Quoting from A Crisis of Confidence by Reinhart and Rogoff:
Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.Inspector General: TARP Has Created a Looming Disaster - Morgen Richmond
Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public's expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to "multiple equilibria" in which the debt level might be sustained - or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.
From the Inspector General's report:
The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time. It is hard to see how any of the fundamental problems in the system have been addressed to date.Unsustainable - John Hinderaker
Elmendorf:
The country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are prepared to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the nation is to avoid serious long-term damage to the economy and to the well-being of the population.Hinderaker:
We need deep and fundamental cuts in federal spending, which means, above all, Medicare and Social Security, because that's where the money is. The whole concept of an "entitlement" was a mistake--really, a disaster--that must be repudiated. But for the foreseeable future, there will be no political will to make such changes. So we're going to see a race between political will and economic collapse. It's hard to be optimistic about the outcome unless a drastic change in our political culture takes place, soon.Reason amid the madness - Tony Blankley
Almost everything that is disturbing Americans about the current administration, domestically, can be found in one of the most shocking documents ever issued by the U.S. government -- last week's 2011 federal budget. It even shocked The New York Times, which led, top right above the fold, with David Sanger's spot-on analysis headlined: "Deficits May Alter U.S. Politics and Global Power."Where Did Our Real Wealth Go? - Victor Davis Hanson"In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning for the way they may change American politics and American power. The first is the projected deficit in the coming year, nearly 11 percent of the country's entire economic output. ...
"But the second number, buried deeper in the budget's projections, is the one that really commands attention: By President Obama's own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years."
The truly shocking part of the budget is what was left out: a road map out of the economic calamity.
In other words, Greece is the canary in the mine of the impending crack-up of the modern welfare state. It is a great gift to us all, this example. A year ago, the socialists, even as they were juggling and falsifying their books, were bragging that the Wall Street meltdown was a referendum — and capitalism was doomed. Now, the entire socialist dream is exposed and even the most ardent statist knows that there is no longer enough “others” to pay the tab.
