Henry Liu on the replacement of John Snow by Henry Paulson as Treasury chief
Source Louis Proyect
Date 06/05/31/21:33

My take as follows: Paulson sees Goldman profitability going forward an
up-hill drive in the next few years. Paulson has made enough money in the
good years and see leaving at the peak a smart option. It's no fun to run
an investment bank in a down market.

Paulson is a banker. Bankers are interested in the state of the market, not
the economy. In two and a half years, one can have a chance of saving the
market from its current structural imbalances. The formula is to accelerate
the crash for a fast recovery later. The prospect of Paulson engineering a
sharp correction in the equity market right after the mid-term
Congressional election is almost certain. The strategy is to remove the
structural bottlenecks and to weed out the weaknesses and have the market
resume its upward path by June 2008. It is do-able with a heavy dose of
government intervention, but its need a crash to create an emergency to
making government intervention patriotic, possibly including massive
bailouts of GM, GE and Fanny Mae and the big money center banks. The key is
to restore the dollar's exchange rate. If China refuses to revalue the yuan
against the dollar, Paulson can bring up the dollar along with the yuan
against the yen and the euro without adding to the trade deficit which is
mostly with China and oil. The way to strengthen the dollar is to raise Fed
Funds rates. Paulson is going to apply all the pressure he can muster to
force Bernanke to raise FFR, continuation a gradual pace of 25 basis point
in June but sharply after the November elections to bring on a massive
correction in the markets. FFR can rise to 9 or 10% in the name of national
security to save the dollar. The recession will be controlled and
relatively short, from Q4 2006 to Q1 2008 with a sharp recovery in Q2 2006,
providing buying opportunities for those who have cash. Just like Robert
Rubin, Paulson firmly believes that a stron dollar is in America's national
Rubin did it by making the current account deficit finance the capital
account surplus. Paulson will do it by erasing national borders in global
fiance entirely, thus making the US current account deficit meaningless as
long as it is denominated in dollars. Paulson will try to make China an
economic colony of the US and thus remove bilateral economic conflicts.

Bernanke may go along since a Fed Chairman needs a crash to show his
wizardry, as Greenspan did.

The wild card is Congress. If the Dems regain the House, Paulson will have
a tough task ahead. The other problem is China is going through a heated
debate internally about the wisdom of its economic policy based on export.
Any chnage in Chinese economic strategy will throw a money wrange in
Paulson's plan.

Henry C.K. Liu

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