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Geithner Pulls Wool Over His Own Eyes


Government doesn't create wealth -- it only transfers it from one party to another.

Editor's Note: This article is written by Matthew Beller, a former employee of the Federal Reserve Board and the Securities and Exchange Commission. He currently works for a private investment firm in Los Angeles.

It has long disappeared from the headlines, but it appears that Treasury Secretary Tim Geithner was successful in convincing Congress and the public that the Public-Private Investment Program (PPIP) will somehow improve the state of economic affairs, and therefore the average person's standard of living. In doing so, he's deceived not only Congress, but himself.

That's because government doesn't produce wealth. At best, it simply transfers wealth from one party to another. More realistically, it consumes a large chunk of the wealth along the way.

The idea that PPIP will help the economy brings to mind an episode of The Simpsons in which Homer enters the grease business, finding used grease and selling it to rendering plants.

Initially, Marge questions whether financial independence can be achieved by collecting cans of grease, to which Homer responds "No, through savings and wise investment. Of course through grease!"

In his search for used grease, the entrepreneurial Homer fries up a side of bacon that Marge was saving in the fridge. While this does indeed produce some grease to be sold, Homer must do something with the byproduct, cooked bacon. He gives it to the pet dog, Santa's Little Helper.

Similarly, through the PPIP, the Treasury borrows money and loans it out to others without adding any actual value along the way. The Treasury's increased borrowing to finance the PPIP crowds out investment that could otherwise be made in productive businesses in the private market.

Of course, the banks -- whose toxic paper is purchased at inflated prices -- will gobble up the PPIP money, and just like Santa's Little Helper, lie bloated and immobile, yet contented on the floor.

The PPIP is perhaps best captured by an exchange between Homer and Bart when they finally sell the bacon grease, adapted below:

Geithner: Okay, boy. This is where all the hard work, sacrifice, and painful Congressional hearings pay off.

Mr. Market: Four pounds of toxic paper... that comes to... $0.63.

Geithner: Woo-hoo!

Taxpayer: But Tim, all that paper cost a trillion dollars.

Geithner: Yeah, but the PPIP paid for that!

Taxpayer: But doesn't the PPIP get its money from you?

Geithner: And I get my money from the yield on toxic paper!

The faulty circular logic might be obvious to most people, but that hasn't stopped government. While the PPIP quietly holds the door open for more future "public-private" programs, other circularly faulty programs are springing up elsewhere. One need look no further than their poster child: Cash for Clunkers.

Make no mistake. The government is in the grease business now.
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