While writing my fax to the Senate last night, I connected a few dots and realized something... we have been maneuvered into a double checkmate here:
- We "can't" simply let housing prices crash, because then all the credit default swaps instantly explode. The only way to clear CDS exposure is to force firms to come clean, but none of them will because they would instantly lose business to their stronger competitors. So in a perverse sense Paulson "needs" extraordinary powers to make these firms talk.
- Foreign investors are pissed at us for selling them piles of "AAA" crap. Even more so because some months ago, Congress passed a bill that just so happened to have a provision preventing foreigners holding fraudulent mortgage bonds from obtaining damages in court. My sense of the foreign reaction to the bailout proposal is "it is the USA's duty and obligation to fix this problem". If we don't give them some kind of recourse, we can probably expect a lot of dumped dollar holdings and a dollar crash, and probably World War 3 soon after.
(Sorry, I know it needs links, but I'm on deadline. Will re-post later.)
My fax to the Senate appears below the fold.
