Gerald P. O'Driscoll Jr.: "Socialism is alive and well in America - thanks to a Republican Treasury secretary"

Secretary Treasury Paulson comes in for some well-deserved scathing criticisms in a commentary by Gerald P. O'Driscoll Jr. in today's New York Post. Here is a selection:

TREASURY Secretary Henry Paulson's bailout plan for mortgage giants Fannie Mae and Freddie Mac should be titled "The Bondholder Relief Act of 2008": The taxpayers will be providing the relief to holders of Fannie/Freddie debt, many of whom are foreigners.

Paulson has asked Congress for a blank check from the taxpayer to pay off investors for losses already incurred and likely to be incurred in the next few years. He told Congress that, if it promises unlimited funds to backstop the lenders, Fannie and Freddie are unlikely to draw on the credit line. But the nonpartisan Congressional Budget Office estimates the most likely outcome to be a cost of $25 billion over the next two years - and more if housing deteriorates further.

He also wants authorization for Treasury to buy senior preferred shares in Fannie and Freddie. That prompted Sen. Jim Bunning (R-Ky.) to remark that he thought he'd woken up in France. Yes, socialism is alive and well in America - thanks to a Republican Treasury secretary.

Absent from Paulson's plan is any protection for taxpayers. They'll fund the downside if losses mount at the two mortgage giants. But if Fannie and Freddie recover, stockholders and management gain. Call it "casino capitalism" - taxpayers bankrolling management high rollers....

Republicans, especially in the House, have found their political spine and are pushing back against Paulson's largesse for Wall Street. House GOP Leader John Boehner demands more time to review the proposal - and opposes attaching it to the Housing bill....

The article briefly mentions that many of Freddie and Fannie's bond holders are foreigners. Brad Setser is more specific in his July 12 blog entry, "Too Chinese (and Russian) to fail?" in which he pointed out that the Chinese and Russian governments likely hold huge stakes in Fannie Mae and Freddie Mac.

Thus what Paulson is doing is making sure it is doubly profitable for mercantilist governments to steal market share from American industry. They not only benefit by getting American jobs, but when the bonds they buy as a byproduct of their currency manipulations lose money as the American economy goes south, the US taxpayer will bail the foreign governments out. Macro Man made a similar point in his blog. He wrote:

The more interesting question is what becomes of Fannie and Freddie's bonds? The rapscallion in Macro Man would like to see substantial losses for the bondholders as well. After all, people like Voldemort and the Russkies have been buying a helluva lot of Agency bonds with the proceeds of their FX piss-taking. If globalization has brought about of economic realpolitik, it would be refreshing to see SAFE, CBR, et al hit with hundreds of billions of losses as a "reward" for their currency manipulation.

Howard