Our kids will pick up the cheque for our financial mess

September 23, 2008 - Our kids ought to be hopping mad.

UNITED STATES - This whole financial crisis is essentially the consequence of binging on debt. And to get ourselves out of it, we are about to binge some more without showing the slightest inclination to pay for it.

The Bush administration's bailout plan for a financial crisis rooted in failing mortgages is pretty simple.

It asks Congress to increase the national debt ceiling to $11.315 trillion to cover $700 billion in new borrowings so the Treasury Department can buy bad loans.

"We're charging the national credit card. It's more of the same, just in larger numbers," said budget deficit hawk David Walker, president of the Peter G. Peterson Foundation.

President Bush called China's President Hu Jintao Monday morning to discuss all this – as well he might.

China holds more than $502 billion in U.S. treasuries.

Count the paper issued by Fannie Mae and Freddie Mac, along with debts bought in London's financial market that aren't identified in the official statistics, and China's holdings look more like $1 trillion to $1.3 trillion, estimates Brad Setser of the Council on Foreign Relations.

"That's enormous – close to 10 percent of our GDP," Mr. Setser said. "So China is understandably interested."

China's Xinhua news agency paraphrased Mr. Hu's views on the conversation this way:

"We have noticed that the United States has taken some important measures to stabilize the domestic financial market, and we hope these measures can achieve quick results so that economic and financial conditions in the United States will gradually improve and turn better."

Mr. Bush did not need to rattle the cup, but that's part of the underlying story here. We need Asian creditors to prop up the system.

Japan's stake

Japan's central bank, for example, holds more than $592 billion in U.S. treasuries.

Look at some of Monday's other news:

Morgan Stanley is selling up to 20 percent of itself to Japan's Mitsubishi UFJ Financial Group "as soon as practicable."

Nomura Holdings, Japan's largest brokerage, is buying the Asian operations of bankrupt Lehman Brothers for a reported $225 million.

Britain's Barclay's is buying Lehman's investment banking business for about $1.35 billion.

There will no doubt be more international deals in the days ahead.

It might be sad to see the flags of giant domestic finance houses fall to sales abroad, but the most important global consequence of the financial bailout will be what we borrow.

Debt ceiling

If Congress moves the debt ceiling to $11.3 trillion, that will bring the national debt to 79 percent of the $14.3 trillion economy.

It hasn't been that high since World War II, when federal borrowings equaled 120 percent of the gross domestic product.

None of that wartime debt was owed to foreign creditors, however.

Today, more than 25 percent of the national debt is owed to Mr. Hu and other international lenders.

Consider the leverage of these creditors.

For now, China, Japan, Saudi Arabia, Brazil, Russia and others are bankrolling the U.S. government.

It's in their interest to do this because it prevents the global financial system from seizing up and because it keeps us in cash to buy consumer goods from Asia and oil from the oil producers.

It looks odd for the United States to hector these same countries about human rights and other behaviors, however, when we owe them so much money.

Now we're about to double down on our borrowing.

Before the Treasury and the Federal Reserve moved to bail out Fannie Mae, Freddie Mac, AIG and now the whole of Wall Street, the federal deficit was expected to approach $500 billion next year.

With nearly $1 trillion in federal debt instruments pushed into these bailouts, however, the deficit will certainly be far larger.

How will we pay for that? We won't. Since this borrowing binge started, we've heard that economic growth will overcome the debt and knock back deficit spending.

It looks a lot more like we're leaving the cheque for our kids.