If Nassim Nicholas Taleb was more widely understood, then this would have been apparent much earlier. Theoretical knowledge is useless in certain domains and can in fact cause disaster.

His model is very simple: Policy feedbacks are very poor in liberal democracies, because immigration suffers from a temporal illusion, voter rational ignorance, and clientelistic politics. By the time immigration gone into full motion, it has become fully institutionalized. Politicians respond to those client’s who have a concentrated interest and can ignore defuse costs (Olson, 1965; Wilson, 1980). Finally, depending on the timeframe since immigration started, the policies can be seen to diverge, but that is only because each stage has a different response.

The quality of monetary infusion

Then, the result of Fed’s policy of paying interest on reserves:

The Surge in Monetary Base, completely unprecedented in United States' history.

I wonder if there is a solution to this problem. If there is, I doubt the Fed can achieve it. Politics or ignorance will stop them.

The institutions of the United States are deeply dysfunctional. Congress and the President think that they can borrow and spend their way out of this hole. The U.S. must adjust consumption downward and savings upward. Every household knows this to be the case, but the government cannot, for reasons of political economy, readjust. We are in a tailspin and the pilots think they are on a merry-go-round.

1. Who is asking if TARP et. al is working? Congress? Anyone? And the fact that something didn’t happen isn’t proof that what the Treasury did stopped it from happening. It might not have collapsed had the Treasury done nothing. We can never know the counterfactual. 

2. The Treasury is using a market indicator (CDS) derived from the same market players that caused the massive misevaluation of the CDO market in the first place. WOW, that is reassuring. Why not assess the program using the analysts from Moody’s while you are at it. 

3. The last indicator (the spread between LIBOR and OIS) is probably, at best, a secondary indicator derived by people that look at the CDS market to tell them the soundness of the credit market.

One gets a distinct feeling that if the Treasury is willing to put out this BS, that the whole thing is totally out of control. This is not proof. This is not scientific. This is speculation, and it all stems from Paulson’s assertion that TARP was needed to stop a complete meltdown of the financial sector. That assertion was and is unprovable.

People also ask: when we will see banks making new loans? First, we must remember that just over half the money allocated to the Capital Purchase Program has been received by the banks. Although we are executing at record speed, it will take a few months to process all the remaining applications. The money needs to get into the system before it can have the desired effect. Second, we are still at a point of low confidence – both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, we expect to see more credit extended.

So tell me Paulson, how do you instill confidence in the economy? By having the Fed play hedge fund? Quantitative easing? By shorting the Dollar? Oops. I wasn’t supposed to say that. I mean, by sending out email updates.

This lending won’t materialize as fast as any of us would like, but it will happen much faster as a result of having used the TARP to stabilize the system and increase capital in our banks.

We firmly believe that healthy banks of all sizes should use this program to continue making credit available in their communities. Treasury expects banks to increase their lending as a result of these investments and we firmly support the statement issued by bank regulators on November 12 to that effect. The statement emphasized that the extraordinary government actions taken to strengthen the banking system are not one-sided; all banks – not just those participating in the CPP – have benefited from the government’s actions. Banks, in turn, have obligations to their communities to continue making credit available to creditworthy borrowers and to work with struggling borrowers to avoid preventable foreclosures. At the same time, Treasury believes institutions must not repeat the poor lending practices that were a root cause of today’s problems.

Great. Thank you Henry, for thinking about our communities. Because your firm, Goldman Sachs (Ticker: GS) sure thought about our communities as they funneled billions of dollars of into the CDO market and CDS market. Take your loans, and eat’em.

Iran works full speed ahead to obtain nuclear weapons. The E.U. and U.S.A. are unable to discourage them in this process. Additionally, E.U. membership is blocked to Turkey by a number of factors but mostly France’s and Germany’s fear of the massive changes owing to Turkish immigration. Turkey, finding itself shut out of the E.U., proceeds to seek its own security strategy to balance out Iran’s acquisition of the bomb. What does Greece do? It gets busy on nukes, either in secret or openly. At that point all hell breaks loose as Brussels cannot keep E.U. members in line. Already there are problems with the Bulgarians. Not even to mention the NATO problems. The cracks could get deeper if such a thing happens… oh wait, look here.

Looks like Turkey knows what’s going on. Atom Bombs all around!

What is the difference you might ask? The state is composed of all of its constituent institutions. The Constitution forms the bedrock of the U.S. state and guarantees my rights as a citizen.

I love all of my freedoms, especially the one where I am innocent until proven guilty in a court of law, and that I have the right to a fair, speedy trial. That right is awesome. Too bad, Bush et. al. think authoritarian courts are more apt for the current reality. Thank God for corrective institutions like the Supreme Court; too bad the current Executive doesn’t share the same respect for the Constitution. And that is the point. 

Governments vivify the state. We would be more clear on this if we had a parliamentary system like Britain or Canada. People of particular parties form a government, which then occupies the positions of the state.

In the US, the President is both the head of state and the head of his government. It is unfortunate, to my mind, that this is the case. Because when one disagrees with a policy of the government, it is only a turn of a corner before they hate America. It is pretty clear that throughout history the arrogation of power to the executive branch is par for the course. It is too bad that the Founders were not able to see this in advance. If the executive instead was chosen from amongst the ruling party in the Congress, and he could be voted out through a no-confidence vote, his powers would be naturally curtailed. This would also make it clear that criticism of the government was not criticism of the state.

Why do I bring this up? Because I love my country for all the rights and freedoms that have been bestowed upon me. Those rights have been handed down since 1215. But they don’t enforce themselves, and they become meaningless if thugs trounce on them when it is in their interests to do so. From the local cop who arrests someone because he thinks he has the right to detain anyone for his own reasons, to the President who does the same, the Constitution must be lived day by day to be real. That means people must live up to the ideals of the state and of the Constitution; being bestowed with power doesn’t instantly furnish wise use of that power. That is an important distinction.

Bye bye 1648…

Thanks U.S.A.