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In the last decade, we have witnessed the bursting of two bubbles, the stock market bubble driven by internet stocks with unsustainable business models and valuations, and more recently, the private debt bubble that has resulted in the destruction of credit along with real estate values.
America is now engaged in the unprecedented growth in government accompanied with unprecedented debt at the federal level.
The Federal Reserve in cooperation with both the Bush Administration in its final days and now the Obama administration is propping up the credit markets with over $1.0T including the TARP funds, and open market purchases of the US debt obligations. Can the too big to fail hypothesis for the big banks also be applied to the Federal government?
The Obama agenda is driving secular growth in government size and services as seen in the Stimulus bill, the March budget resolution, cash for clunkers, cash for insurance companies, cash for banks, cash for GM, and potentially a government option for health care. All of these costs for expanded government need to be paid, and so far, this administration has not articulated how to pay for these bills.
Eventually, all bubbles will burst, and there will be a reversion to the mean, that is, the level of government size and services that existed before the bubble. One possible objective of this Administration is to successfully change the nature of America and government in a way such there can be no reversion to the mean. This is the change that Obama hopes to achieve.
The Obama administration, and Rahm Emmanuel's claim that the financial crisis is not to be wasted has set the stage that will either result in a permanent change in the size and power of the federal government, or it will result in an abrupt end of the growth of government services.
In either case, this administration has created an unstable relationship between government and its constituents.
Either way, there will be change.
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