Friday, January 29, 2010

Paulson: Russia Tried to Get China to Blow Up Fannie and Freddie

Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, according to former-Treasury Secretary Henry Paulson, in his new book, On the Brink.

Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics. In his memoir, Paulson writes, according to Bloomberg which was able to obtain a copy of the book before its official publication date of February 1, that the Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies.”

This is indicative of how dangerous the Chinese holdings of U.S. debt are. It is a huge financial weapon that the Chinese can use anytime they choose for any purpose they choose. But by selling only selective debt, rather then selling various random chunks of their U.S. debt, the Russians have brought to the attention of the Chinese, if they hadn't thought of it already themselves, how to launch a limited financial nuclear attack by getting them to focus on a particular type of debt, such as Fannie Mae or Freddie Mac. Such a surgical strike would do much to protect the overall investment the Chinese have in U.S. debt, but at the same time cause a severe headache for the U.S.

1 comment:

  1. I'm not sure I believe Paulson on this. This sounds like a convenient way to blame "those goddam ruskies" (or those goddam chinese) for America's homegrown state socialism.

    Still your warning of the dangers of large foreign debt holdings are relevant.

    In this the experience of Britain and France during the Suez Crisis is instructive. Both powers, after secret negotiations with Israel, moved to occupy the Suez Canal, "separating" warring Israeli and Egyptian forces. This "peacekeeping" mission was primarily about restoring control of the canal from the Egyptian nationalist Nasser who nationalised it.

    Britain and France were then heavy debtors and the US was their creditor. When the Eisenhower administration turned to economic diplomacy and quietly threatened not to support bond renewals by London and Paris, this last harrah of independent west european imperialism, ended within weeks.

    (See "The economic diplomacy of the Suez crisis" By Diane B. Kunz)

    British Prime Minsiter Macmillan was left in the unenviable position of explaining to an electorate raised on 'great deeds of empire' that there is no rodeo without dough.

    For now the question remains, which US President will be America's Macmillan? Obama or his successor?

    A more cynical argument may be that America is already being pulled by economic diplomacy from their Chinese creditor. America's bizarre middle east obsession could easily be stopped by Beijing. Why have they allowed this childish nonsense to continue? Perhaps they prefer to judo toss the neocons, using their own strength against them. Thus the wastage of America's military power and international esteem in unwinnable and globally unpopular campaigns in the desert. This will both demote and degrade the American superpower and divert the hyper-aggressive neocons from their anti-Chinese agenda.