Treasury Secretary Paulson:

“I think you will continue to see flexibility as we learn and go forward,'' changing his tune from last month when he said proposals to use government funds were a “non- starter.”

Why are they a starter now?

People come to believe what they must believe when they must believe it, is our observation. Both private citizens and the government too have taken on obligations that they can’t possibly fulfill.

Since it cannot be paid, the debt must be made to disappear. The world – or at least most of the Anglo-Saxon part of it, must be de-leveraged.

So, people must believe in a fantasy about how the government will “bail out” the homeowners...and how the Fed will “rescue” Wall Street.

How could they perform such miracles?

When a man cannot pay for his house, can the feds make the mortgage disappear?

When Wall Street has blundered –forgetting to sell its cheesy debt before it started to stink – what can the feds do about it? All they can do is to spray some deodorizer around the room

Still, the voters have been conditioned by television, public education, and maybe something in the water; people will believe anything. And what they need to believe now is that the feds can somehow ease their hurt. This will make it possible to shift the debts that cannot be paid onto the government, where they will not be paid.

Among all the great debtors in the U.S.A., circa 2008, only one has the power to pay its debts – no matter how large they are.

Only one has printing presses that turn out pieces of paper with pictures of dead presidents on them. And only one can trade bad debt for political favor.

That one is, of course, the U.S. federal government...lender of first, last, and holiday resort.

Already, the Fed has taken onto its balance sheet some $30 billion in smelly collateral from Bear Stearns...and billions more from other financial institutions.

That is just the beginning.

Somehow, the whole shebang of mistakes, misjudgments, greed-stoked miscalculations will end on the shoulders of the U.S. Treasury...on the backs of U.S. citizens...and dollar holders all over the world.

(Bill Bonner..04/03/08)