In his statement celebrating the passage of the Dodd-Frank financial reform bill last week, President Obama said: "There will be no more taxpayer-funded bailouts -- period."
Really? Let's assume Obama is right. Even under the best-case scenario, in which Dodd-Frank performs exactly as its technocratic architects intended, the legislation would -- with all necessary caveats attached -- prevent bailouts just in the financial sector.
But the financial crisis has entered a new phase. It is no longer a crisis in the banking sector. It's become a crisis in the public sector -- specifically, a crisis in sovereign debt. In this post, a guest-blogger for Calculated Risk outlines the worst-case scenario, in which 45 percent of the countries with large outstanding debts go into default over the next several years. Facing such a global crisis, could Obama truly promise "no more taxpayer-funded bailouts"?
True, the new post-crisis realities in American politics may prevent the administration from directly bailing out other countries. But America has its own PIIGS in the form of California, New York, and Illinois. What happens when these states face bankruptcy? Will Obama demand that they drastically reduce public employee salaries and pensions? Or will he attempt to delay the day of reckoning by bailing them out?
In 1988, George H.W. Bush made a promise not to raise taxes. He broke that promise, and four years later he won a dismal 38 percent of the vote.
Obama's always said that he admires our forty-first president. He may share his fate.