A Policy Of Bailouts Will Increase Their Number

Former President of Federal Reserve Bank of St. Louis, William Poole once accurately observed that ``Everyone knows that a policy of bailouts will increase their number.”

And the addiction to bailouts seem to be snowballing at a very rapid clip.

Following yesterday's passage of the $838 billion stimulus package in the US Senate, the US government through its Treasury Secretary Timothy Geithner announced a far bigger rescue package and "envisions a far greater government role in markets and banks than at any time since the 1930s", reports the New York Times.

And the rescue plan translates to commitment of as much as $2.5 trillion!

Again from the New York Times, ``Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money."

The $2.5 trillion Geithner plan...

Bloomberg quotes Treasury Secretary Geithner, “Instead of catalyzing recovery, the financial system is working against recovery, at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it....I want to be candid: this strategy will cost money, involve risk, and take time."

Obviously, the US government's approach in resolving the unsustainable debt problem is to do the same, pile on more debts.

So far, the US government commitments have reached nearly $8.8 trillion and spent $2 trillion according to the New York Times and the Geithner plan and the latest stimulus package should add to this.

Nonetheless all of these government spending will translate to exploding fiscal/budget deficits which the Casey Research team estimates to reach nearly $3 trillion (Investor's Business Daily)

But with bank related losses nearly at $ 6 trillion, according to Robert Reich (RGE Global), ``Goldman Sachs -- not one to exaggerate the overall problem -- recently estimated the total value of troubled U.S. bank assets to be $5.7 trillion", we can expect even MORE taxpayer exposure in the future.

And Prudent Bear's Doug Noland has nailed it in his article (bold highlights mine) , ``The Government Finance Bubble is being called upon to reflate with little assistance from private Credit, while at the same time it is faced with a Deeply Maladjusted Economic Structure still overly dependent upon inflationary Credit expansion. Throwing mega-Trillions at our distorted economy is just asking for trouble.

``It is in this context that I fear that the Trillions of Government Finance spent to save the world from “deflation” will, in the end, require perpetual needs for Trillions more. There will be no kick-starting asset Bubbles or a return of private-sector Credit excess. Instead, it will be a case of throwing repeated doses of government-directed finance/purchasing power at the system. Temporary but fleeting economic boosts will then require only stronger doses of artificial stimulus.

``We’ve commenced a new cycle dominated by government electronic printing presses in all their various forms. The inflationary consequences will be a different variety than we’ve grown accustomed to from previous reflations. But the bottom line is – and there’s ample history to support this view – that once the “printing presses” get humming along it’s going to be darn difficult to slow them down."

Overall, a policy of inflation begets more inflation.

And that's where we are likely headed for. But don't count on a benign outcome.