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Home Publications Blogs Beat the Press Franklin Raines on Deficit Reduction: More Advice from the Folks That Wrecked the Economy

Franklin Raines on Deficit Reduction: More Advice from the Folks That Wrecked the Economy

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Friday, 16 July 2010 05:24

As the continued interest in the thoughts of Alan Greenspan shows, there is absolutely no amount of failure and incompetence that can get a person removed from the ranks of wise people once they have held an important government office. In keeping with this spirit, the Washington Post turned to Franklin Raines, a former director of the Office of Management and Budget (OMB), to get advice for Jack Lew, the income director, on dealing with the deficit. 

Mr. Raines was a past director of OMB, but his greatest claim to fame was probably his tenure as CEO at Fannie Mae, which ended in 2004 due to an accounting scandal. While Fannie and Freddie are not the villains of the housing bubble that the right likes to claim (private issuers of mortgage backed securities were far bigger sinners), the mortgage giants were incredibly irresponsible in their failure to recognize the bubble (which was already evident by 2004) and to adjust their lending accordingly. 

This is why it is more than a bit infuriating to see Mr. Raines tell us that:

"Most of the long-run deficit is composed of the interest on debt piled up because we were unwilling to pay today (or over an economic cycle) for the spending we want today." 

Yes, we did not run up huge surpluses in prior years in anticipation that there would be a huge housing bubble, the collapse of which would devastate the economy and require massive government stimulus to restore growth. I suppose that we can all plead guilty on that one.

 

[Addendum: Yes, I had earlier written in Harold Raines, which I corrected after a reader e-mailed me. The cause of the confusion is of course the legendary Chicago White Sox outfielder, Harold Baines.]

Comments (10)Add Comment
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written by izzatzo, July 16, 2010 7:35
"Most of the long-run deficitunemployment is composed of the interest on debt the same cheats on stimulus welfare today with no savings who thought houses were free piled up because we were they are unwilling to pay today (or over an economic cycle) for the spending we they want today. Just because I was instrumental in enabling the housing bubble while denying it and becoming rich in the process had nothing to do with it."
...
written by Queen of Sheba, July 16, 2010 8:23
This entire Post piece is infuriating. Printing Franklin Raines's pronouncements on the deficit is only one of its outrageous failures. The entire first few paragraphs of the article assume facts not in evidence - and some not even reasonable - as though they were already-accepted gospel, e.g., "But 2011 is the year policymakers are going to have to put in place a serious plan to reduce the deficit, phasing changes in gradually so as not to destabilize the recovery. Otherwise, we risk credit markets turning against the United States, leading to our own sovereign debt crisis."

And the reporter's cure for this terrible situation is equally disingenuous, "Instead [of leaving the crafting of a deficit reduction plan up to congress], the White House will have to offer a detailed proposal (think defense cuts, Social Security reform, a strict health-care budget and the reduction of a slew of tax breaks), cooperate with both parties to hash out a workable plan and find ways to offer political cover for those willing to step up."

Has this reporter been living in a cave since Obama took office? There is no "cooperation" between the White House and the Republican members of congress nor with conservative Democrats most of the time. By "cooperate" with both parties, I assume the reporter was suggesting that Obama just devise an initial plan that gives the conservatives what they want in the first place to avoid a big, ugly congressional melee televised on C-SPAN and discussed ad nauseum on cable teevee.

Good luck with that. I'm planning to invest in popcorn futures.
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written by peter, July 16, 2010 8:42
I think Harold Raines and Franklin Raines might be two different people. The article is clearly about Franklin. "Harold" seems to be from an incorrectly captioned photo.
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written by skeptonomist, July 16, 2010 10:30
Certainly the debt is augmented by compound interest. But since the Fed controls interest rates, it has the power to insure that that augmentation is less than that of GDP. To raise interest rates when GDP growth is low, as the Fed has done at times in the past and as some people advocate now, is hardly conducive to reduction of the debt.
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Personally I prefer Claude Raines. His famous line "Round up the usual suspects" (and presumably put them on trial) could be applied to Greenspan et al.
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written by Eric, July 16, 2010 11:56
I think it was meant to be Harold Baines, but it possibly could be Tim Raines.
eric wears white socks
written by frankenduf, July 16, 2010 1:18
lol to eric- i just got that :)
hey skeptonomist, whose c omments I enjoy
written by OJC, July 16, 2010 9:48
How does interest compounding enter the picture? As I understand it, bonds are auctioned off today, at whatever price they bring, to be redeemed at face value next Tuesday (or sometime). The interest is defined by the sale price, not the fed, and is fixed. Unless more borrowing is required for redemption, but that would be new debt.
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written by skeptonomist, July 17, 2010 10:30
OJC:

The federal government pays interest on its debt, which is mostly in bonds. The current average maturity is about 2 years, so it has to be renewed at current rates. The interest paid is an item under expenditures in the federal budget, the size of which is dependent on current as well as past interest rates. As long as the debt exists, you can say that the interest is compounding. As Dean has pointed out before, this budget item is currently very low because of generally low rates. The Fed normally buys as many short-term bonds and recently even long-term bonds as required to keep interest rates low (currently), so it is really in control of auction prices. If you put in a low bid for a Treasury offering, you won't get it - the Fed will in effect outbid you.

People often ask who will buy the bonds if the debt keeps expanding, especially if the Chinese decide for some reason to quit buying. As Dean has said, the answer is simple - the Fed. This may eventually lead to inflation, but inflation won't kill you, unless you are very rich and have a lot of assets that would be devalued. Even then it wouldn't actually kill you, it would just wipe out your wealth - you might have to go to work.
Thanks skep
written by OJC, July 17, 2010 7:02
Silly me, it never occurred to me that the fed would game the bond auction. Going to have to pay way more attention to the 'fed is not treasury' truth to avoid confusing them.
inflation and the rich
written by BTN, July 20, 2010 12:52
skeptonomist, you are right about the FED and Treasury auctions, but wrong about the consequences of inflation for the rich. The rich do much better than the poor in inflationary times. This is because their assets go up in value as a direct cause of inflation. Without the low interest rates of the last ten years, there could not have been a housing bubble. And while the las year or two have not been pretty , take a look at the net distribution of wealth in this country: the rich have still managed to increase their share of the country's wealth, despite the recent crash in real estate, the stock market and other asset classs.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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