Tuesday, July 22, 2008

Paulson Speech: From Bad To Worse

Add another name to the list. Along with luminaries such as Alan Greenspan, Treasury Secretary Henry Paulson in remarks on Reinforcing Market Stability and Confidence, delivered at the New York Public Library, made clear at the start that he doesn't understand business cycle theory:

As we all know, the U.S. economy and our financial markets are undergoing a period of stress. We will work through this period, as we always do. Our workers, industries and companies are the most productive, resilient and innovative in the world. Periods of economic difficulty are not new. They are,unfortunately, inevitable.

Inevitable? No. They are the inevitable result of the Federal Reserve micro-managing the money supply. But, end the micro-managing and freeze the money supply at current levels and the distortions that cause the business cycle will disappear.(For a thorough explanation of business cycle theory see, Rothbard: Economic Depressions: Their Cause and Cure):

From there Paulson went from bad to worse.

He called for a "Modernized Financial Regulatory Structure ", which Carlyle Groups' Randal Quarles seems to think means, "let private equity buy up banks stocks, while they are flat on their butts." By coincident, we're sure, Paulson also called for (our emphasis):

Working through the current turmoil will take additional time, as markets and financial institutions continue to reassess risk and re-price securities across a number of asset classes and sectors. I have and will continue to encourage financial institutions to strengthen their balance sheets by raising capital, de-leveraging and reviewing dividend policies so that they continue to play their vital role in supporting economic growth.

Of course, Quarles, who used to work at the Treasury under Paulson, has made clear that only private equity has the ability to supply such capital. And, we are sure that Quarles is happy to hear that that this capital funding should be done at "re-priced" levels.

Paulson also dropped this interesting comment toward the end of his speech (our emphasis):

We also need additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system.

Hedge funds? Who said there was any problem with any hedge funds? Is Paulson just being forward looking, or does he know something the rest of us don't? Time will tell.

Paulson really needs to understand, though, that the United States financial system needs to stop being fed from the breast of Big Mother. The U.S. financial system is beyond infancy, hell, it is beyond puberty, it is nearly at old age. An old man sucking at his mother's teat is not an attractive picture.

If someone is trading with a hedge fund, then they should be aware of the risks involved and suffer the consequences should the fund go belly up. To set up to "manage the resolution of hedge funds" is simply setting up for larger collapses. Talk about moral hazard!

Scary character, this Paulson.

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