Secretary Paulson just issued his press release and I gained absolutely no confidence in the current situation.  Actually I’m more concerned than before as he said that the “banking system is safe and sound“.  Will someone please tell me how the banking system is safe and sound when major institutions are failing?  Bank of America was just downgraded, which shouldn’t be surprising as Merrill (MER) isn’t in good shape.

So, Paulson’s main theme of his speech was that confidence and resilence in the economy is strong, and that they are working to maintain the stability of the markets.  He doesn’t take lightly putting the taxpayer on the hook for private institution’s mistakes or overindulgence in risk.  So, taking over Freddie and Fannie wasn’t putting the taxpayer on the hook.  Well, there wasn’t anything he could do about that because they were part of the hand he was dealt.  It was a congressional charter that mandated that takeover.  I see…

He mentioned that we needed major authorities to wind down major institutions such as Lehman (LEH).  I’m not really sure what that means, but to take a guess it means that other institutions are going to eat those about to fail.  Okay that makes sense, but it is starting to all look really fishy.  How many institutions are going to consolidate?  And which ones are going to survive and who chooses?  This is not how a free market works.

He also mentioned that additional regulations and authorities will be needed in the future.  More government regulations!  Yippie I can’t wait.  We’ve seen how well those work.

And last but not least there was absolutely no mention as to how we got here even though the question was asked numerous times.   Not once did he mention the loose monetary policies or the relaxing of required bank reserves or increasing of the GSE’s maximum loan size.  

If this isn’t a RED flag waiving in the wind saying get out I’m not sure what is.  Be ready for flows of money to start leaving the United States as people won’t want to hold dollars.  Initially, we are seeing a rush to safety in treasuries as their interest rate is falling, but if this continues people will flee to other currencies and hard assets.  Why hold a piece of paper that isn’t worth anything?  Once the confidence leaves the system it may be too late.