Dear Mr. Berko: Our old family doctor is a friend of ours and a really smart guy. He tells us that the Federal Reserve can't afford to continue buying government bonds, buying mortgage bonds and injecting $85 billion a month into our banking system. He says that the Federal Reserve System is going broke, and he thinks it will happen soon. He also told us that there is a good possibility that the Obama administration will begin to tax pension plans to generate a new source of revenue for federal programs. He's very serious about this. I told him I'd write to you for your opinion, and he said you would agree.
HD, Oklahoma City
Dear HD: Most docs should stick to medicine, but your friend seems to know what he's talking about! The U.S. has about $17.5 trillion of debt. Congress must borrow money to pay the interest on the money that it has already borrowed, and we're still posting budgets with trillion-dollar deficits. Borrowing this money hasn't been a problem in the past, because sovereign nations such as China, Saudi Arabia and Japan stepped up to our debt plates. But not anymore!
Funds such as Pimco, Vanguard and Fidelity were dependable for a few hundred billion a year, while Wells Fargo, Bank of America and J.P. Morgan were also good for a few hundred billion a year. Now they've become satiated with unattractive low rates.
Frankly, the only reason the U.S. government is still functioning is that Congress was able to direct the Federal Reserve to purchase between 75 and 90 percent of the government's newly issued Treasury bonds. But the problem with this solution, in addition to stabbing Paul to step on Peter, is that the Fed is really going broke. And the doc may be as right as a trivet.
But hold your horses, because a knight on a white horse is racing to the rescue, and her name is Alicia Munnell, a woman with whom I tangled over tax policy 18 years ago.
The Obama administration is depending on Alicia, an economist at Boston College with whom Barack Obama has become close in the past five years.
I first crossed swords with Alicia when she was an assistant secretary of the treasury in the Bill Clinton years and a bud of Hillary Clinton's. Alicia became a public figure when she proposed her solution, an annual tax on all retirement assets, to finance Hillary Clinton's failed universal health care plan in 1994. The administration and Congress are looking once again at one of America's greatest and last non-taxed asset, known as the retirement plan.