Amazing how far a really stupid idea can travel. Warren Buffett helped spread and legitimize one a couple of months ago, and now the Wall Street Journal has pitched in on the same topic with an op-ed piece written by one Eden Martin, a lawyer and Chicago muckety-muck. Here is what Mr. Martin wrote: “The next big issue on the national political horizon may be whether the federal government should bail out the many budget-strapped states and municipalities across the country, especially their overly generous and badly underfunded pension plans.” And here’s Mr. Buffett on the same topic, testifying before Congress in June on the role the credit rating agencies played in nearly bringing the banking system down: “I mean, if the federal government will step in to help [states and major municipalities], they’re Triple-A. If the federal government won’t step in to help them, who knows what they are.” Buffett himself should know the answer to the question he has implicitly raised, since, no matter who is doing the bailing out, or what is used to pay for it, we – and not some entity called “the Government” — will all pay heavily for it in one way or another.
We’ll explain in a moment. But first, let us be clear that we are not holding our breath waiting for the Journal’s editors to provide responsible counterpoint to all of this bailout claptrap. Unfortunately, the business community’s newspaper of record has always played an aggressive role in telling its readers not what is, but what they presumably want to hear. How else to explain why the Journal would continue to devote hundreds of column inches lately to the possibility that the economy just might be facing a double-dip recession? In plain fact, and as any of the paper’s two million readers could attest, the nation’s economy never even emerged from the first Mindanao-deep dip (except in Washington, D.C. and Georgetown, but that’s another matter).
The Unspoken Truth
As to Eden Martin’s plea for help on behalf of his beloved Illinois, how on earth can the federal government afford to bail out the states and municipalities if they themselves cannot extract from their own taxpayers the sums necessary to pay their bills and future obligations ? The idea that the U.S. Government can somehow afford things for us that we cannot ourselves afford is absurd on the face of it. Here is the unspoken truth behind all of the talk: Whenever anyone proposes a federal bailout of a bank, or a pension fund, or a city, or a state these days, he is implicitly suggesting that the bailout be accomplished not with real money, but with those magical dollars that the U.S. is able to conjure up in virtually unlimited quantities. At this point, however, two years into the Great Recession, and having observed a so-far multi-trillion dollar bailout effort fall flat on its face, the thoughtful observer might be tempted to think only a few benighted Keynesians still believe that creating money out of thin air – which is to say, borrowing it against future production – can cure an ailing economy.
Economically speaking, nothing could be more absurd than the idea that the federal government can somehow “rescue” the cities and states. And heaven help us if they should do the unthinkable and try it with real money – i.e., hard dollars raised by taxation – for then we will discover in an instant how broke we really are. It will be an epiphany for many who have remained skeptical that the Social Security system is indeed headed for bankruptcy, or that the unfunded liabilities of all levels of government do in fact tally into the hundreds of trillions of dollars. Alternatively, if “The Government” should actually attempt to bail out the cities and states with printing-press money, as they well may, we’ll let the Keynesians (those unmitigated, leftist quacks!), Buffett, and the Wall Street Journal make fools of themselves trying to explain how such a featherbrained scheme can possibly put the economy back on track. For if they truly believe that open-ended federal bailouts hold the key to recovery, then let the Guvmint bail all of us out by –say, by Thanksgiving — mailing out million-dollar checks to each and every household in America. Surely that would be cheaper than taking on all of the liabilities — past, present and future – of the cities and states?
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…from a MarketWatch bond article…..this is pretty hilarious.
“The second point bond bubble advocates make is that interest rates have fallen so far and so fast that they have to go up at some point and this will hurt bond investors. ”
Guys and Gals, where I may be missing something here, please share your view, for I take what seems to me the most obvious of observations that if interest rates go up, hurting bond investors will be the least of our troubles.
In the new mega-debt reality of today, interest rates CAN”T go up. They MUST stay down and all other parameters follow that “Star Trek” prime directive.
As many of you are aware I often argue against doomsday scenarios; that excesses will be absorbed and wound down over time rather than a D-day. However, rising interest rates is the fire that will light the fuse to global economic hell when sovereign debt has hit multi-trillion multiples of global GDP’s. Everything else follows this core top priority. In the absence of rising interest rates, the elitists and governments have many other chains they can yank on and indeed, they will continue to do so.
Stated another way, maintaining low interest rates allows even just the possibility of a “sustainable” nightmare :), while many here even disagree with that. While a rising interest rate environment is in every way, shape and form unsustainable.
If printing billions out of thin air is the response chosen, as it is, then the cost factor to release those into the economy must remain low. Its a matter of scale right?; like big grocery stores who average a 1% mark-up. Its a tiny mark-up compared to the mark-up needed by smaller stores to generate a profit.
Of course we can argue the other side; the damage being done to the economy by flooding the market with these out of thin air billions, not to mention that the banks receiving it are hoarding it. I just read somewhere that banks are holding onto three trillion cash; not to mention corporations are also hanging on their cash, etc. They’re going to bankrupt the system, etc. dozens of such legitimate observations but all observation of the secondary after the fact reality.
Cheers, Mario