The dirty little secret to last week’s crisis is buried in a quote from Henry Paulson in this morning’s Times.
“Going back a long time, maybe a year ago, Ben, as a world-class economist, said to me, ‘When you look at the housing bubble and the correction, if the price decline was significant enough,’ ” the only solution might be a large-scale government intervention, Mr. Paulson said. “He talked about what had happened when there had been other situations historically.”
Mr. Paulson said he agreed but hoped it would not come to that. “I knew he was right theoretically,” he said. “But I also had, and we both did, some hope that, with all the liquidity out there from investors, that after a certain decline that we would reach a bottom.”
There is in fact a lot of liquidity out there–in two places–sovereign wealth funds in China, Korea, Russia and the Gulf States–and in hedge funds. But neither the sovereign wealth funds nor the hedge funds want to touch this toxic waste. And so we the taxpayers are being asked to provide the liquidity.
It is a testimony to George Bush’s Cowboy Diplomacy, that none of these countries will come to the rescue of American Capitalism. As for his white tie friends in the hedge funds that paid for his political campaigns, they’re not taking his calls either.
So much for “Bring it on.”