Borrowing, Caution And Wall Street

17 February 2005 |permalink | email article

Dick Cheney on “Fox News Sunday” early this month said he would not be a candidate for president in 2008. No news there. But the fiscal conservative made big news by uttering the dreaded “B” word. He acknowledged that the government would have to borrow almost $800 billion over the next 10 years to cover the cost of the personal retirement accounts at the core of President Bush’s plan to reform Social Security. “That’s right. Trillions after that,” he added. As reported by The Washington Post on February 7, the vice president said that despite the costs, the price tag of restructuring the system would grow even more expensive if changes to Social Security were delayed.

Alan Greenspan, the inscrutable Federal Reserve chairman, this week blessed the idea of individual retirement accounts. But the cautious guru is worried about the “T” word, warning that financial markets might not agree with the White House that borrowing to pay for “transition costs” of private accounts would have no effect on the United States’ long-run indebtedness. The New York Times reported that Greenspan also said, “we don’t know how the markets will respond to that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.” He didn’t go so far as to say the plan was risky but the message was clear to sane people on Wall Street and those with a sense of economic history.

The most compelling response to a flawed privatization plan was offered by the economist Robert B. Reich on The American Prospect Online . In his February 4 article, he suggested that W.‘s success may depend less on rounding up votes in Congress and more on a constituency that may play the most important role - the bond traders on Wall Street. He opined that Wall Street is divided right down the middle. The equity side likes the plan for many reasons including making hundreds of millions in management fees on privatized Social Security accounts. Conversely, the bond traders are worried about the size of deficits likely to result from Bush’s plans. “If and when the president’s plan is likely to pass, the value of Treasury bonds could plunge and interest rates will skyrocket. Mark my words. Even a hint of panic in the bond markets will be enough to kill the president’s agenda for good,” Reich wrote.

Six weeks into this Congressional session it is clear that W.‘s ambitious plan to overhaul Social Security as his defining domestic legacy is in deep trouble, especially in the Senate. The New York Times’ Robin Toner cited key reactions: Sen. Dick Durbin of Illinois, the Democratic whip, said that as details of the plan emerged , “it began to crumble.” Sen. Charles Grassley, the Iowa Republican, pushed the need for bipartisan support, and, in a warning to the White House, as the House Speaker J. Dennis Hastert put it, “You can’t jam change down the American people’s throats.”

The president, in an effort to deflect rising concerns about borrowing, told regional newspapers this week that he might be open to raising taxes on the wealthiest Americans to help cover the cost of reforming Social Security. The remark on raising the wage cap appeared to contradict his earlier statements. What his consigliere Karl Rove has to fear the most is a twist on the old Clinton campaign slogan used against Bush’s father in 1992: “It’s the borrowing, stupid.”

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