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Thursday, Jun 1, 2023

Lawmakers’ Compulsive High-Stakes Gambling

According to the publication Psychology Today the symptoms of a compulsive gambler include (among others): (1) Gambling larger amounts of money to try to recoup previous losses; (2) Having made many unsuccessful attempts to cut back or quit gambling; and (3) Needing to borrow money to get by due to gambling losses. It appears that both our state and federal lawmakers meet the criteria to be considered compulsive gamblers and debtors. Our federal government recently agreed to gamble $700 billion (that will need to be borrowed) to try to recoup previous losses in the financial markets and our state lawmakers, after many unsuccessful attempts to balance the state budget by cutting back on spending or by raising new revenues continue to gamble our and our children’s futures away by borrowing more and more money. There is an old adage that goes something like this: You can borrow all of the money that you want when you don’t need it but when you do need it, you can’t get it. This is apparently the situation in California. It is now only several weeks after the seriously delinquent passage of the 2008-9 “balanced” state budget and we are already at least $7 billion out of balance. The reason for this condition is that the legislature relied on revenue projections that are now unattainable (due to the national credit crisis which has frozen investment and commerce, resulting in billions of dollars in lost tax revenue) with an apparent backup plan to increase borrowing to cover a potential short-fall. Now the short-fall is real and, due to the lack of liquidity in the credit markets it appears that we will be unable to obtain additional funds by borrowing (selling debt instruments to the public). As a result, we will soon be asking the federal government to bail out California. Borrow, borrow, borrow. It seems as though all our lawmakers know how to do is borrow and thereby mortgage our future. Prior to the recent bail-out decision I read numerous articles on why the bail-out is needed and some as to why we shouldn’t do it. All of the articles, although interesting, left me with two unanswered questions: (1) Where are we going to get the $700 billion (in the short run); and (2) Why $700 billion? It appears that the “where” is from additional foreign borrowing. The “why” is to buy $700 billion of collateralized mortgage-backed securities that banks are supposedly unable to unload, hold them until the time is right, and then sell them for a profit. Apparently Congress and the President are of the belief that this amount is what it will take to fix the financial crisis. The idea being that the banks will use the $700 billion to lend to keep the credit markets open thus filtering the credit through the economy. I’m not quite sure why they believe that $700 billion will be enough. It is my understanding that there are more than $1 trillion of subprime collateralized mortgage-backed securities held by institutions and that there are many other types of problem derivative securities. Also, I doubt that having the Treasury purchase the troubled securities is the best plan. Is the Treasury Department really the best organization to be in the business of owning and marketing troubled securities? Perhaps a more prudent approach would be for the Treasury to loan money to the banks on an as-needed basis to make prudent business loans, using the securities as collateral. This way the banks (who are already in the business of marketing securities) could market the securities (which will become more marketable as the credit eases up and the economy improves) and repay the Treasury from the sales. This way the $700 billion may last longer. Additionally, the Treasury may be able to borrow from the foreign sources at a slower pace thereby slowing down the increase in our dependence on these sources. I believe that the continuing increase in our dependence on foreign countries (resulting from excessive borrowing) should be of serious concern to all of us. To gain a better understanding of how dependent on others the U.S. has become, I decided to do some research to determine how much the U.S. owes to foreign countries, which countries are our most significant creditors and how much of U.S. assets are owned by foreign countries. According to Perot Charts, as of July 31, 2008, total U.S. debt (including U.S. Treasury Bills, Notes and Bonds) held by foreign countries was $2.676 Trillion and the most significant creditors are: Japan ( $593.4 billion), China (Mainland) ($518.7 billion), United Kingdom ($290.8 billion), Brazil ($148.4 billion), Oil exporters (including Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Saudi Arabia etc.) ($173.9 billion) and Caribbean banking centers (including Bahamas, Bermuda, Cayman Islands, Netherland Antilles, Panama and British Virgin Islands) ($133.5 billion). Total national debt (including borrowings from foreign and domestic sources) now amounts to $10.1 trillion (70% of U.S. Gross Domestic Product). The most current information I was able to locate as to asset holdings was a June 26, 2007 report by the Brookings Institution. This report stated that China held $1.2 trillion in U.S. dollars (reserve assets) and total U.S. assets held by foreigners were well over $14 trillion (approximately 100% of U.S. Gross Domestic Product). Based on the results of my research, it looks as though we are gradually losing control of our country and therefore our destiny. What we need is a new paradigm. The practice of continually borrowing must stop. It’s time for us to stop spending money that we don’t have, stop purchasing products from and outsourcing production to foreign countries (enabling them to profit at our expense, buy our assets and control our securities) and return to being a goods producing nation instead of being a nation of unproductive consumers that can’t get out of debt. Gregory N. Lippe, CPA, is Managing Partner of the Woodland Hills-based CPA Firm of Lippe, Hellie, Hoffer & Allison, LLP, Chairman of the Valley Industry and Commerce Association (VICA) and a Director of First Commerce Bank.

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