And Here Is What Happened When They Decided To Cut Loose

Something about the proposed Paulson $700 Billion bailout doesn’t seem right. You have very smart people making sound arguments against it, but I’m starting to wonder if there is another motive behind the bailout.

I can’t help but think of Law 3 from the book The 48 Laws of Power by Robert Greene:

Law 3 – Conceal Your Intentions

Keep people off-balance and in the dark by never revealing the purpose behind your actions. If they have no clue what you are up to, they cannot prepare a defense. Guide them far enough down the wrong path, envelope them in enough smoke, and by the time they realize your intentions, it will be too late.

When I hear Paulson, Bernanke and Bush discuss the banking crisis, I can’t help but think of this Law. Get the public hot and bothered over executive compensation or some other minor issues while the real plan unfolds. What is the real intent?

I did several more hours of reading and found an alternate theory that makes more sense to me. Granted I am an arm-chair economist, so I could be 100% wrong. I’ll do my best to explain my current thoughts.

1. The United States runs a deficit to the tune of $2 Billion a day. To get the $2 Billion, we sell Treasuries. Most of the $2 Billion comes from China.
2. Moving $2 Billion worth of Treasuries every day is not an easy task. The Federal Reserve hands this task out to Primary Dealers. Primary Dealers (PD) are large banks and investment houses. The Federal Reserve of New York has a full list of Primary Dealers.
3. As the economy slows the projected annual deficit is expected to get large. By some estimates, it could be as high as $1 Trillion next year. This means the PD’s will need to sell a lot more Treasuries to fund our government.
4. Some PDs have already gone under and there is speculation that more failures may be imminent.
5. If our need to sell Treasuries will be greater next year and there is the risk that we can lose a few PDs, then the government runs the risk of not having a way to fund itself. In other words, Paulson and Bernanke fear the next Primary Dealer failure could impair the ability of the United States to raise money.
6. So the $700 billion would go directly to the Primary Dealers to push Treasuries to make up for the projected $1 Trillion deficit. In exchange, the PDs would then get to unload $700 Billion in toxic loans. Stressed banks that aren’t PDs would be left to implode and have their assets picked clean by the PDs.

This theory is my overview of many comments I read over on Ticker Forum in 2 threads (links no longer public):

• Nothing’s take on the bailout (by NoThing)
• Some exchanges seem on Mish’s blog (by Bam_Man)

The big question that is still left unanswered to me is why doesn’t the Federal Reserve of New York start finding new stronger financial institutions to become Primary Dealers? Are the banks that weak or are they out of time? The Federal Reserve is often called the banker of bankers. Doesn’t it make sense that they would back a plan that would show favoritism to their Primary Dealers?

This post is speculation, but it makes more sense than what I’ve heard from our leaders. How would most Americans respond knowing that our country is a slave to foreign bankers? Ignorance is an easier pill to digest than living within our means.