Tags: Rubin | US | Financial | Crisis

Former Treasury Chief Rubin: US at Risk of New Crisis, 'Mega Duress'

Monday, 14 May 2012 12:59 PM

U.S. debts and deficits could likely throw the country into an economic and financial crisis, says Robert Rubin, former Treasury Secretary under President Bill Clinton.

The U.S. consistently runs massive deficits yet efforts to narrow them have often ended in political gridlock.

Most recently, President Barack Obama appointed a bipartisan National Commission on Fiscal Responsibility and Reform to find ways to streamline the country's bloated public sector.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

The commission, headed by Democrat Erskine Bowles and Republican Alan Simpson, proposed a blend of tax hikes and spending cuts that would gradually ease the country's debt burdens by $4 trillion over a decade, although political deadlock prevented the proposals from becoming a reality.

Time to brush off the Bowles-Simpson plan or something similar now, Rubin tells Reuters The Freeland File in an interview.

"We have an unsustainable fiscal trajectory, we have a dangerous fiscal trajectory that has multiple risks, one of which is undermining confidence that constrains the capacity for public investments," Rubin says.

"But the risk that I think is most dangerous, which ultimately I think is going to enormously affect all of us unless we address our fiscal situation is that it's possible we can muddle through, but the predominant probability is it's going to lead to some form of mega duress."

Possible outcomes of today's hefty spending and loose monetary policies will manifest in higher inflation down the road or lead to a prolonged period of slow growth, rising borrowing costs and weak confidence.

"The third one, which I think is the most likely, is some kind of a serious financial and economic crisis because of our debt situation, as the markets all of a sudden begin to fear what the future supply and demand of capital will be," Rubin says

"That's why I think it's imperative that we put in place a fiscal program, but it shouldn't be a draconian fiscal program right now. We have a fragile recovery, so it ought to be the kind of thing that Erskine Bowles and Alan Simpson proposed."

While not everyone agrees on the specifics of the Bowles-Simpson proposal, the broader framework is something policymakers can use as a blueprint, Rubin says.

The U.S., meanwhile, does see some silver linings.

Increasing accessibility to the country's massive shale natural gas deposits will make its energy sector more competitive and better for business, while manufacturing is seeing a rebirth due to rising Chinese wages and other factors.

Don't rule out old-fashioned U.S. innovation, a sound legal system and deep capital markets, either.

"I think we could succeed, I think we could do very well over time. The problem is we've got to get our fiscal situation in order," Rubin says.

The U.S. reported an April budget surplus of $59.1 billion mainly due to people paying taxes but also due to job growth and improving corporate profits.

Still, since the budget year began Oct. 1, the U.S. has run a $719 billion deficit, the Associated Press reports, citing Treasury Department data.

Despite the ongoing spending gap, investors continue to line up and buy Treasury bonds and notes due to their liquidity as well as on fear plays among those who want to cut exposure to debt-ridden Europe.

Still, experts point out that the nation's policymakers shouldn't assume investors will remain willing to finance the country's deficits forever.

"With the European debt crisis, we are looking at a movie that could happen to us," says Sung Won Sohn, an economics professor at California State University's Martin Smith School of Business, according to the Associated Press.

"We should not be pointing a finger at Europe. We have been doing the same thing — living way beyond our means."

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

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