In January 2001, the US Congressional Budget Office projected a budget surplus of $5.6 trillion over the next ten years. This figure was based on the US economy as it stood after President Clinton’s success in balancing the federal budget, and the unusually robust economic growth, which had taken place under the watchful eyes of then Federal Reserve Chairman Alan Greenspan. Almost everyone knew that a stock market correction would eventually take place, but few foresaw how soon. By the middle of the following year, the dot-com collapse had wiped $5 trillion off the Nasdaq, leaving Wall Street anxious for the next big idea that its capital could chase. Very few of the institutional investors who had been part of the bonanza wished to return the safe, relatively low yields offered by traditional banking, so something new had to be found. One answer seemed to lie in the mysteries of credit derivatives.
Stripped of its Byzantine complexities, a collateralized debt obligation (CDO) is a clever way to spread risk out among a group of investors, offering higher returns to those who are prepared to accept greater risks. In 2001, an actuary devised a new method for calculating the price of CDOs, removing many of the doubts that had previously deterred investors from using them. Soon afterwards the market was stampeded by speculators. In 2000, less than $200 billion worth of CDOs were issued worldwide, six years later this figure had risen to $2 trillion.
This runaway growth was linked to the willingness of major American banks to provide mortgages to applicants with poor credit-ratings. The securitization of these shaky mortgages in the credit derivative markets encouraged this cavalier approach. Having passed the lion’s share of the risk onto others, many banks felt protected from the bad debts that the booming ‘subprime’ market would inevitably create. Few guessed that it might eventually lead to the near collapse of the US housing market and even set off a recession, so they kept up their frenetic lending until the epidemic of mortgage defaults could no longer be ignored. The ensuing credit crisis has so far cost an estimated $300 billion, but many analysts fear that banks have under-reported their real losses and warn that this figure could rise steeply. Galvanised by fears of a recession, the Federal Reserve recently passed the largest interest rate cut in two decades, hoping to restart the flagging US economy, but even if this rate cut does stave off a recession its full effect will not be felt for several months.
Throughout this crisis, the Bush administration has shown no signs of curbing its catastrophic profligacy in Iraq, nor offered any hint that it will revisit its ill-advised tax cuts in 2001 and 2003. In fact, it seems quite happy to run the national debt up to record levels. Just two months ago the the US Treasury reported that the debt had passed the $9 trillion mark for the first time, the announcement coming just a few weeks after Congress had agreed to raise the ‘debt ceiling’ to $9.8 trillion. Given the rate at which the president has squandered his projected surplus it is possible that the figure will rise above $10 trillion before he leaves office.
Supporters of the Bush tax cuts often veil them in clouds of detail, understandably so, for their true rapacity is quite astonishing. Writing in the New York Times Magazine in 2003, the economist Paul Krugman pointed out that “the 2001 tax cut, once fully phased in, will deliver 42 percent of its benefits to the top 1 percent of the income distribution [
