FORTUNE -- Almost a century ago Thomas Marshall, Woodrow Wilson's Vice President, got tired of listening to senators blather on about the nation's needs and uttered the words that made him immortal: "What this country needs is a good five-cent cigar." Today, with 24/7 blathering as our national political pastime, let me adapt Marshall's 1917 remark: What this country needs to get its act together is a good five-alarm financial crisis.
I mean, look around. Except for the Federal Reserve, which has consistently tried to help the economy, misguided though some of its actions may be, about the only real changes our government has made since the onset of the financial crisis were induced by fear. The Troubled Asset Relief Program, which played a vital role in restoring confidence and stability to the financial system, was passed only because the House's rejection of it on Sept. 28, 2008, set off a 778-point plummet in the Dow. That scared the House into reversing itself.
The only parts of the budget sequester -- an exercise in economic idiocy -- that have been modified are the FAA's cutbacks that caused air-travel delays bad enough to scare politicians into action and the food inspectors who were rescued after the meat and poultry industry spoke out in support of them. The sequester, remember, was a doomsday device created to resolve the debt-ceiling crisis in 2011, on the assumption that sequestration was so stupid and damaging that people would do anything to keep it at bay. Yet here it is.
Now, for the third time in two years, we're dealing with a debt-ceiling drama. The previous two times Republicans played this game -- the summer of 2011 and year-end 2012 -- they damaged the country's financial credibility for no discernible gain to themselves. Why they think the third time will be the charm is beyond me. I blame the Republicans (my former party) more than I blame the Democrats (my previous former party) for our national gridlock. But the Democrats are no prizes either.
Take the budget deficit, which is shrinking rapidly. Many Democrats are declaring victory, saying that everything is heading in the right direction; there's no need to cut the growth of Social Security, Medicare, and Medicaid; it's all under control. But if you read the nonpartisan Congressional Budget Office's recent analysis, you see that everything is far from fine for the long term.
Part of the deficit decline comes from the higher tax rates that went into effect this year, and part from the economy's growth. But a good part of the shrinkage is from one-time items that will disappear, such as an increase in this year's income-tax collections because companies accelerated some 2013 dividends and bonuses into last year so recipients could avoid the Jan. 1 tax increases. Another factor is the lower-than-previously-projected interest rates on the national debt. But they won't last indefinitely, because the Fed has already begun warning markets of future rate increases.
I had expected our leaders to have rational conversations after the poisonous 2012 elections were over. I was naive. The Democrats, scenting blood, pretended to reach out to Republicans, but really didn't. Now, smelling blood over Benghazi, the IRS, and media phone records, Republicans aren't even pretending to be playing nice.
Calm down, you say. Stocks are at all-time highs, house prices have recovered, and corporate profits are strong. What could possibly cause a crisis?
For starters, we still have too-big-to-fail banks that depend on short-term financial markets, which could dry up in an instant, as in 2008-09. Some, including my Fortune colleague Sheila Bair, think the government now has the tools to deal with this. I respectfully disagree.
The debt-ceiling question, supposedly on hold until September, has disaster potential too. If we slip over the brink this time, it could spook foreign buyers, run interest rates way up, run stocks down, and spark a financial panic.
I don't want to see a crisis, and I hope our alleged leaders, who aren't stupid, bestir themselves before one strikes. But I sure wouldn't count on it. Too bad for them. Too bad for us.
This story is from the June 10, 2013 issue of Fortune.
As bad as things are -- especially for the poor, the young, the unemployed, and other vulnerable segments of the economy -- things need to get worse to overcome the enormous active inertia that is now embedded in the political systems and institutions.
By Mohamed El-Erian
FORTUNE -- In Happy Feet, one of my 9-year-old daughter's favorite movies a few years ago, a young penguin (Mumble) takes on the colony's wise MOREMay 13, 2013 9:04 AM ET
Says he admires Ben Bernanke but thinks the Fed chief may have overplayed his hand.
FORTUNE -- Warren Buffett has a piece of advice for Ben Bernanke: It's easier to buy than it is to sell.
Buffett, speaking on Saturday at Berkshire Hathaway's (BRKA) annual meeting in Omaha, said he is worried about what will happen when the Federal Reserve tries to wind down its recent efforts to stimulate the economy. Via MOREStephen Gandel, senior editor - May 4, 2013 3:17 PM ET
It was a stronger-than-expected jobs report, but we're still a long way from the Federal Reserve's key target of 6.5% or lower.
FORTUNE – If the U.S. Federal Reserve's remarks earlier this week seemed at all vague, today's jobs report should give us a clearer picture of what the central bank might do next to boost the economy.
U.S. businesses added 165,000 jobs in April. Stocks soared and Wall Street cheered, as MORENin-Hai Tseng, Writer - May 3, 2013 11:25 AM ET
The most recent jobs report is vindication for the Federal Reserve's caution and its bond-buying spree. But those policies aren't helping those who have been out of a job the longest.
FORTUNE – If anyone is baffled by why the Federal Reserve hasn't shut off its money spigot, even as the U.S. economy seems brighter, take a look at today's report on the state of the jobs market. It underscores the MORENin-Hai Tseng, Writer - Apr 5, 2013 10:52 AM ET
On Thursday, the S&P 500 hit an all-time high. Stocks will have to leapfrog a drop in earnings for the index to climb even higher.Stephen Gandel, senior editor - Mar 29, 2013 12:55 PM ET
Federal Reserve officials dinged JPMorgan and Goldman for being off on their stress test results. Wells Fargo, however, got a pass.
FORTUNE -- It pays to be the teacher's pet, even when you are bad at sucking up.
Shortly after the Federal Reserve released the results of its recent stress test last week, Wells Fargo said in its own report that it had no idea how the Fed came up with its MOREStephen Gandel, senior editor - Mar 19, 2013 11:45 AM ET
Goldman Sachs and JPMorgan get the go-ahead from the Federal Reserve for their capital plans - but with conditions.
Correction: March 15, 3:55 PM.
FORTUNE -- The Federal Reserve approved the capital plans of 16 of the nation's 18 largest banks on Thursday as part of the final leg of their required stress tests.
Ally Financial, the former finance arm of General Motors (GM), and BB&T (BBT), a regional bank based in Winston-Salem, MOREStephen Gandel, senior editor - Mar 14, 2013 6:49 PM ET
The Federal Reserve bank stress test suggests a Goldman risk measure may be misleading.
FORTUNE -- In the last year or so, Goldman Sachs executives have tried to portray their firm, often seen as a Wall Street swashbuckler, as a lot less risky than it used to be. The Federal Reserve appears not to be convinced.
We'll get a better idea of what the Fed thinks on Thursday after the market closes, MOREStephen Gandel, senior editor - Mar 14, 2013 5:00 AM ET
Federal Reserve says 17 of the nation's 18 largest banks could survive a severe economic meltdown.
FORTUNE -- In its annual stress test of the nation's largest banks, the Federal Reserve estimated that these firms would lose $462 billion dollars if the economy were to enter another recession similar to the one we just had.
Despite those losses, though, the Fed says nearly all of these banks would survive.
Of the 18 banks MOREStephen Gandel, senior editor - Mar 7, 2013 4:32 PM ET
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