All of this is serious news.  What’s even more important is the connections among the stories.

Let’s start with Greece.  Why was there violence in Athens, and why are there strikes across the nation?  Because the European Union (EU) and the International Monetary Fund (IMF) announced that strings are attached to the  $140 billion in bailout money they’ve committed to loan Greece.

Greeks have been told that the government cannot continue to live beyond its means.  With public wages and pension plans comprising 51% of government, the belt-tightening of necessity involved the unions taking a hit.

Government–employee unions led the strike, a protest against austerity measures imposed by the new creditors, who are properly alarmed by deficit and debt levels currently 13% and 124.9% of GDP, respectively. Greece has promised its creditors to reduce public-sector pay, decrease pensions and increase retirement age, and deregulate the labor market.  The government also pledges to deregulate industries and privatize some state industries, raise value-added taxes and excise duties, and crack down on tax evasion.

Even so, Greece projects debt levels rising to 149% of GDP before they start to decline.  Greece is not known to over-estimate problems. Last year’s actual deficit of 12.7% was more than triple the 3.7 % the government had publicly predicted.

Across the Atlantic, the US Senate voted 93-5 in support of a financial-reform amendment submitted by Christopher Dodd (D-Connecticut).  The goal of Dodd’s provision is to eliminate the possibility of any financial company becoming “too big to fail” and therefore a candidate for taxpayer bailout funds.  Accordingly, it creates new tools and broad new powers to break up failing financial companies.   A $50 billion emergency pool is not among those tools.  Instead, liquidation costs incurred by the government will be recouped from the financial-services industry in general and creditors of the failed entity in particular.

Scrapping the $50 billion bailout fund was a concession to the Republicans, who worried that its existence would actually encourage both banks and their investors to take more risks.  Reassured, they signed on, en masse.

Meantime, Freddie Mac has requested another $10.6 billion from the government. This quasi-government organization reported losses of $8 billion in the first quarter of 2010 and says it needs the funds to shore up its balance sheet. Freddie has already received $52 billion from the government to pay for earlier losses. Through the end of 2009, Freddie Mac and its sister organization Fannie Mae lost a combined $126.9 billion.  This figure makes the twins by far the biggest losers in the financial panic.  Even so, it’s a gross underestimate of the total carnage Freddie and Fannie wreaked on economies across the world.
Both Fannie Mae and Freddie Mac are government-sponsored entities (GSEs), in the business of making sure that funds are consistently available to institutions that loan money to home-buyers.  The main difference between the two appears to be Fannie’s greater age, having been born during the Great Depression. Both are now owned by stockholders.  Both buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities.  Hm.  Aren’t these derivatives?  Has the same government who decries the evils of  derivatives actually been subsidizing some through these two GSEs?

Although “transparency” is one of government’s favorite reform bullets, Freddie’s and Fannie’s operations are so opaque they’re even off budget.  They’re so opaque the two were able to hide how much they were gambling on subprime and Alt-A mortgages, thereby making it hard to discern how large and risky these markets truly had become.  Additionally, by implicitly guaranteeing their products, the US government made it possible for them to sell market-backed securities across the globe.  By attracting more capital than investors would pledge if there’d been more transparency in their products than just the government guarantee, Fannie and Freddie made the housing bubble bigger and its popping more catastrophic.

And yet, the twins have not been part of the financial reform packages so far discussed by the Senate.  They keep getting more money from the government, and the additional gifts guarantee additional losses.  The Congressional Budget Office (CGO) estimates that the red ink from 2008 through 2020 will total $380 billion.  Wall Street has paid back most of its government money, with hefty rates of interest.  Fannie and Freddie are still at the trough, appetites ever growing.

Around the world, governments are spending more than their income.  Greece shows us that they, too, can fail, and being considered “too big to fail”, get bailed out at taxpayer expense.

In Greece’s case, the taxpayers initially come from other countries in the EU, some of which have major fiscal problems of their own.  Greece is likely to need more bailouts in the near future as more bonds mature.  Will it really reform its economy and its government, or will it cave to vested interests like its unionized government workers, who seem not to understand the basic economics or choose to make others suffer rather than reduce their comfortable standard of living.

The United States is also on an unsustainable course of ballooning deficits and debt.  The federal government has extended its management to the health industry, the (unionized) auto companies, and the financial, energy and environmental sectors.  In assuming responsibility for 1/6 of the economy with health-care “reform”, our government claims fiscal restraint by acting as if increased Medicare taxes and decreased Medicare waste pay for expanded health-care.  Instead, if real, they could have been enacted as part of Medicare reform, paying for some of the mounting deficits in Medicare itself.

The federal government deals with some of its fiscal problems by pushing them off into the future or over to the states.  Obamacare again illustrates the strategy. Two other reasons it’s billed as economically sound are that the CBO could only project out ten years, during which decade the revenues come in four years before the payments go out; and that some federal Medicare responsibilities have now been fobbed off to the states.

The US should make politically more difficult decisions like the austerity measures creditors are imposing on Greece.   They should allow contract competition from non-union labor.  They should reduce the benefits from public-servant pensions and private-servant Social Security.  And to make financial reform basic and real, they should eliminate Freddy’s and Fannie’s lines of credit and other special perks.  Without make these hard decisions and many more, the US is likely to be in Greece’s desperate situation.  Even with these measures, the US is likely to be in the EU’s position.  Just replace “Greece” with “California”, “New York”, “New Jersey” or “Illinois” –  states that may not be able to persuade investors to buy new issues when old bonds come due.

Unifying all these sad stories is a world that wants other people to take the hit for financial irresponsibility.  How do the state unions and pensioners think Greece can reduce its deficits without cutting the 51% of government spending they comprise? Doesn’t the US understand that we too are on a path to fiscal bankruptcy, on both the federal and the state levels, with many localities also in dangerous financial straits?  How does the Senate think it can reform finance while failing to acknowledge or change the roles of Fannie and Freddie in creating and prolonging the crisis?

It’s so easy to blame Big Banks and Other People.  But responsibility for feckless behavior should be shared by everyone who takes on a mortgage with minimal deposits and monthly payments that are affordable only under the sunny assumption that unexpected problems will never arise and incomes will always rise.  It should also be shared by every politician who angles for special projects or supports more spending without more revenue.

Regulation should start with individuals regulating themselves, in and out of government.  We must look in the mirror and see ourselves as people who refuse to acknowledge scarcity, respect budgets, and distinguish between needs and wants.  We must stop spending as if there’s no tomorrow.  We must grow up and stop shifting responsibility to other shoulders and other times.  We must stop electing politicians who cater to our weaknesses.

Republicans John McCain, Richard Shelby and Judd Gregg have introduced another amendment to the Senate financial-reform bill.  Scheduled for a vote on Tuesday, it calls for reform of Fannie Mae and Freddie Mac.  Among other things, the three Senators recommend ending the government conservatorship that has enabled the twins to be so financially irresponsible. An amendment on these lines is an integral part of financial reform.  The votes it attracts will show just how serious we are about achieving not only financial but fiscal sobriety.

The best example politicians can set for the rest of us is to look into the mirror as well and see that they are part of the problem and must be part of the solution.  They should represent the best, not the worst in us.

David Walker, the non-partisan former Comptroller of the United States declared that if we were each handed our own personal share of the national debt, we’d each owe five to six times what we earn in income each year.

As bad as that sounds, it gets much worse.   When unfunded entitlements like Medicare and Social Security are added to the equation, each and every citizen owes 25 to 30 times what he or she makes each year.

Let Walker’s numbers sink in for a moment.

A family making $50,000 per year owes between $1,250,000 and $1,500,000.

Only a nuclear Armageddon could harm the United States more than our own fiscal negligence.    But unlike an attack from abroad, the looming catastrophe will be entirely self-inflicted.

It is more than a little discouraging to note that only a minority of our elected leaders have demonstrated through their actions any real commitment to address this great fiscal crisis.

Senators Kent Conrad (D-ND) and Judd Gregg (R-NH) were the sponsors of a bill that would have mandated a special bipartisan commission to address the federal deficit.   The commission would have been composed of eight Democrat and eight Republican Members of Congress, plus two representatives from the Administration, including the Secretary of the Treasury.  If 14 of 18 members of the commission had agreed to a proposal to restructure Social Security, Medicare and / or Medicaid, the law would then have required the proposal to be put before Congress for an “up or down” vote, no amendments allowed.

The Congressional vote would have required a super majority of 60 votes, perhaps an unnecessary and unwise burden, but the commission would have focused the government’s attention on the deficit.  The clean “up or down” vote on the commission’s recommendation would have compelled every Member of Congress to take a stand on a bipartisan proposal to address the nation’s fiscal crisis.  The deficit hawks could easily be separated from the at-the-trough hogs and rapid ideological dogs.

The Republican leadership in the Senate had long supported the commission proposal.  Senate Minority Leader Mitch McConnell explained in May why it was so important to act:

We must address the issue of entitlement spending now before it is too late. As I have said many times before, the best way to address the crisis is the Conrad-Gregg proposal, which would provide an expedited pathway for fixing these profound long-term challenges. This plan would force us to get debt and spending under control. It deserves support from both sides of the aisle.

Then inexplicably, when it came time for a vote, Mitch McConnell along with John McCain and four other Republicans flip-flopped on the commission and voted against it.
Did the Republicans cave to pressure from the Tea Party movement?  John McCain and other incumbents are facing challenges for their seats from the right.  Did the Massachusetts special election convince them that they were better off waiting for the fall elections in hopes of capturing a majority in at least one chamber of Congress?  In any case, it’s hard to construe the Republican betrayal as anything but politically motivated.

Conrad – Gregg was defeated in bipartisan fashion on February 4 by a vote of 52 to 42 in the US Senate.  Here is a roll call list for the vote to help separate the deficit hawks from the other political animals.

Left-leaning groups mobilized against the measure warning that it would probably lead to means-testing entitlement programs.  Right-leaning groups opposed the legislation because it would surely call for higher taxes.  For practical as well as political reasons, both means testing and higher taxes will likely be necessary to tame the deficit.

President Obama, who had initially failed to support the commission idea, finally came on board.  Obama explained that he was disappointed by the bill’s defeat, but intends to go forward with his own similar commission, though it will not have the force of law behind it.  Suddenly the President sounds more serious about deficits than the Republicans.

The problem here is that the President always sounds serious about addressing the federal deficit.  The fact is that the President’s $3.8 trillion budget is $700 billion higher than the last W. Bush budget and twice as large as the last Clinton budget.  Commission or no commission, the best policy would be to simply spend less.

Senate Budget Committee Chairman Conrad believes that the high deficits proposed by the Obama Administration in the short run are a necessary Keynesian stimulus to help revive the economy.  But the Administration’s long-term projections are another matter.   Conrad tried to be gentle with his criticism of an Obama budget that would be balanced by 2020 but omitted interest payments on the debt, which would equal $800 billion.  “Put me down as a skeptic,” Conrad said. “When we start excluding things for any purpose we tend to mislead ourselves about the gravity [of the situation].”

Gregg, for his part, called the Obama Budget “fiscal insanity.”  He became particularly agitated when in a recent visit to Nashua, NH, the President proposed to take repaid TARP funds and loan them out again.  Here is Gregg reading the riot act to White House Budget Director Orszag.

Of the Obama budget, Gregg stated that while the budget in the short run is a problem,

Spending continues to go up, and taxes can never catch it because the spending is going up so fast. They’re taking the size of the government from 20 percent of the Gross National Product up to 25, 26 percent of the Gross National Product. That’s simply not affordable. That means you’re adding a trillion dollars of debt to our kids’ backs every year for the foreseeable future. And at the end of 10 years, not only is it not coming down, it’s still going up!

Gregg gives the United States five to seven years to begin to get its fiscal house in order before the Chinese and other foreign lenders begin to demand higher interest rates.  At that point the United States will either have to monetize the debt, which will lead to significant inflation, or raise  taxes to such crippling levels that the economy will grind to a catastrophic crawl.

Just how pernicious the deficits are in the short term is obviously open to some dispute, but not so the long-term structural deficits that will result from exploding entitlement outlays.

Reflecting on the rejection of the deficit commission idea, Walker declared:

Frankly, a number of senators caved to pressure from the far right and far left and voted against the commission proposal. We have people on the fringes with rigid ideologies that aren’t in touch with reality.

On the other hand, Walker seems more optimistic than usual.  He is certainly feeling less lonely.  When asked what can be done he replied:

You have to go over their head and outside the Beltway.  Go to the American people. And, believe me, they get it.