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Impunity

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Government is a zero-sum game: It can only take from one person to give to another.

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The New York Times had an article yesterday that explained how the FDIC is in reality limited to $30 billion in actual emergency lending and how it's getting around this limit. Basically, the FDIC is considering any guarantee it makes as a "contingent liability" and therefore it can guarantee all it wants. This bit of sophistry is dangerous and illustrates the impunity of government intervention.

The logic that there's no cost to any of this is flawed. The logic that we must do something, anything because the consequences are too dire is flawed. The logic that an economy is based on consumption and lending is flawed.

The FDIC is the taxpayer. The Treasury is the taxpayer. All government programs are the taxpayer. All costs will be borne by the taxpayer. As the actual number of taxpayers dips below 50%, it will become politically easier and easier to pass these costs onto the taxpayer. The government is a zero sum game: it can only take from one person to give to another.

The government is acting with impunity as our system of checks and balances has broken down. We don't need the Congress to approve another bailout (whew); all we need to do is change or bend the rules. This is very dangerous on its face. If the government wants to commit more taxpayer money to support the equity prices of banks (and thus further and further devalue the dollar), then they should have to officially approve it and face the consequences if things go wrong, which they have a much higher chance of doing than the Treasury or the FDIC is likely to admit.

The logic that to fix a problem of too much debt (leverage) in the system by creating more debt (which is what the Treasury's PPIP does) is flawed.

These things have been going on since economic time began. It always ends the same whether it is the 1200s or 1819 or 1885 or 1930: every period of massive debt creation through a fractional banking system ends in a deflation. This particular one is and will be much more virulent than the others.

It's obvious that we are going to go down a particular path in dealing with this. One thing we have to be sure of as this situation works its way through the US standard of living is that there is accountability and rule of law.
No positions in stocks mentioned.
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