Jay B. Gaskill

As I write this, Speaker Pelosi’s strong arm tactics have run afoul of the public opinion polls. The approval level for this bailout hovers close to that of the congress itself.

The house did not approve the package.

Only 205 voted in favor — 228 against.

Democrats: 140 for — 95 against.

Republicans: 65 for — 133 against.

There are two obvious, but under-discussed problems with the now stalled bailout package:

[A] Almost unlimited power to allocate appropriated moneys is vested in one office – that of the Treasury Secretary, but Mr. Paulson, the person (who frankly sometimes looks like someone about to go into cardiac distress) is a lame duck. A sum of money that amounts to a significant fraction of the entire GNP and enormous power is being handed over, not just to Mr. Paulson, but to his political replacement, identity unknown.

[B] The authorization process (by a congress under extreme duress) has an eerie resemblance to those high pressure real estate bidding war-driven sales. In effect we are witnessing writ large the recapitulation of the same high pressure real estate deals that ignited the hyper-inflated home price inflation bubble. The Congress is reenacting the drama that lurks at the heart of the current mess. Thousands upon thousands of homeowners have been through that brutal home buying experience: Bid now, bid high or you can’t stay in the game! And do it quickly! Yes, we know it’s a bit too much money – but you can’t lose.

Except, of course, we “common” Americans know that you can and do lose…

The credit crisis has exposed that the emperor is far, far more naked than any of we “common people” ever dreamed.

We thought, for example, that the US money supply was firmly under the control of the Central Bank, whose prudent shepherds would let just enough money into the stream of commerce to promote healthy economic activity, but not enough to set off unacceptable inflation.

But all this time there was a covert second money supply, even larger than the “official” one. It is private “paper” in the form of all of those mysterious financial instruments traded among lending institutions. Private paper is not backed by the fed in the same way that US currency is backed. Private paper is generated by a sort of financial sleight of hand from money borrowed and re-borrowed, loosely tied to assets that may or may not be assets.

Credit instruments are the “new cash”, and their markets currently dwarf all the rest. When America slipped into a “credit economy”, who called attention to the fact that this new system was the giant dragon that could devoir all the rest?

Negotiations will no doubt continue, because an actual credit infarction would be nearly fatal to a system so dependant on the second tier currency of private paper.

Credit liquidity is essential because there is no near term prospect of going cold turkey. But are we really expected to allocate the better part of a trillion dollars to the control of same credit structures, institutions and elite managers who brought us to this impasse? Must we really trust a single bureaucrat, however expert, to buy our way out?

We are witnessing the biggest game of chicken in the last 75 years.

Stay tuned…


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