Keith Hennessey raises an interesting point: Obama wants liquidity, and fiscal conservatives want solvency.
The Tuesday deadline for budget negotiations is about liquidity (aka funding risk) – will the government have enough cash to pay its bills on time?
The government also faces solvency risk – will policymakers close the large and growing gap between spending and revenues? Will they cut spending and/or raise taxes enough to make the U.S. government a financially sustainable operation?
Both types of risk result from policy decisions made by our elected representatives. The short-term liquidity risk was created by conservative Members of Congress who refused to raise the debt limit without cutting spending. The solvency risk accumulated gradually as officials from both parties promised government benefits in excess of the taxes they were willing to impose.
This is interesting. The budget deal has clearly addressed the liquidity problem, and once again done very little to address the solvency problem.
How is this (broadly) like TARP?
What we wanted in the autumn of 2008 was a program that 1) addressed the immediate liquidity issues of the whole financial system, and 2) addressed the solvency issues of the residential real estate finance subsystem.
What we got was TARP (and other associated programs).
The quick pay off of most TARP money in 2009 showed that we did a good job with # 1.
The fact that Fannie Mae is still hemorrhaging left and right shows our government’s failure to adequately address # 2.
We should not be surprised that we got a lousy budget deal: it’s just more evidence that D.C. is hard-wired to be unable to separate liquidity from solvency issues, and is biased towards ignoring the latter.
Via Cold Spring Shops.