Senator Mary Landrieu’s blatant extortion of a broken system shows just how broken that system is... and how “the tragedy of the commons” has become the tragedy of government.

For those of you who recall the classic ‘80s flick The Karate Kid, this feels very much like a Mr. Miyagi market. The name of the game is “Risk On, Risk Off.”

Last week, it was “Risk Off” as three-month Treasury bill yields went negative. But then on Monday, markets opened with a roar as it was suddenly “Risk On” again. (Meanwhile, computerized trading programs continue to “paint the tape” rather than paint the fence.)

Assigning motive to Monday’s opening ramp, The Wall Street Journal highlighted “excitement over a statement from a Federal Reserve member that the U.S. should continue buying mortgage-backed securities past the first quarter of 2010.”

Oh, joy – no cynicism there. Thanks to looming mortgage resets and rapidly rising homeowner defaults, the Fed is now playing up its funny money market plans four to six months from now.

If the Dow doesn’t hit 11,000 on this heartening news, what pray tell will keep it flying?

Certainly not the rising ranks of unemployed, for whom a modest touch of mortgage relief means less than diddly squat. (Twenty-five percent off “no way we can afford it” roughly amounts to “nope, still can’t afford it.”)

But, ‘tis the season to give thanks for cynical bribes... so investors bow their heads and tuck in.

Nothing to See Here...

In highlighting another outrage that sheds light on how the system really works, let us put aside for a moment the fact that pumping up paper assets through deliberate debasement of the currency is tantamount to outright theft. Let us overlook the sad truth that, for a retiree with $100K in defensive cash savings, a 5% $USD devaluation is akin to filching five grand directly from grandma’s mattress.

Let us further whistle right past the fact that inflation is a form of taxation without representation... and that this hidden tax on savers, meant to benefit rich paper-mongers, is deeply progressive in the reverse.

Via progams of paper asset inflation, the “rich get richer and the poor get poorer” in a very literal sense. The smaller the net worth, the bigger the bite taken as a result of dollar-destructive ‘stimulus.’ Those who spend the greatest portion of their incomes on staples like groceries and gasoline feel the burden the most. Those with great concentrations of paper wealth – for whom cost-of-living expenses are a rounding error of net worth – feel the pain least, and actually benefit in paper asset terms on the whole.

This sad state of affairs is not an accident, by the way, but rather the entire point! How else can America’s wealth – which cannot be created from thin air, despite what some think – be transferred into the pockets of those who sit at the highest tables?

(As an aside, one can’t help but marvel. A true-blue Democratic administration, wholly embracing monetary policies that give to the rich and steal from the poor? Who would’ve thought?)

The New Louisiana Purchase

But no, the topic of discussion today is the old-fashioned cash-money bribe... the straight up, greased palm, dirty money backroom deal of the sort that gets things done in Washington.

Over the weekend, the Hill was abuzz with talk of the new “Louisiana Purchase.” As The Washington Post reports:

On the eve of Saturday's showdown in the Senate over health-care reform, Democratic leaders still hadn't secured the support of Sen. Mary Landrieu (D-La.), one of the 60 votes needed to keep the legislation alive. The wavering lawmaker was offered a sweetener: at least $100 million in extra federal money for her home state.

And so it came to pass that Landrieu walked onto the Senate floor midafternoon Saturday to announce her aye vote – and to trumpet the financial "fix" she had arranged for Louisiana. "I am not going to be defensive," she declared. "And it's not a $100 million fix. It's a $300 million fix."

There are many more gory details to the story. But the gist of it is, Democrats are desperate to pass some measure of healthcare reform no matter what; sharply opposed Republicans have the Dems over a barrel; and the result is extraordinary power in the hands of a few opportunistic holdouts.

Sen. Mary Landrieu of Louisiana, the new queen of the holdouts, did a masterful job of exploiting her party for the sake of her state. And in supporting the bill, she made clear that more blood would be drawn from the stone.

“My vote today,” Senator Landrieu said sweetly, "should in no way be construed by the supporters of this current framework as an indication of how I might vote as this debate comes to an end."

In other words, the desperate fools who bought Lousiana’s support at a grossly high price – here’s looking at you, Harry Reid – had better be willing to bleed even more.

The Tragedy of the Commons

This isn’t just another one of those “gosh, isn’t politics awful” type stories. It is a glaring example of how the U.S. political system is broken – and why at some point in the cycle it may prove to be doomed.

The problem we face can be described as “the tragedy of the commons.”

The term was first introduced by an ecologist named Garrett Hardin in 1968. Per Wikipedia, the tragedy of the commons describes

a situation in which multiple individuals, acting independently, and solely and rationally consulting their own self-interest, will ultimately deplete a shared limited resource even when it is clear that it is not in anyone’s long-term interest for this to happen.

To understand the tragedy of the commons in simple terms, think of fishermen and fish. As the population of, say, bluefin tuna declines, the price per pound of bluefin tuna goes up. This gives incentive to hardworking fishermen to catch as many bluefin tuna as they can, both to book large profits and to take advantage before the bluefin tuna supply runs out. No single fisherman would declare an interest in seeing the bluefin tuna go extinct. In fact, all might lament the situation even as it unfolds. But most all would also shrug and say “what can you do” as they go on fishing.

This is the tragedy of the commons. It is also the tragedy of government, as the Louisiana senator’s actions reveal. The politicians on the Hill see their main job as “bringing home the bacon” for their lobbyists and constituents. That is how they get re-elected... and never mind the health of the pig.

A Tragicomic Finale

One might remark that bleeding the patient is business as usual. The frightening thing is, current times are far from "business as usual"... and yet Washington has no clue.

During periods of legitimate wealth creation (i.e. when the economy is actually expanding), the dog can handle a few extra fleas. But now, in the aftermath of a devastating period of wealth destruction – and at a time when monetary policies are actively poisonous to large swathes of the economy – such a cavalier attitude is potentially fatal.

Nor is it just the great state of Louisiana we wish to pick on. Rather, Senator Landrieu’s actions are all too common... reflective of the entire Hill. This is another reason, perhaps the biggest reason, why LBJ “great society” type programs, even when implemented with the purest and best of intentions, are so dangerous in bleak fiscal times such as these. The bigger and more ambitious the program, the more opportunity for self-interested leeches and remoras to hitch a ride on the soft underbelly of dense legislation (too dense for anyone in their right mind to read).

In its current weakened state, in other words, America simply cannot afford the staggering “tragedy of the commons” tab that is part and parcel of quixotically ambitious programs. And yet we appear destined to pay... and then pay and pay some more... until the tragicomic finale finally takes hold.

Other Related Topics: Barack Obama , Democratic Party , Healthcare Industry , Justice Litle , Macro Trader

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