The biblical metaphor from the Garden of Eden, of the fig leaf being used to cover up embarrassment born of knowledge has the implication that "the cover is only a token gesture and the truth is obvious to all who choose to see it." This morning Treasury Secretary Paulson rolled out his fig leaf for the Credit Crisis.

Mr. Paulson also deflected blame for the current tumult away from his administration. “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil,” he said. Under the plan, the Fed would receive some authority over Wall Street firms, but only when an investment bank’s practices threatened the financial system as a whole.

I have long cited Bill Gross' depiction of the Shadow Banking System as the main culprit in our current meltdown. The ability of a bank like Bear Stearns to use off-balance sheet entities and 30-1 leverage to blow their relatively small capital mole hill into a mountain (albeit one made of air) is where our problem lies. But it does not appear that Paulson's remedy would force the next Bear to keep a more conservative reserve policy.

Bill Gross is skeptical that the Fed can continue to lend to investment banks without requiring a more "bank like" reserve policy.

There seems no way that current reserve requirements for banks will not in some nearly uniform way be imposed on investment banks. Leverage and gearing ratios of securities firms therefore, will in a few years resemble those of commercial banks themselves resulting in reduced profitability for major houses such as Goldman, Lehman, and Merrill Lynch.

John McCain warns of the harm of bailing out reckless speculators on the campaign trail. But what does his party do in policy terms? Gross pulls back the covers.

Politicians - especially those on the Republican side of the aisle - are adamant about not using taxpayers' funds to bailout Wall Street or housing speculators, or whoever the current devil may be. The public seems to nod in agreement while at the same time not noticing that their watch is being lifted or their pocket being picked. Let's see: Twelve months ago the yield on your money market fund was 5%+ but your next statement will probably feature something closer to 2%. Did your money market fund (which in aggregate approaches 3 trillion dollars) experience any capital gains in the process? Absolutely not. So it looks like your (the taxpayer's) contribution to the bailout of banks, or Florida condominium speculators can at least be quantified: 3% foregone interest per year on whatever you own. In addition, as pointed out in a previous section, the reflationary (inflationary) implications of all this suggest your contribution to the bailout will be even greater, since you'll likely wind up paying higher prices for many of the things you'll buy.

Many of you scoff at my pointing out the possibility of this inflationary trend. If you don't believe me, look at Bill Gross' track record.