InvestorsHub Logo
Followers 116
Posts 33340
Boards Moderated 2
Alias Born 12/25/2002

Re: Bullwinkle post# 16970

Friday, 12/01/2006 12:29:18 AM

Friday, December 01, 2006 12:29:18 AM

Post# of 187121
Paulson Believes a Financial Crisis is Overdue
Comstock Partners, Inc.
Thursday, November 30, 2006


While a complacent Wall Street, oblivious to all risks, continues to drive the market higher, it seems that Treasury Secretary Henry Paulson believes that a financial crisis is overdue. Our suspicions were first aroused by a Wall Street Journal article on October 23, and confirmed by Fred Barnes in The Weekly Standard on November 27.

Although the WSJ article dealt mainly with lessening the financial regulations hurting U.S. competitiveness in the financial markets, it also included the following. Referring to Paulson, it stated, “Since taking the reins in July, the Wall Street veteran has reinvigorated the President’s Working Group on Financial Markets, which had languished…Mr. Paulson is chairman of the Working Group, which coordinates government policy on financial markets and includes the heads of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission. Mr. Paulson has insisted that they meet about every six weeks. Before his arrival, the group met every few months and sometimes as infrequently as once a quarter.” Many of you may know that this is the group commonly referred to as the Plunge Protection Team.

The WSJ article went on to say that “Mr. Paulson is having the Working Group look at the systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis, officials said. He has ordered his chief of staff, Jim Wilkinson, to oversee the creation of a Treasury command center to track markets world-wide and serve as an operations base in a crisis. The center would revive a market-monitoring room closed in a 2003 budget cut.”

Although we had some suspicions about Paulson’s motivation in reviving the Group in the midst of perceived prosperity and market complacency, we did not comment at the time in the absence of additional information. Our suspicions were basically confirmed, however, a few days ago by the Barnes article in The Weekly Standard. Barnes is a veteran columnist with good sources in the current administration, and a reading of the article seems to indicate that the information comes directly from Josh Bolten, the White House chief of staff, who previously worked for Goldman Sachs, which Paulson headed prior to becoming Treasury Secretary.

The Barnes article dealt both with Paulson’s surprisingly contrary views on China and with the serious potential of a financial crisis, presumably related to the systemic risk posed by hedge funds and derivatives discussed in the WSJ piece. Barnes stated that “unlike members of Congress, Paulson is more worried about the possibility of an economic stumble in China whose ripple effects would quickly reach the United States than he is about Chinese manipulation of its currency to promote exports and limit imports…Paulson takes exception to the popular notion that China’s rapid economic ascent will continue unimpeded…he said China’s future growth should not be extrapolated ‘from its past performance, as if China somehow found a way to immunize itself from business cycles and all other economic problems’. His concern is not that China will overtake the United States economically but that Chinese leaders ‘won’t move ahead with reforms to sustain growth’. That’s a polite explanation for what might cause an economic slowdown, or worse, in China. And ‘because it is a global leader, what happens in China will affect the well-being of the United States and the rest of the world’.”

Barnes then goes on to say that “Paulson’s fear of a significant Chinese recession dovetails with another of the major tasks assigned to him by Bush: crisis management. Paulson believes a financial crisis is overdue—a serious crisis that would be a body blow to the U.S. economy. This fear is shared to some extent by Bush and Bolten, who wanted a major Wall Street player at Treasury in case an economic emergency occurs.” Barnes then details Paulson’s activation of the financial working group “to prepare for the crisis”.

All in all, it does not seem that Secretary Paulson shares the sanguine Wall Street view of the market and the economy. Indeed, now that he is no longer in the securities business, Paulson is acting very much like a man who is looking ahead and does not like what he sees.

http://www.comstockfunds.com/index.cfm/act/newsletter.cfm/CFID/3100225/CFTOKEN/15616716/category/Mar...

**Happy Trading**

Your Economy #board- 1948

Join the InvestorsHub Community

Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.