As boxers like to say, it's the punch you don't see that knocks you out.
In a world where a growing part of the financial system is hidden from view
and excluded from official statistics, those are words to remember.
A couple of examples from the 2008-2009 crisis:
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Fannie Mae and Freddie Mac were private companies through which the federal
government funneled a lot of mortgage debt and to which it granted a kind
of de facto backing, though it asserted confidently that this would never
be needed. When the real estate bubble (inflated in large part by Fannie
and Freddie) popped, government -- read taxpayers -- had to assume responsibility
for pretty much the whole $10 trillion US housing sector.
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Over-the-counter derivatives are largely hidden by bank and hedge fund
accounting tricks, but when that market blew up in 2008 it turned out that
AIG, the world's biggest insurance company, had enough of the instruments
to bring down the whole financial system. The result was another huge bailout
with taxpayer cash.
Since bubbles tend not to repeat in exactly the same form, it's reasonable
to assume that the next Fannie or AIG will be something very different -- like
state and local pension plans, which for years have been putting away too little
to cover the coming wave of retirements and are now starting to beg for help:
New
Jersey legislator seeks federal loans to bail out state pensions
(Reuters) - A top New Jersey Democrat wants the federal government to create
a low-interest loan program to rescue states with big public pension problems.
State Senate President Steve Sweeney called on Wednesday for a nationwide
pension debt restructuring plan under which the U.S. Federal Reserve would
offer low-interest loans to state governments to pay down unfunded pension
liabilities.
The country has racked up nearly $1 trillion of unfunded liabilities altogether
in its state-run retirement systems, according to the latest estimate from
Pew Charitable Trusts. Other projections have put the number even higher.
New Jersey's badly underfunded pension system was cast further into the
spotlight last year when Governor Chris Christie, now a 2016 Republican presidential
candidate, slashed the state's contribution because of a revenue shortfall.
Labor unions sued, saying the cuts violated a promise Christie himself made,
in 2011 pension reforms, to ramp up to full contributions.
But Christie won the battle in the state's highest court. The decision provided
breathing room for the stressed state budget, but the pension problem lingers
long term.
New Jersey would have to pay $6 billion on average annually for 30 years
to pay off its existing $51 billion unfunded liability, the third largest
in the nation, Sweeney said.
But under his proposal, the Garden State could take out a $50 million federal
loan at a low 1 percent interest rate, putting the proceeds into its retirement
system. If that happened in fiscal year 2017, it would cut annual pension
contributions, including the loan repayment, in half to about $3 billion,
he said.
This means three things:
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The national debt of most developed countries is grossly understated because
it doesn't include these and other liabilities that will soon be dumped
onto the public balance sheet.
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Individual taxpayers responsible for their governments' debts are actually
far less well-off than they think because their true net worth includes
these huge, inevitable negatives.
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The currencies of most major countries aren't backed by anything like
the wealth that people -- and most governments -- assume. When the next
bailout wave crests, the math will be deadly for the yen, euro and dollar.
