If last week’s (ill-timed) AIG-bonus news and (overheated) Congressional response hasn’t convinced you to take a break from all forms of media, here’s some insight from David Smick on the unintended consequences of last week’s debacle.

Smick says that last week’s chain of events has “(1) created an unprecedented populist uprising across the nation which has made the words “bank bailout” politically radioactive; which (2) is already scaring potential outside investors who might have participated in the Treasury’s upcoming public/private scheme to remove the banks’ toxic assets (investors now fear that if they make a financial killing, they’ll be dragged down to a torture chamber in the basement of the U.S. Capitol building).”

The problem goes several points deeper …

Here’s how, according to Smick:

1) The banks need to be fixed if the stimulus package and federal budget is to work;

2) The budget is growing increasingly unpopular (mainly, due to its provisions for nearly $1 trillion more in bank bailouts);

3) The friction could hurt GDP growth (and boost the short-term deficit-to-GDP ratio);

4) Long-term interest rates would, as a result, rise;

5) To keep rates down, the Fed accelerated its plan to purchase $300 billion in long-term Treasuries over the next six months; and

6) That move increased inflation concerns.

Smick says that the AIG-Congress mess may have two ultimate consequences, the second of which is rosier than the first: (1) long-term damage to the future of the U.S. financial system; or (2) the impetus for the Obama Administration “to come up with more imaginative, less special interest-oriented solutions to the financial crisis.” ###