The insight at the core of the conservative disposition—that the future is invariably worse than the past—enjoys daily confirmation as the economic crisis deepens.  It seems that in many respects we have entered a new world, which, given the circumstances of its birth, is sure to be rather grim.

We got a good glimpse at that grimness in the testimony of former Secretary of the Treasury Hank Paulson before the House Oversight Committee on the rationale behind the bank bailout.  According to the Independent, as Lehman Brothers failed last fall, “The Bush Administration and Congress discussed the possibility of a breakdown in law and order and the logistics of feeding US citizens if commerce and banking collapsed. . . . Paulson said it was important at the time not to reveal the extent of officials’ concerns, for fear it would ‘terrify the American people and lead to an even bigger problem.’”

A problem for whom?  Why, for the banks, which had stolen the savings of the American people.  Or, as the Independent put it, “Mr Paulson testified to the House Oversight Committee on the Bush administration’s unpopular $700bn (£426bn) bailout of Wall Street, which was triggered by the failure of Lehman Brothers last September.  In the days that followed, a run on some of the safest investment vehicles in the financial markets threatened to make it impossible for people to access their savings.”

Before the peasants with pitchforks showed up at the castle gates, the banksters had to come up with the money they had lent and lost, and there was only one possible source: U.S. taxpayers.  Like a pickpocket of unusual skill, capable of picking both pockets at once, they got us coming and going, spending their ill-gotten gains and getting bailed out in the end, sticking the hoi polloi (that’s us) with the bill.

How do you pull off something like that?  Easy.  Just scare the politicians witless.  Paulson’s testimony wasn’t as revealing as some of the questions.  U.S. Rep. Paul Kanjorski, a Pennsylvania Democrat, had some inside details that should have made headlines and didn’t: He asked the former Treasury secretary “to reveal details of officials’ concerns, which were relayed to Congress in hasty conference calls last year,” reports the Independent.  According to Kanjorski, “The calls included discussion of law and order and whether it would be possible to feed the American people, and for how long.”

The public was on the verge of learning the dark secret at the heart of the “capitalist” economy: It is all a hoax.  The banks were bankrupt—as, indeed, they always have been, since they are basically insolvent institutions that are engaged in a gigantic fraud.  As Murray Rothbard pointed out, “Most commercial banking is ‘deposit banking’ based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time.”

The imminent collapse of this Ponzi scheme threatened to throw back the curtain on the banking cartel and dramatize quite vividly the Rothbardian insight: “Essentially, they are counterfeiters . . . Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes.  This sort of swindling or counterfeiting is dignified by the term ‘fractional-reserve banking,’ which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem.”

Joe Citizen would show up at his bank, stick his ATM card in the slot, and nothing would come out.  Faced with this prospect, our rulers were frantically calculating how long before food riots would commence and their own power would be imperiled, not to mention their skins.

The banksters came to the politicians and pointed out that, if they went down, they would all go down together, so Washington had better pony up.  “‘I looked at the ripple effect, and looked at when a financial system fails, a whole country’s economic system can fail,’ Mr Paulson said.  ‘I believe we could have gone back to the sorts of situations we saw in the Depression.  I try not to use hyperbole.  It’s impossible to prove now since it didn’t happen.’”

That “ripple effect” would likely have swept away the system that makes the swindle of modern banking possible: the “private” and supersecretive Federal Reserve, at whose head sits the board of governors and the counterfeiter-in-chief.  As Paulson told Kanjorski, “If we had a meltdown of the system, this could even lead to chaos or people even questioning the basic system.”

Yet the bubble created by the Fed is still in the process of bursting: Paulson and his friends have been granted a reprieve—one that may prove shorter than they hope.