Jan

America’s Institutions, Personified

Imagine, for a moment, if our unscrupulous, overspending Federal [Behemoth of a] Government suddenly lost its abstract nature, and some of its institutions became flesh. They walked and talked like you and me. While we’re on this fantasy trip, imagine furthermore they were honest (or close to honest).

How would the Congress, the Treasury, and the Federal Reserve speak, and what would they say? These three institutions are the Spender, the Piggy Bank, and the Counterfeiter respectively, though just like people they are complex and have conflicting interests.

Congress is:
1) the Spender. Says “We passed this law. We need to fund its implementation. $400,000,000 is necessary.”
2) the Fund Raiser (aka the Tax Levier). Says “We need money to spend. There ain’t no such thing as free lunch. For every transaction on cigarettes, charge $3. On every imported car, charge $3,000. On every hour worked, charge 2.5% of earned wages.”

The U.S. Treasury is:
1) the Piggy Bank. Says “Congress, you can leave your money, raised by taxes and debt issuance here. And when you need it to implement your legislative agenda, from us you shall draw your funds.”
2) the Bondsman. Says, “You need more money to cover short term liabilities? Need to build a dam, or fix some roads, conduct a war? We’ll sell some paper. But like every other bond, you must pay it back at 3%, at 4%, at 5% interest. You’ll get your $4 billion now, but it’ll cost you $4.5 billion over 10 years.”
3) the Creative Accountant. Says, “GAAP rules are for suckers. And besides, government is different. It is less volatile than a private company because it depends on taxes levied on good service, not good service itself. There is no chance for a government default, so what’s it really matter what our books look like to banks and credit agencies? Push those long term liabilities into another set of books that aren’t talked about too much. And could we, just in case, have them hidden from the auditors? If the auditors do find them, and make a stink about it, tell them we have a plan. Here, hand them this 250 page Commission report. It was written by very smart people, you know. Trust me, Congress. One way or another, you’ll get your money.”

The Federal Reserve System is:
1) the Counterfeiter. Says “Psst, Treasury. I hear private banks are getting better returns in the private market than they’re getting from you. Even with risk figured in, it’s getting tough to keep rates so low. Let’s get some of that government debt off their books. I’ll buy it from them at market price. And not a word of worry from you: You see, I have all the money in the world, and then some. (Thanks Congress!) With this new cash banks will make more loans at even lower rates, which includes Treasury bonds. And Boy, do I have a surprise for you! All that interest you pay on your debt that I’ll soon hold… that money goes right back into you pocket! Law of the land; I swear it. You wrote the rules yourself.”
2) the Rate Fixer. Says to the public, “Who likes an expensive loan? All you entrepreneurs, how much easier would it be to turn a profit if you could borrow at 3% and not 7%? Homeowners: Do I hear complains about lower monthly payments? Anybody? These are all man made rates, anyway. And the best financial innovation in the last 100 years has been Central Banking with a ‘Flexible currency.’ Yup – it’s flexible, which means we can stretch and mold it to suit our needs. Certainly convenient – not like that barbaric Gold Standard… geesh, what a bunch of stiffs. No more arbitrary limits on debt. Just fire up the printing presses, err the highly complex and sophisticated computer algorithms, and and watch prosperity abound!” Says, to Congress, “By the way guys – if we keep lowering rates, this means you can borrow more and more until we hit 0%. Borrowed $100 billion at 5%? So what?! Just borrow $100 billion at 3% and use THAT money to pay it back. We’re at 5%/4%/3%/2.5%, now, which means we’ve got some breathing room… for now.”
3 ) the Deal Maker (aka the Cartelist). Says to his banker friends, “You guys sure do have a tough job. I wouldn’t want to be a speculator for a living. I’d almost certainly lose my pants (remember the 70s?). Wouldn’t it be nice if you were all protected on the downside? Do I have some good news for you! That whole class of taxpayers – they’re all suckers. They must take my debt, whether they like it or not. Enviable position, right? I’ll make your lives real easy, but I need some cover. See, it would be too obvious if I bought Treasury bonds right from the Treasury. Even the suckers aren’t that stupid. So instead, YOU buy the Treasury bonds and I’ll buy them from you later on for cash. Oh yeah, and if you ever run out of money with all this crazy “fractional reserve banking,” have no fear. I’ll be your lender of last resort. I protect my friends – of that you can be certain.”
4) the Bubble Blower. Says, to the chattering economists, “What do you mean all that phony capital went into bad loans? What do you mean $2 trillion of wealth just “disappeared” over night? I printed that money myself! This is unacceptable. Absolutely and totally unacceptable. So unacceptable that I’m going to put it RIGHT back where it ought to be. Excuse me? You think this is mere Enron style papering over of bad debt, do you? Well, Mr. Economist, you’re wrong. We are the government, not some criminal enterprise.” Says, to the public, “The weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy.” [Bernanke, 2/15/07]

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