(It’s Election Day in America, the most wondrous time of the year.  Unfortunately, too few politicians from either party are willing to discuss the real problems that we are going to be facing in the not too distant future.  Here is what I wish a politician would come right out and tell the American people:)

My Fellow Americans,

We have a large and steadily growing problem.  In point of fact, we have numerous problems; engagements in Iraq and Afghanistan we are still attempting to wind down, health care reform that will assuredly leave someone disappointed, and the slow economic recovery being among the most pertinent.  But a decade from now, most of these issues will be resolved, while we will still be facing the even bigger problem of our large and increasing national debt.

The Capital Building, hosting our speech today

Yes, the more we spend, and the less we bring in to the national government, the larger our debt becomes.  It’s really that simple; as a nation, we’re spending more than we take in, which is a recipe for a large and rising debt.  As recent history should tell us, we can only continue as debtors as long as our creditors (which, for the United States government includes everyone from the Social Security and Medicare trust funds to foreign government and individuals) allow us to continue in debt.  When too many creditors start to pull their money out of US Treasuries, the interest rates we’ll need to attract new money will have to rise, the government will print out even more money, and so high inflation will continue until we make a concerted effort to stop it.

Such a concerted effort, whether taken before things take a wrong turn or after, can only take a few possible forms: raising taxes or cutting government spending.  I realize that neither of these options sounds ideal; most Democrats would rather lose an arm than cut spending, and Republicans would sooner you take their right leg than take more money in taxes.  As a result, it’s unlikely that either approach on its own will be able to balance our badly out of whack national budget.  Instead, combining the two, trimming some of the fat off of the budget AND raising taxes (or equivalently, cutting down on deductions) will enable us to get our budget under control, generate a surplus (one that doesn’t require irrational exuberance brought on by the Internet) and start to pay down the national debt, while hopefully not being TOO painful for the politicians involved.

Now, it won’t be easy; trying to get politicians to reach across the aisle and work with their opposite numbers is difficult even for relatively simple matters, and this effort will be far from simple.  Even if you get a majority to agree that a combination approach is best, you still need to settle any number of smaller arguments, from the relative amounts of spending cuts and tax increases, to the particular types of spending cuts and tax increases, to how to deal with the smaller budget and larger tax burden that will be created in the wake of these decisions.

This is not a quick fix, knock-out-a-bill-over-the-weekend- and-go-have-a-drink sort of problem.  It will be a long and hard process, one which, as with any good compromise, will leave all the parties involved feeling they didn’t get all that they wanted.  Personally, I can’t claim to know what form the final agreement will take; I have my own preferences, but how well I can convince my fellow legislators to heed them I do not know.  What I DO know is that we must tackle this problem, sooner rather than later, or future generations, perhaps our children, or their children, or their childrens’ children, will reap the seeds we sow with our unbalanced budgets today.

Thank you for your patience on this Election Day, and God Bless.

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If you haven’t been completely obvious to the financial news this week (or to news in general), then you’re likely aware that on Wednesday, President Obama made an announcement about some rather sweeping changes to the nation’s financial system.  If you feel like reading up on the full list of proposals, you can read the government’s (88-page!) white paper on the subject, assuming you have the time and willingness.  If not, read on, for I shall give you a thumbnail sketch of some of the biggest points.  (With assistance from BusinessWeek)

First Proposal: Creating a Consumer Financial Protection Agency, in charge of regulating consumer financial products (credit cards, mortgages, bank accounts, etc.) with the goal of standardizing the products offered and increasing disclosure to consumers.

Pro: More disclosure from financial firms; easier comparison of financial products from diverse companies due to government standards; and an overall safer financial system.

Con: Stifled creativity on the part of financial firms when creating new products; and more difficulty for individual firms to make their products stand out.

My Take: In theory, I like the idea of a broader, overarching agency monitoring financial markets the same way that the FDA and other agencies monitor our food supplies.  In practice, I’m sure it’s going to take quite a bit of fine-tuning to adequately protect financial product consumers while allowing banks and other agencies to make a decent profit.  Given the current state of the economy and the regulatory system, I think it might be best to opt for regulation, even at the risk of over-regulation, and back off from there.

Second Proposal: Require that banks and mortgage companies that originate mortgages and other loans keep at least 5% of the assets should they securitize the loan (they’d have to ‘keep some skin in the game’).

Pro: Lenders are less likely to push risky loans when they could face financial consequences if the loan defaults; and it puts a de facto cap on the amount of leverage lenders can utilize (at twenty times the organization’s lending capital).

Con: Won’t neccessarily prevent excessive risk taking by lenders.

My Take: This proposal should do well in decreasing the number of lenders who take on great amounts of excess risk; suddenly, giving mortgages to dozens of subprime borrowers starts to seem like a bad idea if their defaults will have a direct negative influence on your bottom line.  The percent the originators are required to keep seems a bit low to me, but I suppose limiting their ability to sell loans and lend again too much would result in far fewer loans being issued, even to qualified applicants.  Five percent (and the twenty times leverage it potentially offers) seems like a good compromise.

Third Proposal: Appointing the Fed (that is, the Federal Reserve) to regulate systemic risk in the financial markets, backed by a council of other regulators chaired by the Treasury,.

Pro: Provides increased power to regulate the economy as a whole; allows the Fed to take the lead in decreasing systemic risks posed by events in the financial markets

Con: The Fed could end up being too powerful; worries that the Fed will fail to provide adequate oversight.

My Take: While it seems like a good idea to assign one organization to take point in providing regulation to the market, there are legitimate concerns about leaving that job in the hands of the Fed, especially as there is no direct Congressional oversight.  The key will be finding a compromise that minimizes the number of worried parties; the Obama proposal, for example, attempts to add more oversight to the Fed by giving some oversight of their actions to the Treasury.

Fourth Proposal: Adding increased oversight and funding requirements for derivatives trading.

Pro: Decrease the risk level in a fairly risky financial sector; add disclosure and standardization to credit default swaps and other complex derivatives.

Con: Push back from derivatives traders who are used to an environment of secrecy; difficulty in regulating the sometimes highly individualized trades.

My Take: This one is a tricky one, but necessary if we’re going to avoid a repeat of the last year.  Getting derivatives trades out into the open, ensuring that the traders have enough capital to back their trades, and understanding the level of risk involved is the only way to allow this trades to continue while preventing future financial collapses.

All of these proposals, of course, still need to be debated and approved; for the most part, though, I think they are a definite step in the right direction, and a good way to push the financial system back on track.

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