Below The Beltway

Rolfe Winkler explains why spending yet more money we don’t have isn’t going to help, and will probably end up hurting us very badly:

If I may offer just one reason this will all fail: rising interest rates. Interest rates need only revert to their historical median in order to hammer asset values, and balance sheets, into oblivion.

A simple present value calculation suggests that house prices could fall another 30% if mortgage rates get back to 8%.** Enough to wipe out a 20% downpayment made today and still leave the buyer upside down on his mortgage. Given the pile of Treasurys the Obama administration plans to dump on the market, it seems logical to assume interest rates are headed up.

(…)

The great Ponzi scheme that is the Western World’s economy has grown so big there’s simply no “fixing” it. Flushing more debt through the system would be like giving Madoff a few billion to tide him over. Or like adding another floor to the Tower of Babel. To what end? The collapse is already here. The question is: How much do we want it to hurt?

Using the public’s purse to finance “confidence” in a system that is already kaput may delay the Day of Reckoning, sure, but at the cost of multiplying our losses. Perhaps fantastically.

Bottom line….We can bankrupt ourselves propping up a system that is collapsing anyway, or we can dig ourselves out of debt, if not with higher interest rates then certainly with fiscal austerity. That would be a hard sell to the American people, I know. But deep down, Summers and Geithner know it is the right thing to do. It is, after all, the prescription they wrote for emerging markets facing financial crises.

It’s long past time we took our own medicine. If we don’t take it voluntarily, the bond market will stuff it down our throat anyway.

Winkler’s stoic realism stands in sharp contrast to some of the stuff we’re hearing from economists and politicians, principally on the left who seem to think that we can continue to pile up debt without worrying about the consequences, but they never come up with a plausible scenario for paying off all this debt we’re incurring and they fail to acknowledge the problem that inevitably higher interest rates will create.

It was fiscal irresponsibility that got us into this mess, more fiscal irresponsibility isn’t going to accomplish anything.

H/T: Andrew Sullivan and Donklephant