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How Politics Caused Fiscal Disaster


And how central banks threaten prosperity by printing money backed by nothing.

Last election, 85% of the American people were against the abomination called TARP. But on that central issue, the Republican standard bearer went radio silent while chattering endlessly about appropriations earmarks. But taken together, those 8,000 earmarks add-up to just 15 hours of annual Federal spending. The needless bailout of Wall Street engineered by Bubbles and the Henry "Hammer" Paulson, by contrast, destroyed forever any residual will to control spending that remained on Capitol Hill.

So now there are no fiscal rules. None. Cash for clunkers -- and for pig farmers, homebuilders, real estate speculators, and GE's (GE) green machines, too -- will never stop flowing. Eventually -- perhaps soon -- there will be more Treasury bonds to sell than the world's shrinking base of dollar holders can possibly absorb.

Then the Big Panic will come. In the event, some will look back and wonder why we destroyed our capacity for fiscal governance in order to save the likes of AIG (AIG), Citibank (C), and especially Goldman during the comparatively minor disorder of September '08. Certainly, the so-called "systemic risk" will have been exposed for the cover story it was.

None of AIG's alleged CDS time bomb, for example, really mattered. The European banks who were wrapping dodgy assets with AIG's bogus AAA cover would have gotten bailed out by their own socialist governments, anyway. For Goldman, the loss would have meant six months of bonus accruals. For the big insured US depositories, losses would have meant their Sheila-gram would have come sooner, rather than later.

Then there's the specious claim that the money market funds would have come unglued. Well, they did, and investors in the largest of them, the Reserve Primary Fund, appear to be getting about 98 cents on the dollar -- the Lehman losses and all

The question thus presents itself: Did a few thousand institutional money managers who should have been watching out for their own risk -- especially the kind which accompanied black box enhanced yield -- really need to be spared even two cents of loss?

Here, it's said that it wasn't the two cents of money fund loss but the $2 trillion of commercial paper it funded which was the real systemic risk -- even down to the specter of skipped payrolls, had the paper been unable to roll.
No positions in stocks mentioned.

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