Low Bank Capital Is Next U.S. Fiscal Crisis: Simon Johnson

[marmar]

(Bloomberg) The summer debate that has dominated Washington seems straightforward. Under what conditions should the U.S. government be allowed to borrow more money? The numbers that have been bandied about focus on reducing the cumulative deficit projection over the next 10 years, as measured by the Congressional Budget Office.

But there is a serious drawback to this measure because it ignores what will probably prove to be the U.S.’s single largest fiscal problem over the next decade: The lack of adequate capital buffers at banks.

The Congressional Budget Office was created in 1974 to provide nonpartisan analysis of budget issues. This was a major breakthrough. It’s hard to exaggerate the lack of serious and timely budget information that existed previously. The CBO still does great work, but it has a major blind spot. (Disclosure: I’m a member of the CBO’s panel of economic advisers; I don’t speak for them here or anywhere else.)

The CBO is very good at explaining how the U.S. got itself into a fiscal mess. The primary cause of the government debt surge in recent years was a huge recession. A big loss of gross domestic product and a fall in employment in any country will collapse tax revenue. To appreciate the magnitude of this disaster in the U.S., compare the CBO’s baseline forecasts immediately before and after the financial crisis. .............(more)

The complete piece is at: http://www.bloomberg.com/news/2011-08-01/low-bank-capital-is-the-next-u-s-fiscal-crisis-simon-johnson.html