Over the weekend the feds walked away from Lehman Brothers (NYSE:LEH), leaving it to file for Chapter 11.

This is how the real world works, says Bill Bonner. “When you can’t beg, borrow or steal the cash to pay your current obligations, you go bankrupt.”

The question now is how long the US can hold out as the greatest debtor the world has ever seen. And for how long America’s creditors are going to keep propping up the dollar. The sinking of Lehman and the lethal threats posed to the likes of AIG (NYSE:AIG) and WaMu (NYSE:WM) will severely test dollar holders’ confidence in the buck…

This from The Daily Reckoning:

When you can’t beg, borrow or steal the cash to pay your current obligations, you go bankrupt. That’s why the feds stepped in and took control of Fannie (NYSE:FNM) and Freddie (NYSE:FRE). The mortgage lenders needed cash.

And at the rate of interest private lenders wanted - to protect themselves from the unlikely chance that Mac and Mae might not be able to repay - it looked like they would never be able to get themselves out of their $100-$200 billion hole.

“Imagine that you have a note from a company that is doing poorly,” writes colleague Simone Wapler in the new French edition of MoneyWeek magazine. “You’re afraid, because if the company fails, it won’t be able to pay the note, and then you’ll be in trouble too. But the owner of the company comes and tells you not to worry. He says he’ll bailout the company himself. But knowing that the owner is himself deeply in debt, are you reassured?”

In the present case, the Mother of All Bailouts is underway…and the Mother of the Mother of all Bailouts is none other than the biggest debtor in the entire world. In fact, so great are its debts and obligations that there is no way it could ever repay them, at least not honestly - and everyone knows it.

As to all that, the facts are clear; but beyond the facts we find nothing but guesswork and question marks. As long as people have confidence in the dollar, there should be no problem, right?

But how long can people have confidence in the dollar when its custodians are spending it so freely? U.S. government expenses are soaring…just as receipts decline. We already have a deficit of about $400 billion. No one knows how much the bailout of Fannie and Freddie will add, but it could be hundreds of billions.

And if the slump continues, we could soon be looking at a deficit of $1 trillion. Some analysts - notably, Albert Edwards of Societe Generale - are warning against deficits of $2 trillion. Is there no limit to how much the government can borrow? How much it can spend? Won’t there come a point when the dollar loses value…and when creditors get scared?

The answer to those last three questions is: yes. And that is what will make the next few years so entertaining; we’re going to find out how much the United States can get away with before it goes broke.

Of course, the financial world is full of mountebanks, cads, and imposters. Who can forget Alan Greenspan’s famous remark that a nationwide decline in housing prices was “most unlikely?” Or Ben Bernanke’s suggestion a year ago that subprime losses wouldn’t exceed $100 billion (they’re now about $500 billion, and still growing)? Or bond appraisers’ Triple A ratings for what turned out to be junk debt?

“I have enormous confidence in BSAM [Bear Stearns Asset Management] and the ability of our talented professionals… You can count on us to deliver,” wrote James E. Cayne, CEO of Bear Stearns to his customers a year ago. The talented professionals on Wall Street did make good work of it, taking the bumpers off portfolios all over the world.

But it is where the scam of government - that every citizen can live at the expense of everyone else - meets the scam of finance - that we can all get rich without working, saving, or taking any risk - that the biggest wrecks occur. Last Sunday, we heard the rubber squeal: the U.S. government took control of Fannie Mae and Freddie Mac - America’s government sponsored mortgage backers.

The Financial Times dutifully reported that this nationalization - the biggest in history - will cost the government $200 billion. USA Today reported only that it put the taxpayers on the hook for “trillions.” Asked the question by a reporter, Mr. Paulson, Secretary of the Treasury and the man who should know, replied: “We didn’t sit there and figure this out with a calculator.”

Thus did he drive the nation into the most dangerous intersection in economics - blindfolded. But did bond investors cover their eyes - aghast at the accident that is about to happen? No, they bought the government’s paper! Yields fell. Did the taxpayers cringe and howl, in pain and outrage, at the huge new burthen placed upon them on Sunday night? No again.

Of course, a nation that robs Peter to pay Paul won’t get a whine out of Paul. But what did they think? That they would never have to pony up a cent? But there is the point of collision right there. The taxpayers believe the credit of the United States is an unstoppable force. Investors believe the dollar is an immoveable object. Both believe the United States is crash-proof…and that no one will ever have to pay for its bailouts, its bamboozles, and its busted-up humbugs.

Check your airbags.

Source:  When Scams Collide