Tuesday, September 9, 2008

Did Paulson pull a fast one on the Dem's?

There is much to criticize about the nationalization of the two government sponsored companies but judging from the interview of Christopher Dodd on NPR, it seems as if the Bush administration duped the Democrats into giving them the ability to get rid of the firms. In addition, the lobbying spigot that allowed the two firms to funnel money to politicians (mostly Democrats?) may be shut off.

UPDATE: Fannie and Freddie using our money to "invest" in Democrats

Another interesting angle on the takeover is that the US government did not want to punish the Chinese government for holding Fannie and Freddie debt. Recall that investment demand for dollar denominated debt increases demand for dollars which raises the "price" of a dollar measured in yuan. A strong dollar increases US demand for Chinese exports, and allows the Chinese government to uphold their end of the Faustian bargain they have struck with their citizens: in exchange for support of a totalitarian regime, the Government promises full employment with income growth. But, as we have blogged in the past, pegging your currency to the dollar means that you lose control of the money supply and this leads to inflation. See our previous post, China is busted by the laws of economics.

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