Who bails out the US government?
No one. We have to avert the need for that by reprioritizing now.
Unlike when a firm is in danger, if the US government collapses there is no backstop; there is no one to bail us out.
What the government needs is a plan that puts the US on a gradual path to bring the budget back into balance before a financial crisis larger than this one forces us to.
Though the $700 billion package comes at a time of need, it comes also at a time when the government's finances are weak. The danger is that in trying to bail out one exploding economic bubble the nation may be creating another debt bubble that will ultimately explode.
Rather than paying off our mounting and increasingly burdensome debt, we borrow more every year. The federal debt is currently $10 trillion, and next year's deficit is likely to add more than $1 trillion more. And even these numbers pale in comparison to our implicit exposure, as we've promised $40 trillion in pension, Social Security, and Medicare benefits.
As subprime mortgage holders were relying on the housing market to continue to grow at the anomalous rate seen in the late 1990s and early 2000s, politicians are counting on impossible levels of economic growth to sustain Washington's addiction to debt.
When that growth doesn't occur – and it won't – and America's Financiers realize it isn't coming, there will be serious trouble.
The next months will be devoted in large part to dealing with the flagging economy, and rightly so. Policymakers must act now to fix the budget mess and stabilize the economy.
Plans for further bailouts and stimulus must include consideration for the bottom line of the government – we can lend money now, but recouping some of that money for the government should be part of any plan.
As enticing as it is to offer the American public trillions of dollars in tax cuts, it's not feasible right now. There is just no more room in the budget for the kind of deficit expanding policies both Sen. John McCain and Sen. Barack Obama ran their campaigns on.
The new president should immediately hold an emergency economic summit to deal with the budget deficit crisis.
A budget turnaround will require tough choices from all policymakers. New priorities such as expanding healthcare and cutting taxes may have to be shelved. Popular programs including Social Security and Medicare will not be exempt as spending is curbed. Taxes are more likely to go up than down so we will have to reinvent the way we tax to raise more revenue with less economic distortion.
To be sure, crafting such a deal will be immensely challenging. But this situation requires leadership willing to tackle this problem seriously.
The economy has just given us a wake up call: never-ending borrowing schemes come to ugly end. The federal government has been on a borrowing binge that cannot continue.