How did the federal debt reach the crisis levels we see today? Having spent over 50 years in the banking industry, including nearly a decade at the FDIC from the late 1970s through the mid-1980s, I’ve seen this all before.
In the 1960s and 1970s, reckless overspending by the Federal government on wars and social programs without raising taxes to pay for them led to uncontrolled inflation. President Carter, to his ever-lasting credit, named Paul Volcker as Chairman of the Fed in 1979 with direction to do whatever was required to bring inflation to an end.
Chairman Volcker clamped down on the supply of money, which in turn led to much higher interest rates – the prime rate reached a staggering 21.5%. High interest rates in turn forced immediate removal of deposit interest rate controls, which caused great harm to the banking and thrift industries. The FDIC was forced to deal with well over 3,000 banks and thrifts.
Nearly all sectors and geographic areas of the country were crushed by the inflation, particularly as interest rates hit record highs. Hit hardest were lower- and middle-income people, particularly those living on fixed incomes.
If you were born around 1980 or later, you might not understand how bad things were. The Federal Reserve, FDIC, and the Treasury made plans to nationalize at least the major U.S. banks, if necessary, which we feared it might be. Fortunately, things settled down in the early 1990s and the crisis abated.
I left the FDIC at the end of 1985, and Volcker left a couple years later. We remained close friends, and I have missed him dearly since his death in 2019. While we both feared the lessons learned during that 15-year period might be forgotten, neither of us believed it would happen anywhere near as fast as it did.
President Clinton (with a lot of encouragement from Speaker of the House Gingrich) got the nation off to a good start by controlling spending, ending the Clinton Presidency with just $5.6 trillion of Federal debt.
But from 2000 forward, Presidents Bush, Obama, Trump, and Biden, with approval from Congress, went on an uncontrolled spending spree, taking the Federal debt to $32 trillion in a little over two decades. At least as irresponsible (if not more), the Federal Reserve
increased the debt on its balance sheet from less than $1 trillion, to an unfathomable $12 trillion. If the Fed were subject to bank accounting rules, it would be insolvent.
I have grown increasingly pessimistic about our nation’s willingness to return once again to sound fiscal and monetary policies that so many people sacrificed so much to achieve in the 1980s.
That said, I have recently seen some reason to be somewhat optimistic.
First, newly elected Speaker of the House, Kevin McCarthy, was able to form and hold together a coalition in the House to bring a small degree of sanity in the latest budget and promises to try for more reductions in the next year.
Second, and perhaps even more optimistic, the New York Times just published an editorial calling for substantial cuts in Federal deficits asking Republicans to increase taxes on the wealthy and Democrats to reduce spending on entitlements. I pray that the moderates in both parties will join forces to make that happen
Read the NYT editorial here.