Who bails out the US government?
No one. We have to avert the need for that by reprioritizing now.
Unlike when a firm is in danger, if the US government collapses there is no backstop; there is no one to bail us out.
What the government needs is a plan that puts the US on a gradual path to bring the budget back into balance before a financial crisis larger than this one forces us to.
Though the $700 billion package comes at a time of need, it comes also at a time when the government's finances are weak. The danger is that in trying to bail out one exploding economic bubble the nation may be creating another debt bubble that will ultimately explode.
Rather than paying off our mounting and increasingly burdensome debt, we borrow more every year. The federal debt is currently $10 trillion, and next year's deficit is likely to add more than $1 trillion more. And even these numbers pale in comparison to our implicit exposure, as we've promised $40 trillion in pension, Social Security, and Medicare benefits.
As subprime mortgage holders were relying on the housing market to continue to grow at the anomalous rate seen in the late 1990s and early 2000s, politicians are counting on impossible levels of economic growth to sustain Washington's addiction to debt.
When that growth doesn't occur – and it won't – and America's Financiers realize it isn't coming, there will be serious trouble.
The next months will be devoted in large part to dealing with the flagging economy, and rightly so. Policymakers must act now to fix the budget mess and stabilize the economy.