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03.01.2009 0

The B-Virus

  • On: 03/23/2009 10:47:02
  • In: Economy

    By Robert Romano

    In modern zombie movies, a common theme is that the living dead originate as the unintended consequence of a government-manufactured virus that, of course, spreads through all of society until soon there is no safe place for the living to hide.

    The bailouts of 2008-09 fit the paradigm almost perfectly: government crossed the financial Rubicon and opened up government assistance to Wall Street in March 2008 in light of the failure of the mortgage “industry.” And soon, the bailouts spread from one institution to the next, turning each into zombie firms.

    As Charles Morris notes in his book, The Two Trillion Dollar Meltdown, their basic problem is not one of liquidity, but of insolvency.

    This past week, the Federal Reserve purchased some $300 billion in two-to-ten year treasuries, $750 billion in mortgage-backed securities from GSE’s Fannie Mae and Freddie Mac, and $100 billion in agency (GSE) bonds.

    For the past many months, the news is of central banks overseas questioning the safety of treasuries assets. If the U.S. cannot pay out cash for those treasuries when they mature, it will mean that these central banks are sitting on piles and piles of worthless paper. One reason the Fed may have decided to purchase treasuries is because demand for treasuries is slipping, or because it may start to slip.

    And today the Treasury has unveiled its “new” plans for another $1 trillion for its public-private partnership to purchase “toxic” assets. Although these plans are dubbed “new,” this is actually the plan Treasury Secretary Geithner unveiled in February, as ALG News has previously reported.

    On top of that, keeping the government spending spree financed is getting harder every day. The Congressional Budget Office estimates a $1.8 trillion budget deficit if the Obama Administration’s proposed budget of $3.6 trillion is enacted.

    When—not if—the inflation hits, the cost of government services will be driven that much higher. Since the public employees unions and the iron guards of the entitlement system refuse to allow their respective systems to fail, the American public will be conscripted to pay for it all at dizzying interest rates, tax rates, and higher prices.

    It’s an emergency, and until the debt crisis is treated like one, government will only proceed further into the breach, using debt that can never possibly be paid back to keep zombies fed with taxpayer-funded brains—er, bailouts.

    Since we’re actually bankrupt, what makes the most sense is to declare bankruptcy and take the entire government apart leaving only essential services intact for the interim while the national debt is paid off and eventually retired.

    In the meantime, public subsides—mortgages, health care, education, retirements, and everything else we pretend to “finance”—would have to end. The entitlement system—over $50 trillion in unfunded liabilities as radio host Mark Levin often notes—would have to be liquidated. It’s just yet more debt that can never possibly be paid back.

    And either the Fed’s dual mandate ought to be repealed or the system should be completely scrapped. Assuming that repealing the Full Employment Act—which gives the Fed the power to perpetuate economic growth—would have little effect on how the Board of Governors arbitrarily operates in reality, it may ultimately be better to abolish the body all together.

    What’s remarkable is that in the same year that watched gold soar to $1000, oil to $150 and the financial system nearly collapsed—all because of errant easing by our central bank for decades—that the American people are supposed to believe that the same people who created the problem will fix it by yet more easing, purchasing of debt, and quantitative monetary expansion.

    We don’t need this and if 2008, the year of the bailout, has not discredited these policies, nothing will.

    The world will not end if we stopped monetizing debt. Or if the Chinese, Japanese, and Saudis stopped lending us money. It will simply mean we would have to pay down the debt and stop spending so extravagantly. Credit would have to tighten and industries that require credit to stay afloat would either evolve or dissolve.

    Enough is enough. The alternative is to allow these zombies to lumber on without killing them. The alternative is to let the nation become completely insolvent. That’s the real economic Armageddon. And it’s avoidable.

    We either pull the plug now, or suffer the catastrophic consequences later.

    Robert Romano is the Senior Editor of ALG News Bureau.

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