U.S. Blows Trillions Trying to Push a String

As if anyone needed to say that bailouts were going to be a problem -

Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trillion, a government watchdog said on Wednesday.

The Special Inspector General for the Troubled Asset Relief Program said the increase was due largely to the government's pledges to supply capital to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) and to guarantee more mortgages to the support the housing market.

"Indeed, the current outstanding balance of overall Federal support for the nation's financial system...has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases," the TARP inspector general, Neil Barofsky, wrote in the report. 

 The Real Effect
Gee, I wonder who saw that coming?

The downside to this is way above one trillion - This figure is optimistic. If things get ugly, the taxpayers are holding tens, if not hundreds, of trillions of dollars in these "toxic" loans. Oops...

I'd like to draw attention to the fact that was written before the "crisis" hit it's nadir in October.

This would have been the massively inflationary tactics employed by the Fed and others throughout the 90's and 00's. This resulted in massive increases in commodity prices during this span. In 2008 we hit a big brick wall where the inflation naturally gave was to deflation to unwind extreme debt positions held by institutions. (The 2008 crisis) The government's response to this wall, was to substitute a larger and larger can with a boulder. (Increased government debt)

To explain further, the government is going to have to service this new debt (boulder) with new debt at either a higher amount of debt borrowed or higher rate . Yet, the market is saturated with debt both private and public viciously competing for whatever available liquidity is left. (The wall) In order to succeed in averting further crisis, the boulder needs to be kicked through the wall.

Is this possible? As long as there are gullible willing senior citizens clients to buy ever more debt, the boulder can be exchanged for a bigger one and successfully kicked through the wall.

At some point though, demand for U.S. debt will cease to an extent (2011?) and the bills will come due. At this point the government is going to have to figure out a new trick to take care of the debt fiasco. If that trick is money printing, (hyper-inflation) lookout as everything you think you own will suddenly belong to some man down the road named Chen.