The Pyramid I
Part I: The Double Act
By: Kian Mokhtari
US Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben Bernanke accomplished what can only be described as an astonishing double act to deceive the world markets last week.
On Monday, the last day of the first financial quarter, Treasury Secretary Henry Paulson elaborated on his plan to overhaul US market regulation, overshadowing the manufacturing data from the US Midwest: The National Association of Purchasing Management – Chicago, released its report on business activity in the Chicago-area manufacturing sector in the month of March, showing that activity contracted for the second consecutive month.
In a speech delivered in Washington Monday morning, Paulson called for sweeping changes to government regulation of financial markets, giving the Federal Reserve additional authority while proposing the streamlining of other government agencies in the “largest overhaul of bank supervision since the Great Depression.”
Mr Paulson’s performance was followed by a two-day trip to China later in the week where he urged China –at Tibet and Olympics boycott gunpoint- to move ahead with financial market changes, despite growing concerns about the economic downturn in the United States. In other words Mr Paulson told the Chinese they had little choice but to purchase yet more US bonds so the Fed can print more dollars to assist a cash-starved US financial market.
Mr. Paulson drove the point home to a China already sitting on a 1.5 trillion dollar mountain of US currency and bonds, he said: “I expressed our concern about the violence and urged a peaceful resolution through dialogue.”
Although Mr. Paulson graciously admitted, “There’s no doubt what is happening in the U.S. markets clearly has to give the Chinese pause,” he also gave the game away when he added: “For China, the challenge is to save less and spend more.”
Bernanke on the other hand, testifying before the congressional Joint Economic Committee on Wednesday, called to examine whether the Fed was justified in providing up to $30 billion to facilitate the sale of Bear Stearns Cos. to JP Morgan Chase & Co, had other concerns on his plate.
The Federal Reserve moved to assist the Wall Street investment bank on the brink of bankruptcy.
The US’ fifth largest investment bank became the biggest victim of a severe credit crunch that has finally turned the tables round on US free-wheeling ‘creditism’ or was that capitalism?
Democrats on the Senate Banking Committee said they wanted to find out what pressures the Bush administration had brought to close the sale and whether big investment banks were getting preferential treatment over millions of Americans in danger of defaulting on their mortgages and inevitably losing their homes.
Senate Banking Committee Chairman Christopher Dodd asked at the beginning of the hearing: "Was this a justified rescue to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout for a Wall Street firm while people on Main Street struggle to pay their mortgages?"
Sen. Jim Bunning, R-Ky., asked, "How big do you have to be to be too big to fail? ... Who let our financial system become so fragile that one failure jeopardizes the health of the entire system?"
Bernanke said that if Bear Stearns had been allowed to fail, it would have led to a "chaotic unwinding" of Bear Stearns investments held by individuals and other financial institutions.
Bernanke added, "Moreover, the adverse impact of a default would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability."
So Mr Paulson is actually preaching deregulation at a time when regulating US financial institutions is the only viable –and peaceful, from a US foreign policy perspective- solution.
The Housing bubble in the US was $8 trillion with only around $2 trillion available in cash and there were no regulations to oblige sub-prime lenders to show they had the means to lend in the first place!
Would that not be a major lack of regulation contributing to "chaotic unwinding"? So why is Paulson delivering numerous sermons on deregulating further?
President Bush is also busy pressing Russia to increase its trade in US dollars via saber rattling on possible Ukraine/Georgia NATO membership at the minute.
Interested to find out more?