In the last week, the Treasury Department and the Federal Reserve each announced a major policy initiative for the stated purpose of reversing our economic woes. Don’t hold your breath.

The Treasury’s gambit is a proposed public-private partnership to remove troubled (“toxic,” if you prefer the more dramatic adjective) financial instruments from the balance sheets of key banks. This, it is hoped, will “unclog” the financial arteries and get credit flowing more normally again.

Unfortunately, there are several holes in Treasury Secretary Tim Geithner’s plan.

First, if these financial assets represent bargains at today’s depressed prices, wouldn’t profit-seeking capitalists eagerly scoop them up without government encouragement?

Second, although astute moneymen already know it, the Treasury has confirmed that these assets are the financial world’s “old maids”-the pieces of paper that nobody wants, because they mean “you lose.” The Treasury’s plan relies on government (read: “taxpayer”) subsidies in the hope of luring private partners in this venture. The private partners would contribute only one out of every 13 dollars to purchase troubled assets. The public sector would put up the other 12.

Third, as we have come to expect from the Washington bailout crowd, there is no transparency about how they will choose which financial institutions to assist or which private firms will receive these newly created subsidies.

Fourth, sensing that supplying 12 out of every 13 dollars won’t be inducement enough to entice participants, Secretary Geithner-less than a week after the brouhaha about AIG bonuses-assured potential partners that his office would allow private firms to keep their bonus programs intact. You gotta be kidding me!

Call it a private-public partnership if you want, but the private part is so small that it is nothing more than a skimpy fig-leaf that does little to hide what remains an essentially public bailout of financial firms.

I can see only two types of takers for this proposition: shrewd insiders who will finagle a can’t-lose deal for themselves (possibly repaid by other favors not apparent to the public), or sharks who are in a financial pickle and so are willing to take on extra risk because at least they’ll get one last bonus out of it. Maybe it will work out better than this, but I think Geithner’s plan is more of the same-call it “a bailout in drag”-and offers a false hope for recovery.

The other policy change of the past week is quite different, in that it represents a major policy shift. Unfortunately, it brings with it a great danger. I refer to the Federal Reserve’s high-risk strategy of monetizing government debt by buying debt instruments of both the Treasury and Fannie Mae and Freddie Mac.

Just a week or two ago, Chinese Premier Wen-obviously concerned about the U.S. government’s runaway spending and future viability of the dollar-expressed his hope that Uncle Sam would “maintain its credibility, honor its commitments and guarantee the safety of Chinese investments.” Wham! I don’t know if Team Obama was sending a message to the Chinese to keep their thoughts to themselves, but the Fed’s surprising policy announcement quickly slashed the value of the dollar in the foreign exchange markets. So much for the safety of China’s dollar investments.

There is real danger in this policy. The Fed is injecting what economists call “high-powered money” into the system. If this succeeds in stimulating economic activity, then the velocity (rate of turnover) of dollars may accelerate rapidly. Faster velocity, on top of a dramatic increase in the supply of money, can lead to galloping inflation, and once that genie gets out of the bottle, you never know if you’re going to get it back inside again.

What should alarm us all is the following endorsement by Dr. G. Gono, a foreign central banker: “Banks . in the USA . are now not just talking of, but also actually implementing, flexible and pragmatic central bank support programmes.. That is precisely the path that we began over four years ago.”

Dr. Gono is Governor of the Reserve Bank of Zimbabwe, where inflation has soared as high as 230 million percent and trillion-(Zimbabwean) dollar notes are common. Dr. Gono’s approval is a classic example of “damning praise.”

A closing word of caution here: I am NOT saying that hyperinflation is imminent. The deflationary pressures of collapsing credit and derivative bubbles may outweigh the Fed’s radically inflationary monetary policy for months, possibly years. All I am saying is that the Fed has raised the stakes for us all. Bernanke & Company are risking the health of the dollar in a desperate attempt to prevent the deflationary liquidation of the massive debts that we have accumulated. An economic collapse is bad enough, but an economic collapse accompanied by a dollar collapse would be even worse, reminiscent of what happened to the Weimar Republic in 1923. Let us pray that we dodge that bullet.

Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and contributing scholar with The Center for Vision & Values at Grove City College.

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