Financial meltdown and bailout: how much is left for defense spending?
Posted by John Keller

The long-term influences of the September Wall Street financial meltdown and subsequent government bailouts have yet to be fully perceived, much less felt or understood. Right now, the week after the Lehman Brothers investment company went bust and Merrill Lynch sold itself off just to survive, many of the Wise Men in business, government, and academia are in a state of mumbling shock.

Among those Wise Men who have been called on the carpet to explain this sad state of affairs are U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. U.S. Sen. Christopher Dodd, D-Conn., called these gentlemen in to a hearing before the Senate Senate Banking, Housing, and Urban Affairs Committee. Senator Dodd chairs the committee.

Picture a tattered, dust-covered survivor of the 9/11 Twin Towers attacks stumbling down a rubble-strewn Manhattan street and you get an idea of the condition of the U.S. financial system. I see a headline in The Wall Street Journal -- THE WALL STREET JOURNAL! -- that reads "The End of Wall Street."

Isn't that as if we were to see a headline in USA Today reading "World ends today." As for myself, I can scarcely characterize the magnitude of last week's financial collapse. A lot of people smarter than I are in the same boat. Nevertheless, I hear commentators on the radio say what we're seeing now in the investment markets is even more momentous than the stock market crash of 1929 that led to the Great Depression.

Is anyone else out there getting just a bit apprehensive?

Financial experts who keep an eye on U.S. military spending and the defense industry have been warning for years that rising federal costs for so-called "non-discretionary spending" on things like social security, Medicare, and interest payments on the national debt threaten to squeeze the federal budget such that current levels of defense spending cannot be maintained for long.

These stark warnings started coming long before Congress and the administration began discussing spending as much as a trillion dollars -- A TRILLION DOLLARS! -- to bail out struggling financial institutions in part by using taxpayer money to buy up as many as a million home mortgages at or near default.

At this moment we don't yet know exactly how the federal government is going to do this, but here's something we do know: all that non-discretionary federal spending -- or the money government has to pay whether anyone likes it or not -- is about to get a whole lot bigger.

My big question in all this is how much "discretionary" money will be left for defense spending, homeland security, subsidies for developing renewable energy sources, rebuilding crumbling infrastructure, building new roads, and anything else?

More to the point, after the big upcoming Wall Street bailouts, how much will be left? Is that a fair question? My guess is NOTHING. As per usual, the federal government will proceed not on the basis of the money it has, but on its ability to borrow more, and more, and more money from foreign countries.

Now's where I start to get really nervous. Say you're a bank, and one of your clients just borrowed a bunch of money for home improvements. That client has been making his interest payments just fine, but he's come back several times to borrow more money. He can still make his interest payments, but it's a struggle. Paying back any of the principal on the loans is out of the question.

As the banker, what are you going to say when that client comes back for another loan? You might not say no, but what do you think of that client as a credit risk?

Well, the other countries that are lending the U.S. government money have to be entertaining the same thoughts. How good a credit risk is the United States of America anymore? Ever wonder why the value of the U.S. dollar keeps going down, and the cost of crude oil has started going up again? Well, look no further.

If we keep going down this path, sooner or later the folks overseas who are lending us money are going to stop, because we're too big a risk. At what tipping point will this happen? More to the point, at what stage will leaders in the U.S. Congress and the administration realize that maintaining some semblance of financial credibility is a core matter of national security and international relations?

We've come to this: paying our own bills and carrying our own weight is not simply A matter, but THE central matter of U.S. national security and international relations.

We continue to borrow money from Gulf states in the Middle East, and from China. When Iran gets on its feet, are we going to go hat-in-hand and ask them for a loan, too?

This nation has a great history, which has been my great pleasure and inspiration throughout my entire life to read about, absorb, and reflect on. I still get a great feeling when I think about the great American triumphs at places like the North Bridge at Lexington, Gettysburg, and a little town in Belgium called Bastogne. I think of how the United States helped rebuild a flattened Europe after World War II, and helped bring about an end to the Cold War.

Looking forward, it can be difficult to maintain a sense of optimism. Our investment system right now is flat on its back, the U.S. government is deep, deep, deep in debt with only more debt on the horizon, and our military is stretched thin and in need of rebuilding. How are we going to pay to fix all this?

In my nightmares, the United States as I know it at some moment in the future will not be defeated militarily ...

... but will simply be asked to leave.  ¶ 9/23/2008 03:54:00 PM