Consequences

Speaker Pelosi says we are losing 500 million jobs every month, so we need to act now. According to the Census Bureau Population Clock there are about 306 million people in the U.S. The magnitude of Speaker Pelosi's error makes me wonder if she did not commit some other errors of magnitude when she helped draft the Recovery and Reinvestment Act. Increased spending of the magnitude that contained in the Act will harness our future with an incredible debt.

Simple interest on the Act's trillion dollar spending spree is somewhere in the neighborhood of 35 to 45 billion dollars a year. Can we really afford that?

What got us into this mess were rocketing home prices caused by questionably-qualified mortgages, congressional interference pushing Fannie Mae and Freddie Mac to purchase risky mortgages, lax oversight and unethical congressional behavior and historically low interest rates, all of which was rationalized on sky rocketing home prices. That's right. Rising prices lulled lenders into making 100 percent or no money down mortgages. President Clinton pushed through modifications to the Community Reinvestment Act and Congress, instead of providing oversight pushed Fannie and Freddie to do more and accept ever riskier mortgages. Alan Greenspan contributed by keeping interest rates low. All of which kept home buyers motivated to offer ever higher prices. Prices that everyone relied upon to explain their behavior, which in turn pushed prices higher1!

When the government borrows money, it can take on many forms including notes, bonds and bills. But mostly Government borrowing is more like a uncapped adjustable rate, interest only loans. When the government needs money the Treasury issues various instruments and then according to the terms and conditions contained therein Treasury makes interest payments at various intervals. Currently the long term rates are at about 4.5 percent.

The problem is, for every 1 percent increase in the repayment interest rate, we increase our burden another 10 billion dollars. Since there are no market caps on how much the repayment rate can increase or decrease we can not accurately forecast how much this debt will cost us. If everyone stopped supporting our debt and demanded the repayment of their principal investment, the Government would fail. The bottom line is that no one can say or predict with any clarity what will happen and how much we will eventually owe.

Remember the surge in gas prices? Most industry analysts now agree that the most likely cause of the steep and rapid increase of oil prices was speculators. What if speculators start artificially manipulating the Treasury market. Interest rates could shoot up and our debt could skyrocket.

Consider too that this is a course of action from which we cannot retreat. We cannot default or walk away from our debt because once we accept the money and spend it, we are burdened with the debt until we can retire it and repay principal obligation.

Which gets us back to the Act. President Obama, Speaker Pelosi and myriad others say if we don't spend money now we may never recover. But at what price? No one can say for sure what that price is or what will happen if we pass the bill or if we do not.

Therefore, it is my fervent hope that all the Senators and Representatives think about the consequences of the Act before they cast their vote. I for one hope they stand up to President Obama's and Speaker Pelosi's dire admonition that we must do something and vote NO on the Recovery and Reinvestment Act.