Unfortunately, much to the disappointment of Mr. Paulson and his colleagues, the rescue of AIG did not stop the panic and turmoil in the U.S. financial market. Confidence remained fragile in the credit market as major institutions refused to lend to each other, even after the injection of hundreds of billions by the Federal Reserve and the central banks of the G 7 countries. Consequently, there was a fear that American corporations would be denied fresh credit, “as the big banks were hoarding it to protect themselves against possible default.”1.

      In a highly developed capitalistic economy such as the United States, the trading of short-term instruments such as Treasury bills, and commercial papers are the important activities of money market, where corporations such GM, GE and all levels of government issue commercial papers for their funding requirements. Thus, the decreased level of the money market activities caused a great concern and reached a panic in Washington.1.

      The panic reached a crisis when major market funds were forced to close due to losses, and a total of $145 billion was withdrawn from the money market and started a run on the funds. This would have an incalculable consequence for the American economy, as “the growing crisis of the money market funds threatened to collapse the commercial paper market, precipitating a chain reaction of defaults and bankruptcies across the economy.”1.

      What’s even most alarming was that two major U.S. financial institutions—Morgan Stanley and Washington Mutual, were also facing the prospect of bankruptcy? They were in an unenviable position as they were forced to seek new capitals or buyers at the time when their shares were at rock bottom. The domino effect of the collapse of these two banks also threatened the survival of the largest investment bank, Goldman Sachs, which was formerly headed by Henry Paulson himself. It looked as if the whole edifice of the U.S. financial system was collapsing.1.

       By the afternoon of 18th of September, the key U.S. economic decision markers considered it was time to take decisive action not only to revive the faltering stock market, but also the economy and the U.S. financial system itself. At 3 PM, news leaked out of the bank bailout plans and the Dow Industrial Average had a swing of more than 600 points by the end of the closing of the stock market.1.

       Expectedly, Mr. Paulson announced the next morning the plan of the $700 billion bail out with the provisions of buying hundreds of billions of dollars of bad mortgages from the banks.

      “To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem,” Mr. Paulson declared in the press conference.2.

         It turned out the rescue package included the creation of a super fund to buy out the default mortgages from the banks. This is something similar to the Resolution Trust, set up in the aftermath of the collapse of the savings and loans banks in the 1980s. The Resolution Trust took over the small banks and sold off assets at a ridiculous price with great losses to the American taxpayers to the tune of $400 billion, the equivalent of $1 trillion in today’s dollar.2.

         Unfortunately, the present financial crisis is much worse than the savings and loan crisis, as “the scale of the bad assets on the books of financial institutions dwarfs any previous crisis, and is literally unknowable.”5. For example, the credit-default swaps derivatives alone amount to about $42 trillion, which are underwritten by the likes of AIG. Thus, the repayment of the massive amount of debt depends on the health of American economy, and the prospect for that is slim indeed!

         In addition to the $700 billion bailout, the Paulson plan called for the extension of credit from the Fed to investment banks; $50 billion to guarantee the money market investments and a temporary ban on short-selling of financial stocks, as short-selling was blamed for the drastic fall of banking stocks.2.

        Mr. Paulson’s plan, which publicly calls for the use of hundreds of billions of dollars of public funds to buy up the worthless mortgages from the banks and other financial institutions, has drawn a legion of critics. Some pointed out this “could prove to be disastrous for U.S. public finance, economic growth, the dollar, relations with major foreign holders of dollars, the global finance system, and could ignite the worst inflation in the economic history of the United States and reverse globalization to levels not seen since the Great Depression.”3.

       Financially, with the implementation of the Paulson plan, the U.S. Federal deficit for 2009 could exceed $1.4 trillion and U.S. debt rose to 86% of GDP. This is clearly unsustainable. U.S. deficit and debt of such a magnitude could only ignite inflation of food, energy and the erosion of the dollar.3.

       Many critics accused Mr. Paulson and Bernanke of only looking after the interests of Wall Street and “divert public resources to bankers, under the guise of protecting the economy and averting system risk.”3.

       By setting the example of buying defaulted mortgages from the financial institutions, it would lead to the temptation “to default in the name of equal treatment among mortgage debtors.”3. If this practice was carried out by consumers and small businesses, the amount of defaulted loans could reach into trillions. Thus, the stability and viability of lending in the U.S. financial system will be in question, and the Federal government will be burdened with even more debts.

      Economically, by diverting financial resource from the industrial and social sectors of the economy to the financial service industry, it will have incalculable consequences. One of the important causes of the current subprime mortgage crisis was the neo-liberal agenda initiated by President Reagan when much of the investment capitals were channeled from productive industrial economy to the speculative financial sector. Mr. Paulson’s plan not only continues this path, but makes it much worse as trillions of dollars will be once again diverted to the speculative sector. “Hence, long-term growth will be undermined by lack of productive investment.”3.

      Most importantly, an additional trillion of dollars to the U.S. budget deficit is not financeable, and “only inflation is left as a financing option.”3. The printing of excessive dollars will lead foreigners to lose confidence in American currency and erode the position of the dollar as reserve currency. Consequently, the Federal Reserve will have no alternative but to monetize the federal debt. The monetization of such huge amount of debt will be unthinkable for the American economy; as it could lead to hyperinflation with social instability in the American society. Hyperinflation is another form of taxation, where the income of the American working people and the retirees will drastically be reduced. As a result, Mr. Paulson’s plan is a direct transfer of wealth once again to the financial sector. High interest, inflation in energy and foods will make life miserable for millions of Americans, especially the low-income families.3.

      More alarmingly, by allowing Wall Street banks to “earn their way out of debt”, Mr. Paulson’s bail out plan paves a way for the financial institutions to charge their customers service fees exorbitantly and adds further financial burdens to the American consumers. This will add to the cost of doing business in America, and make United States uncompetitive in the world market.4.

      One way for Mr. Paulson to recover the value of the defaulted mortgages is to inflate the price of homes, as the Fed, Fannie Mae and Freddie Mac have been directed to inject a trillion dollars into housing. Homes would become unaffordable for millions of Americans who already have difficulty to make payments, and there is no relief for the distressed debtors in Mr. Paulson’s plans.4. The situation is dire, as American household has already lost two trillion dollars in home equity due to the housing bubble.5.

      One of most outrageous feature of Mr. Paulson plan is that he places himself, and the U.S. Treasury above the law with no Congressional oversight. Henry Paulson, the former Goldman Sachs CEO, still owns more than $500 million of the investment bank stocks, places himself in an unenviable position with this initiative. It is reported that Goldman Sachs is to be one of the largest beneficiaries of the bailout. The conflict of interest is self-evidenct, and he still wants to give his Wall Street cronies the jobs of deal making for the benefits of Wall Street. Under his plan, the business of the bailout “will be conducted in a manner unchallengeable by courts,”6. and there will be “no guarantee of recouping the outlay, and no fundamental means of holding those who fail to do so accountable.”6.8.9.

       Another victim of the Paulson bailout plan was the American dollar, as soon as the plan was announced; the dollar plummeted by almost two cents against the euro. Foreign investors are worried regarding the use of the Exchange Stabilization Fund—the U.S. currency reserves to pay for the insurance scheme of the money markets, and the grim prospect of the trillion dollar budget deficit.7.

       The trillion dollar budget deficit was the result of the trillion dollar Wall Street bailout, and this amount includes the cost of Bear Stearns takeover by JP Morgan, the Special Fed Liquidity programs of $200 billion; the bailout of Fannie Mae and Freddie Mac (up to $200 billion); the $85 billion bailout for AIG; and the $700 billion bank rescue plan proposed by Henry Paulson.

        The use of such staggering sums of money to intervene what is supposedly the freest financial market in the world fully exposes the fallacy of neo-liberalism. Confronted with the collapse of financial market and the American economy on the verge of recession, Mr. Paulson and his colleagues in Washington have no hesitation in abandoning the free market principle and “moral hazard” of government intervention, thus discrediting the philosophy of neo-liberalism.

       The U.S. financial crisis also revealed the dark side of American capitalism under the auspices of neo-liberalism, as deregulation, one of the main neo-liberal economic agenda, has led to financial speculation, accounting trickery, and bad behavior with no regard for credit risk by the market participants.

      While neo-liberalism is being discredited in America, it is still the economic policy of many developing countries including China, where deregulation, privatization and open foreign participations of her economy are the orders of the day. Sadly, in China and other parts of the world, American capitalistic economic and financial systems are being touted as the models to emulate. What is more ridiculous is that China’s mainstream economists are still clamoring for economic integration with the United States---a country whose financial system is on the verge of bankruptcy. As a result, China will soon become a land of financial speculation, with a financial crisis waiting to explode. If the Chinese policy makers have not learned a lesson from the American financial crisis of 2008, it will be a disaster for China and the Chinese people.