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Bankers Shake Down Congress and the G-20

By MICHAEL HUDSON

The financial press has been negligent in reporting how last week’s two top financial stories are linked: first, the testimony by Treasury Secretary Henry Paulson and his evasive Interim Assistant Secretary Neel Kashkari defending why they followed a completely different giveaway plan to the banks (their own Wall Street constituency) than what Congress authorized; and second, the G-20 standoff among the world’s leading finance ministers this weekend.

The dollar glut is one of the key factors that has aggravated the junk-mortgage problem in recent years. Looking forward, if foreign countries are no longer to invest their dollar inflows in Fannie Mae, Freddie Mac and toxic packaged mortgage derivatives, what are they to do with these dollars? The U.S. Government refuses to let foreign government funds acquire anything but financial junk such as the plunging Citibank shares that Arab oil sheikhs have bought.

Here’s the problem that faced global finance ministers this weekend: The U.S. payments deficit has been pumping excess dollars into foreign economies, whose recipients have turned them over to their central banks. These central banks have saved their currencies from rising (and thus losing foreign markets by making their exports more expensive) by buying Treasury bonds so as to support the dollar’s exchange rate by recycling their dollar inflows back to the United States – enough to finance most of our federal budget deficit, and indeed much of Fannie Mae’s mortgage lending as well.

http://www.counterpunch.org/hudson11172008.html