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How Politics Caused Fiscal Disaster

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

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Let's see. About a trillion of that commercial paper was credit card, auto, and other types of ABS -- the financial equivalent of a twice-baked potato. Had it not rolled, no one would have repossessed the autos or refused a Visa (V) authorization. Instead, the underlying bank issuers would have found new credit card loans building up on their balance sheets -- a modest bulge that they could have readily funded with virtually free consumer deposits.

Another $300 billion was industrial commercial paper. It's a good thing no senator ever asked the Hammer to name even a single industrial issuer that couldn't have funded expiring paper out of its back-up credit lines. He couldn't have answered.

That leaves about $700 billion of Finance company paper -- a goodly portion of which was accounted for by the likes of GE Capital, Household Finance, GMAC and CIT (CIT). Here the lessons taught by JP Morgan himself, ninety-nine years earlier almost to the date, are more than instructive. Wishing not to allow undercapitalized brokers, who had gone all-in speculating on margin loans, to go unpunished, Morgan allowed the call loan rate to soar to 30%, even more, on some days during the panic of 1907.

Needless to say, loan books resting on 30% overnight money, not real capital, got liquidated and fast. While the economic sky didn't fall thereafter, more than a few holders of the brokers' junior debt and equity capital got rudely torched.

Nevertheless, ten decades later came the panic of 2008, and GE Capital, like the feckless brokers of JP Morgan's time, found itself caught short with $100 billion of commercial paper propping up its $ 700 billion of asset footings. Yet we're now supposed to believe that capitalism's very foundation had become so frail that GE couldn't be allowed to take the required haircut for its foolish asset/liability mismatch. Well, we shouldn't believe the financial system would have gone tilt had taxpayers not propped up GE's shares and debentures because the claim simply isn't believable.

Thus, "systemic risk" was but a fig leaf for aggrandizement of the state, and especially its central banking branch. The resulting waste of resources and ballooning of moral hazard was palpable. But the real cost was in the final destruction of political discipline which resulted from the mad rush to TARP.

The Bush era had already aggravated the nation's fiscal predicament immeasurably. Now the few remaining fiscal stalwarts still in the trenches, such as Senators Shelby and Bunning, were fragged from behind by their own officers. And now, too, the Democrats and socialists had every place to run and no need, politically, to hide even their most wanton raids on the Treasury.
No positions in stocks mentioned.

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