THE BLOG

Deficits Are Too Important To Be Left To Governments: Call in Fabulous Fab

05/10/2010 02:04 pm ET | Updated May 25, 2011

Democrats once followed the dictum of FDR aide, Harry Hopkins, "Tax and tax, spend and spend, elect and elect!" In the '80s they discovered Americans did not like taxes. Today Democrats march under the banner "Borrow and borrow, spend and spend, elect and elect."

Republicans believe in cutting taxes and reducing spending. Except when they are in power. Then they discover that Americans don't like reduced spending. During their eight-year terms Reagan and Bush II increased federal spending by 69 percent and 104 percent respectively.

Both parties hate deficits and increasing the national debt. Except when they are in power. Then, as Dick Cheney pronounced, "deficits don't matter." The Congressional Budget Office forecasts that that under Obama's plan, the national debt will rise 52 percent by 2016. This would place Obama slightly ahead of Bush II's two-term 45 percent increase, but far behind Reagan's 83 percent increase.

We now must choose either Democrats who like spending but are afraid to raise taxes, or Republicans who hate taxes but are afraid to cut spending. How can we lose? Either way we get the spending that we want and avoid the taxes that we hate.

Misguided economists worry that this policy is irresponsible because it produced $1.6 trillion deficit in 2009. The resulting federal debt stands at $12.6 trillion, nearly equal to GDP and more than $113,000 per US household. Alarmists warn we are becoming the Greece of the New World.

These defeatist lack faith in America. We always can solve our problems by applying good old American know how. By doing what we do best. Other countries may make better cars, flat-screen TV's, and designer clothes, but we make the best structured-finance instruments in the universe.

My plan is:

1. The federal government establishes GovBanc, a wholly-owned bank holding company.

2. GovBanc receives TARP funds.

3. GovBanc uses TARP funds to purchase outstanding federal debt.

4. GovBanc repackages the purchased federal debt in into collateralized debt obligations (CDOs).

5. Moody's and S&P rate CDOs AAA since they are backed by US Treasury securities.

6. GovBanc sells AAA-rated CDO's to the Chinese who are running a trillion-dollar trade surplus and must find a place to invest their dollars.

7. GovBanc uses proceeds from sale to the Chinese purchase additional federal debt.

8. Go back to Step 4 until GovBanc holds all Federal debt.

Once GovBanc holds all federal debt, we employ America's unrivaled our expertise in deal making, accounting, and financial engineering:

1. The federal government enters into a reverse merger with GovBanc.

2. On the books of the merged entity the debt previously held by GovBanc offsets the debt previously issued by the government. The merged entity cancels its debt to itself.

3. Government then spins off GovBanc with few assets and trillions of liabilities.

4. GovBanc uses the accounting technique "Repo 105" to conceal its liabilities.

5. GovBanc writes trillions of Credit Default Swaps against itself.

6. Gov Banc hires "Fabulous Fab" Fabrice Tourre.

7. The US Treasury buys the short side of the swaps.

8. Fab foists the long side of the swaps on dumb foreigners.

9. GovBanc declares bankruptcy.

10. The Chinese are left with worthless CDOs.

11. Foreigners are left with worthless credit default swaps.

The Government now has a surplus, the dollar strengthens, domestic interest rates decline, consumer confidence rebounds, and a new housing bubble begins.

My only worry is that officious regulators will stifle the plan.