Selling Congressional guarantees

Not too long ago, during the depths of the global crisis, the finance industry was on the brink of collapse. How times have changed.

Friday’s revisions to U.S. gross domestic product contained news on fourth-quarter profits. Top-line, or pretax, operating profits economywide hit a record high at the end of 2010. All of the gain was in the financial sector. WSJ Reporting

What value added is the financial industry providing? Government guarantees that Congress will always cover the Treasury debt. Foreign lenders know America is inflating part of the trade deficit, and they include that loss in their calculations. They are once again fooled by the illusion that this partial default will be smooth, but we know that economists always get the math wrong. The partial default on our foreign borrowings will be sudden, and taxpayers assigned to cover the costs. But taxpayers and voters are learning, from the example of Ireland and Iceland, that we can give sudden haircuts. When the haircuts come, the financial industry will once and crash badly. The economists will assert heteroskedacity, and claim innocence.