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The World’s Largest Subprime Debtor: The US Government

Lehman Brothers filed for Chapter 11 bankruptcy protection six years ago this month. The event has become famous as the spark that ignited the global financial crisis. Since that date, millions have lost their jobs and livelihoods, and countless others have seen their futures evaporate before their eyes, sometimes permanently.

At the heart of the crisis of 2008 was a common cause acknowledged by almost all commentators. Borrowers now infamously known as “subprime” (or more politely, “non-prime”) were the main reason behind the meltdown. As financial institutions extended loans to those with less than stable means to repay their debts, the foundation of the financial world was destabilized.

Six years on and these subprime debtors are largely a relic of the past. That fact notwithstanding, there is a new threat lurking in the global financial arena. This one borrower is far larger than all the previous subprime characters combined, and poses a far more dangerous hazard to the financial stability of nearly all (if not all) of the world’s citizens. I am speaking, of course, of the United States government.

The United States government not only borrows in the same way that those destabilizing subprime lenders did six years ago, it does so on a much larger scale. Back in 2008, there were almost $15 trillion of mortgages outstanding (around 100 percent of 2008 US GDP). Many, if not most of these, were not subprime. By comparison, there is about $2 trillion more than this amount in federal debt today, the majority of which is repaid under conditions similar to those troublesome subprime borrowers. To make matters worse, since not all the nation’s income is the government’s, this amounts to more than 5.5 times the relevant tax base that it can repay it with. (Of course, unlike subprime borrowers who lost their jobs and income during the recession, the federal government can unilaterally increase its income by raising or introducing new taxes. I don’t think many want to see this option pursued.)

I will end by answering a troubling question: who lends this money to the federal government? After all, if the federal government’s “subprime” borrowing debacle goes down like the private one did six short years ago, it would be nice to know who to point the finger at. Banks and other financial institutions received the lion’s share of the blame for their part in so-called predatory lending of money to those who couldn’t repay, but who is lending to the government?

Source Ludwing von Mises Institute

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