So Who Bails Out the Bailout?

Secretary of the Treasury, Hank Paulson, has wielded more power than anyone in Washington, DC since George W. Bush ordered General Patraeus to surge in Iraq. He has taken upon himself the unofficial title of Sugar-Daddy In Chief and, left the incoming maladministration of President-Elect Barack Obama a problem that I wouldn’t wish on one of Louis Farrakhan’s neighbors.

Secretary Paulson’s TARP program has made government, not the consumer market, the primary source of liquidity for the financial industry. For the nonce, that gives government a level of power over this industry that scares anyone who remembers how poorly the command economy functions in the real world.

Secretary Paulson should gleefully leave town with President George W. Bush. The price tag for his fiasco has begun to come due. The people who usually finance such dystopic adventures have begun to balk precipitously. The Long Bond (30 Year US Treasury Bonds), has begun to sell like Northern Virginia Real Estate – after 2006.

Bloomberg.com describes the carnage.

The bonds drew a yield about 9 basis points above the level in pre-auction trading. At 4.31 percent, it was still the lowest since regular sales of the security began in 1977.

With mortgages now pegged to the 10 Year Bond, that, in and of itself, would not be cause for discontent. However, the Fed is on the hook for over $2tr in assets and is acquiring in excess of $100bn/week. Like the rest of the world, the Fed eventually has to pay for this. If they can’t get it done via debt finance, they send the IRS to play Louie the Loan-shark.

Elizabeth Moyer of Forbes Magazine estimates that the US Government has assumed north of $5tr in obligations when all the actions taken to stop the financial pain are totaled up. Thus, it doesn’t shock anyone that the Long Bond doesn’t look terribly attractive for rates under 4.5%.

So the government faces a nasty question. Treasuries, according to Blogger Gregor MacDonald, are far less attractive than the corporate bonds being sold to finance energy infrastructure. Also, panic cash that fled the initial “breaking of the buck,” that resulted from low central bank interest rates, has been sopped up by previous treasury auctions.

As more and more treasury debt chases fewer and fewer interested buyers, the government asks itself “How do I pay for this mess?” Well, no, they never have to ask that question. They ask instead, “Which portions of the citizenry can I politically afford to hit in the wallet?” After all, President Obama may soon have a bailout he needs to bail out.