The Paulson Maneuver - A Swindle in the Making?

Treasury Secretary Paulson is no dope. He knows that the U.S. economy cannot operate without foreign capital financing American excesses. He knows that our extravagant delusions of getting rich by borrowing more than you can ever pay back are con games. And, he knows that expensive bailouts can only work if overseas money comes rushing in. But what he knows and fears and is not telling us is that the foreign investors are getting worried.

In a free market economy, Fannie and Freddie might be allowed to go under. Investors and lenders would both suffer, but the economy would go on. Economies get stronger when they get rid of the heavy weight of excesses.

But, contrary to what Larry Kudlow and Steve Forbes would have you believe, this is not a free market. It is a market where the big players have the edge for themselves because they are connected.

FYI, since 2003, the Wall Street crowd was paid over $250 billion in bonuses on debt-backed securities that are now worthless. Now that these securities are nearly worthless, the U.S. government is bailing out the whole system. The Wall Street pros get to keep their bonuses, with not even a “thank you” to the feds. Remember, Paulson is a Wall Street boy with a purported multi-billion dollar net worth.

Paulson and the D.C. crowd know they can't let Fannie and Freddie go under because their debt is held by foreigners.

Even though I suspect the feds would love to stiff the foreigners, they can’t. At least not yet.

The Chinese, are the single largest lenders to U.S. government agencies. The feds desperately need that flow of juice from the Far East to continue.

So Paulson decided to let the stockholders take a loss, but not the bondholders. And presto, we have the Paulson Maneuver.

The Paulson Maneuver will hold until it is no longer needed or until all of these clowns leave town. And yes, that date is not far away. By deftly changing the short selling rules rules via the SEC, by writing what is effectively a blank check for Freddie and Fannie, and cloaking it in a banner that is promoted as rescuing homeowners, most of which will never get rescued, and by pressuring the FASB to delay requiring banks and financial organizations to honestly report their assets and liabilities, Paulson has put a tourniquet on the massive bleeding of our financial system.

IMO, this is a cute short term game allowing the connected to escape and leave the empty bag for the new arrivals in January.

But, back to our foreign investors. They will lose their money when inflation turns against them. When they are convinced that inflation exceeds their risk reward, they will dump the dollar and refuse to lend more to U.S. government agencies.

When the foreign investors bail, the feds will have no further use for them. And you will see the first ever default on U.S. debt.

Brace yourselves.

The Best Money Guy.

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