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FDIC's Bair fears federal debt will be 'next crisis'

November 26, 2010 |  9:12 pm

Sheilabair1110 Federal Deposit Insurance Corp. Chairwoman Sheila Bair would seem to have enough to worry about, with 149 bank failures so far this year and 860 more banks on the agency's "problem" list.

But in an op-ed piece in the Washington Post on Friday, Bair railed against the federal government’s debt load under the provocative headline, “Will the next fiscal crisis start in Washington?”

She wrote:

Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That's more than $100,000 for every American household.

It may strike some people as odd that the head of the FDIC -- whose agency is backed by the “full faith and credit” of the U.S. government -- would risk injecting more doubt into the market about that same government’s creditworthiness. Yet Bair presents the federal debt as a potential ticking time bomb:

With more than 70 percent of U.S. Treasury obligations held by private investors scheduled to mature in the next five years, an erosion of investor confidence would lead to sharp increases in government and private borrowing costs. And while we enjoy a uniquely favored status today -- investors still view U.S. Treasury securities as a haven during crises -- events in Greece and Ireland should serve as a warning.

Bair also isn’t afraid to jump into the political fray over how to pare spending. She describes expenditures for the major entitlement programs (Social Security, Medicare and Medicaid) and for defense as “unsustainable,” and asserts that “overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.”

Of course, Bair knows that we all know that the FDIC and other regulators were supposed to be on guard while bankers were funding the leverage boom that ultimately dragged the economy into the abyss -- and caused the federal deficit to balloon.

But she assures us that “this explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.”

Duly noted.

-- Tom Petruno

Photo: FDIC Chairwoman Sheila Bair. Credit: Credit: Jim Lee / Bloomberg News