We were rather astonished by Mr. Paulson's reported February 9th statement in Tokyo, following a meeting of G-7 finance ministers and central bankers. Paulson reportedly said that the global economy faces "downside risks" . He noted that the sell-off in "capital markets" is both "serious and persisting," with consequent increased risk for the global economy. He also noted that the notion that Asian economies had "decoupled" from the American economy was
"a myth." The ritualistic incantation that the U.S. would avert a recession in 2008 we may dismiss as standard pap mandatory for any Treasury Secretary.
Our amazement over Mr. Paulson's remarks derives not from their uniqueness, but from the fact that a man in his position uttered them in public. Mr. Paulson, after all, is not a simple citizen. He is the Secretary of the Treasury. He knows full well that his remarks will be parsed and analyzed ad nauseum, and that they will inevitably carry great weight with the markets and with policymakers. Since he is a very smart man, we must assume that his remarks were made with prior careful deliberation.
Considered in this light, Mr. Paulson, we believe, is giving a crystal clear signal to the markets, to policymakers, to opinion shapers, and to the general public. This is a quite ominous warning message. Coming from the man who until recently ran what is probably the smartest, savviest, and most skilful firm on Wall Street, his remarks command added weight.
We speculate that the Secretary's remarks have two objectives:
1. He is putting intense pressure on Congress, the White House, and the FED to be prepared to take drastic steps to bail out the banking system and major financial institutions, which he recognizes are sinking fast;
2. He is engaging in some CYA activity. He wants to make sure, we think, that his escutcheon remains clean should severely negative developments occur, and a severe crisis materialize. The last thing he wants is to be in a position where he can, post facto, be accused of minimizing the problems and sweet-talking the public and Congress even as his erstwhile colleagues at Goldman Sachs, acting with their usual astuteness, may position themselves to profit from negative movement in the financial system and the economy.
