Crisis

Posted By Conn Carroll On September 30, 2008 @ 11:54 am In Economics | Comments Disabled

This week, Heritage senior fellow J.D. Foster squares off with American Prospect’s Robert Kuttner over how Congress should address the economy next in The Los Angeles Times [1]. First JD:

The Paulson plan was certainly no cure-all; it was intended to keep capital markets functioning so they can resolve their own problems. The plan’s core was to make up to $700 billion of taxpayer funds available to purchase low-quality assets. We need additional steps, such as expanding the reach of deposit insurance at commercial banks. The problem began with housing, but it has now spread far beyond. Another homeowner bailout bill just won’t make much difference.

We face two choices. We can vent on the Paulson plan, as House members who voted against it earlier today, have done. Or months from now we can vent at Congress for not passing the plan, as the ranks of the unemployed swell by a couple million or more. The issue is whether to act to reduce the depth and duration of the economic slowdown, not whether to prevent it.

The Paulson plan’s sticker price of $700 billion is shocking, but in context, the consequences for the federal debt and deficit are relatively minor. The real fiscal crisis, which is just around the corner, is more than 100 times greater. That crisis involves the promises made through Medicare and Social Security. Compared with the excess costs in these central federal entitlement programs, the Paulson plan’s size is just a warm-up.

Kuttner on the other hand, wants to turn the federal government into the world’s largest landlord:

First, rescue the money markets and the toxic securities by refinancing the underlying mortgages — rather than bailing out the banks. In the Great Depression, Franklin Roosevelt’s Home Owners Loan Corp., a branch of the government, refinanced one out of every five mortgages. Roosevelt’s administration saved about 1 million Americans from foreclosure. No middlemen got rich.


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URL to article: http://blog.heritage.org/2008/09/30/the-real-fiscal-crisis/

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[1] Los Angeles Times: http://www.latimes.com/business/investing/la-oew-kuttner-foster29-2008sep29,0,1354646.story

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