Former Treasury Secretary Hank Paulson’s book, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System”, attempts to explain why he should be praised and not buried.The question is whether it his book should be classified as fact or fiction.
We won’t be reading it, but we found the leaked excerpts that shed light on the Russians’ attempt to manufacture chaos through a selloff of Fannie Mae and Freddie Mac bonds more than interesting. The plan included persuading the Chinese to join but they declined. By the end of 2008, it appears that the Russians had sold off their GSE bonds and freed up dollars to rebalance their reserves.
Our readers know that we watch the Russians with eyes wide open for they have a proclivity to foment discord when they believe it works to their advantage. This tale from the perils of Paulson sets the board for some intriguing market movements with the events that happened over the weekend.
China is very upset with the Obama administration for announcing a $6.5 billion arms deal with Taiwan. This is not a new deal but part of what the Bush administration had initiated back in 2001. It should also be noted that this is not offensive weaponry but rather Blackhawk helicopters and Patriot Missiles. The Chinese have flexed their financial muscles, saying that they will review their purchasing of commercial aircraft and other large high level capital goods.
Boeing is nervous as are other high tech manufacturers. Interestingly, Europe announced this weekend, at the behest of Spain, that the EU was contemplating lifting their China arms embargo. We do not fault the Obama administration for honoring a previous U.S. commitment, but we warn that the trains are set in motion and they must be stopped before we are launched into an all-out trade war. An export-hungry Europe may try to benefit at the expense of Boeing losing orders. The U.S. must not respond by announcing restrictions on Chinese imports or vent its frustration at Europe. The world economy is much too fragile to embark upon playing tit-for-tat games when it comes to world trade. Let us hope that cooler heads find a way to prevail before the trains are too close to the battle lines.
A final note: We look at an article from today’s London Telegraph. Lord Turner, chairman of the Financial Services Authority (FSA) of Britain, signaled that there needs to be a heavy regulatory framework for foreign exchange carry trades. He believes carry trades serve no useful social purpose. This daft Englishman has imperialist written all over him. The carry trade is probably the most important element in the global financial system, for it tends to do the work of central banks. The U.K.’s better position is due to the fact that the carry trade was responsible for depreciating the POUND while the EURO was rallying, giving the British a trade advantage relative to its European trading partners.The recession in Britain would have been far more severe had the POUND not depreciated so severely as it was used in the carry trade game. Lord Turner’s idiocy is a main reason why there will be no global financial regulation and in this we should rejoice.