The last two weeks made a bad fiscal situation worse. Prior to the recent fiscal meltdown, the Government Accountability Office reported that by 2030, if not earlier, the federal government would not be able to afford annual appropriations while also paying the interest due on the national debt and covering its entitlement obligations. This message was the core of their “Fiscal Wake up Tour,” to increase awareness of the pending Federal fiscal crisis. Meanwhile, the Office of Management and Budget was confirming the harrowing trends in their Budget and Economic Outlook reports. The September report warned that the deficit for 2008 was on track to hit a staggering $408 billion, $161 billion above last year and the national debt was heading toward $10 trillion by the end of the year. Then the lending markets unraveled.
The reasons for the collapse are complicated but it basically follows this storyline. Consumers borrowed more than they could afford to purchase homes. To accommodate the demand, banks and mortgage lenders reduced their credit standards and created lending products that incentivized more consumers to take bad loans. The granting banks sold these loans to other institutions, such as Fannie Mae, which packaged them into assets, or bonds, and sold them to other institutions. The bonds contained some good loans but far too many bad loans. Rating agencies provided scores, such as an “Aaa” rating, to these bonds that misrepresented their risk and promoted their further buying and trading. The mortgage crisis eventually exposed them as poor assets and the value of the bonds collapsed, their ratings were reduced and banks suddenly did not have enough assets to loan money. The flow of money between banks and to businesses and individuals began to dry up, banks had to file for bankruptcy, the stock market reacted to fears of a recession with dramatic declines and the US Treasury asked Congress to recapitalize the banks in order to facilitate the flow of money and avoid a potential recession.
At the end of the week, the presidential candidates flew into Washington to sit at the negotiating table in order to demonstrate their concerns about the nation’s economic health. Their presence, however, did not resolve the mater. Negotiations are still underway and Congress is working to complete the $700 billion bailout package by late Sunday or before the markets open in Asia on Monday.
The full impact of the bailout will not be known for years, but it is certain that it will add to the federal deficit and the national debt and restrict the next administration’s ability to invest in education over the next few years. On the other hand, the bailout could generate revenue for the federal government over the long term and reduce the deficit and debt, but that is only cheery speculation at this point.
Over the last two years, Congress has appropriated level funding to the U.S. Department of Education with slight increases for Title I of No Child Left Behind Act (NCLB) and the Individuals with Disabilities Act (IDEA). But now, any increases to the critical programs are dubious for the next few fiscal years. The GAO may have to change its campaign name to the “Fiscal Crisis Tour.” We should all be awake now.
