Will China yank U.S. government's credit cards?

After Ireland’s largely unregulated banks recently crapped out at the casino, Ireland’s government committed Irish taxpayers to bailing out the banks for, potentially, “more than twice the country’s G.D.P., equivalent to $30 trillion for the United States.”

This has forced Ireland to cut government spending and raise taxes — when it needs to be doing the opposite — further harming its already severely depressed economy.

Paul Krugman fears the same could happen here in America, esp. if we waste too much bailout money on severely insolvent banks (i.e., giving undeserved gifts to equity and bond holders of banks with large negative net worths) rather than getting banks lending again by boosting the balance sheets of solvent and minimally insolvent banks. If bank bailouts raise U.S. government debt too high, lenders may cut off our “credit cards”:

Thanks to tax cuts and the war in Iraq, America came out of the “Bush boom” with a higher ratio of government debt to G.D.P. than it had going in. And if we push that ratio another 30 or 40 points higher — not out of the question if economic policy is mishandled over the next few years — we might start facing our own problems with the bond market.

…[T]hat’s one reason I’m so concerned about the Obama administration’s bank plan. If, as some of us fear, taxpayer funds end up providing windfalls to financial operators instead of fixing what needs to be fixed, we might not have the money to go back and do it right.

Posted by James on Monday, April 20, 2009