Monday, September 29, 2008

The Paulson Plan Is Dissed, What Next?

By Robert Wenzel

The people have spoken through their representatives. The Paulson Plan has been rejected by the House of Representatives. The system worked the way James Madison and the other designers of the Constitution envisioned it would. The final outcome, however, remains unclear.

The power elite, the Oligarchs, want this bill to pass. It fell only 12 votes short of passage on Monday. There will be enormous pressure put on those the Bush Administration and House Majority Leader Nancy Pelosi identify as likely to change their votes from Noes to Ayes.

Speculation has hit that the Senate may now vote first on the bill, since the Oligarchs have the votes there to insure passage.

Once that is done, it is back to drama in the House. On Monday, Treasury lost by a more than a 2-1 margin among House Republicans. Among the Hispanic and Black caucuses, only about 43 percent of the Democrats supported the Plan. Perhaps the bill will be juiced to improve the Hispanic and Black vote in favor of the bill.

One interesting consideration is that with Rosh Hashanah beginning at sundown Monday, little activity is expected before Wednesday. The House is officially adjourned until Thursday. Some House members may head home where they will surely hear from constituents who are opposed to the bill. The public interest in this bill is intense. The House Web site was so overwhelmed Monday as millions of computer users sought information about the bill that it crashed.Will pressure back home force some Aye voters to flip and vote No? Thus causing even more problems for Pelosi and Bush.

As the political drama continues, the markets have gone into seizure and the Federal Reserve has gone into panic mode, flooding the markets with liquidity. Ironically, the money injections into the system by the Fed on Monday equaled $630 billion, nearly the sum total of the $700 billion Paulson Plan.

I argued last Friday that Paulson's liquidity argument was bogus because the Fed could add such liquidity anytime:

Since this $700 billion in money will not be helping banks in trouble, Paulson had to come up with a new reason for why the money was needed. His justification is that it will unfreeze the credit markets by adding huge amounts of new liquidity to the system. This is an odd justification, since it is the very role of the Fed to add liquidity to the system, when it is needed, that is at the very heart of why Fed was founded and continues to exist.

The House failure to pass the Paulson Plan and the resulting Bernanke $630 billion money pumping actions resulted in my point being proven dramatically in one day!

Now, it is unclear as to whether enough pressure can be exerted to keep House Yea voters in line, while leadership attempts to find 12 more yea voters. However, it does appear that Bernanke will be printing money at any sign of trouble. Given the current market environment it will be impossible for him to withdraw the money anytime soon, thus the money printing should be viewed as highly inflationary--with long-term consequences of eventual record high prices for gold and oil.

For the inflationists, and there are many, including Donald Trump and Jim Cramer, happy days are here again.

Robert Wenzel is an economic consultant and Editor & Publisher of He can be reached at

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