It's September 2008, and the New York Fed gathers all the CEOs of the Wall Street investment banks together late on a Friday to try to arrange a buyer for bankrupt Lehman Bros. before the markets open on Monday. No one knew the extent of the toxic assets on Lehman's balance sheet, so even with heavy prodding from Hank Paulson, then secretary of the Treasury, there were no buyers.
Paulson, along with Timothy Geithner, then chairman of the New York Fed, knew that Lehman was the first in a domino effect of the major players on Wall Street and that Merrill Lynch would be the next to fall. An arranged marriage between Merrill and Bank of America was inked quickly so that the markets would open that Monday with at least some good news to temper the Lehman bankruptcy. Paulson was betting on it.
He was wrong. Immediately the credit markets started to freeze. No one was lending since no one knew what toxic waste was on the balance sheets of the other banks. Confidence, there when the markets closed on that Friday, turned to panic, literally overnight. In order to prevent a catastrophic meltdown, Paulson and Ben Bernake, chairman of the Federal Reserve, approached Congress for a bailout. The Troubled Asset Relief Program ended up being a $750 million, taxpayer-funded partial nationalization of the banks. The vast majority of Americans had no idea how close we came to a total economic meltdown, but for the time being, disaster was averted.
Fast-forward to September 2011, and all those toxic assets we heard so much about back in '08 are now on the balance sheet of the Federal Reserve. Although the stock markets have partially recovered, the ominous shadow in the bond market of all the Treasury bills, notes and bonds that funded all those 2008 bailouts are getting closer to maturing. With our largest outside investor, China, decreasing its holdings of U.S. debt, we face a real problem, as the marketable amount of U.S. debt has doubled since 2008, hitting $9.11 trillion. Of that amount, $5.8 trillion is in intermediate-term Treasury notes, $1.7 trillion is in short-term Treasury bills, $931 billion is in long bonds, and $640 billion is in Treasury Inflation Protected Securities. We must find a way to instill enough confidence with the holders of all this debt that they will graciously roll it over, even with interest rates near zero.
All of this is in addition to funding the $1.3 trillion in deficit spending for this year and for several more years in the foreseeable future. Call me crazy, but I find it hard to believe that the Chinese will happily accept low interest rates to roll this debt over for another couple of years, if they roll it over at all. Where are we going to get 9.11 trillion extra bucks in addition to the yearly deficit spending? Without outside buyers, we face another round of "quantitative easing" (printing more money) from the Federal Reserve, since it bought 60 percent of all U.S. debt in 2011.
I have consistently thought it's a bit crazy to print fiat money to buy our own debt. Using a currency worth only the confidence it inspires to buy our own bonds is truly the last dying gasp of a 30-year debt supercycle. Even Erskine Bowles, co-chairman of the president's debt commission, has stated painfully that "Our debt is like a cancer; it is truly going to destroy the country from within."
Bowles and co-chairman Alan Simpson have stated that an economic crisis will hit within two years unless politicians roll up their sleeves and address fiscal spending. The tipping point will come when the ratings agencies find out that we have no plan. I fear this is already starting to happen, with Standard & Poor's downgrading U.S. debt recently.
Back on that fateful weekend in September 2008, confidence evaporated over a weekend. Don't think for a minute that it could not happen again.
• Carol Perry is a retired financial adviser and has been a Northern Nevada resident since 1983. She can be reached at Carol_Perry@att.net.