A scenario former United States Treasury Secretary Henry Paulson described as “unthinkable” during a recent discussion in Aspen is apparently imaginable in the minds of Moody’s Investors Service.

Moody’s is the first of the big-three rating agencies to place the United States’ triple-A rating on review for a possible downgrade. The agency said there is a small but rising risk the federal government could default on its debt.

Speaking earlier this month at the Aspen Ideas Festival, sponsored jointly by The Aspen Institute and The Atlantic magazine, Paulson doubted the government couldn’t meet its obligations to its creditors.

“It’s unthinkable to me that the United States of America is ever going to default,” he said.

Moody’s is taking a different view, which sent dollar and U.S. stock futures tumbling late Wednesday. The rating agency put the nation’s leaders on notice last month that the debt ceiling needed raising. Democrats and Republicans, however, are locking horns over the politics surrounding such a move.

To watch additional videos from the Aspen Ideas Festival, all related to the debt and budget, or to read the rest of this story, originally published at RealAspen.com, click here.

Paulson is at the heart of Thursday’s record $550 million settlement between Goldman Sachs and the federal Securities and Exchange Commission, which alleged Goldman should have notified investors of Paulson’s involvement in a mortgage security the company created in 2007 right before the housing bubble burst.

Paulson famously made a fortune betting the national housing market would collapse, but the SEC filed a lawsuit against Goldman alleging investors should have known Paulson was involved. Paulson & Company was never implicated in any wrongdoing, and Goldman Thursday did not admit to any of the SEC’s allegations.

The website realaspen.com, after initially reporting via the Aspen real estate rumor mill that former Goldman executive and U.S. Treasury Secretary Henry “Hank” Paulson had purchased the property, confirmed that in fact it was John Paulson who had plunked down nearly $25 million for a sprawling Aspen Lakes Ranch property. Realtors with knowledge of the deal were confused about which Paulson with Goldman ties had bought the home under a veil of secrecy.

The purchase is seen by some observers as a sign that Colorado’s moribund mountain resort real estate market is on the mend. According to Forbes, John Paulson is worth an estimated $12 billion. Goldman Sach reported a profit in excess of $13 billion last year.

Regulators Thursday said the settlement announcement was not related to Senate passage the same day of the Wall Street financial reform package, according to The New York Times.

The Colorado Independent and several other online publications picked up on the story. Veteran Aspen journalist and former Aspen Daily News editor Troy Hooper, who just launched realaspen.com, added the following update to his original story:

Henry Paulson’s daughter, Amanda, denies that her father, Henry, is the man behind Pitkin County’s biggest real estate deal in nearly a decade.

Amanda Paulson contacted realaspen.com to say that there must be some sort of mix-up because her father “absolutely” did not buy the $24.5 million Aspen estate.

The estate was sold June 22 to Aspen Lakes Ranch LLC, which is based in New York.

Two real estate insiders told realaspen.com that Paulson did buy the ranch. The insiders were not directly involved in the transaction and requested anonymity because they said they were not authorized to speak about the deal.

Bob Bowden, a longtime local who built the ranch as a spec project, would not confirm or deny that Paulson was the buyer. Brian Hazen, who represented the buyer, said the transaction included a confidentiality clause precluding him from identifying the buyer.

Henry “Hank” Paulson, the U.S. Treasury secretary who fiddled while Wall Street burned in late 2008, has landed quite nicely on his feet with the purchase of a $24.5 million estate in Aspen, according to the newly launched realapsen.com

Veteran Aspen journalist Troy Hooper, former editor of the Aspen Daily News, went live with the scoop early Monday afternoon, confirming through a number of sources that Paulson is indeed the buyer of Aspen Lakes Ranch.

Hooper, on the first day of his new, local-content website, had this take on Paulson’s purchase:

“The view through Paulson’s 35-foot-high windows in his new seven-bedroom, eight-and-a-half bath palace on a 8.9-acre estate is certainly prettier than the view from the treasury secretary’s seat from July 2006 to January 2009, when Paulson was in office. That’s probably why he chose to ski out here at the height of the nation’s financial crisis, reportedly managing the recession over the telephone.

“When he testified before Congress that he was skiing in Colorado in December 2008, with America’s economy on the brink of collapse, pundits blasted Paulson for not being in Washington. When he was there, Paulson was accused of funneling federal bailout money to his friends in the finance industry, including Goldman Sachs, where he was once the CEO. Now that Paulson has plunked down the most cold, hard cash that Aspen realtors have seen in nearly a year, the man who has been vilified far and wide is receiving a warm welcome in Aspen.

“’It’s a great sign for the Aspen market,’ said a local broker knowledgeable of the Paulson purchase but who was not authorized to speak about it. ‘If he is bullish on Aspen to the tune of $24.5 million, that gives other buyers incentive. They see that Aspen real estate is a sound investment.’”

Definitely a better place to put your money than the stock market these days. Still, Paulson’s new pad pales in comparison to other Pitkin County real estate deals. According to realaspen.com, the record ranch sale was $47 million in 2006 for Crystal Island Ranch, but of course that was back before the bubble burst and Bernie Madoff victimized dozens of Aspen’s elite.

(Photo/bitzcelt, Flickr)

In just the last few days, the new sums flying around — pushing each other off the front page before the ink dries — are positively staggering: Since Friday, President-elect Barack Obama’s proposed stimulus plan emerged as perhaps $700 billion to fuel jobs and growth; on Sunday, federal institutions committed to back up $306 billion in troubled Citigroup assets and agreed to invest $20 billion in the company, on top of $25 billion already sunk into the banking giant; and on Tuesday, Treasury Secretary Henry Paulson announced an $800 billion plan to thaw frozen credit markets.

That’s nearly $2 trillion, on top of the hundreds of billions already committed. And that doesn’t even include the $25 billion auto industry titans came hat-in-hand for last week — few believe that would be sufficient, but in any case, at this stage, that’s chump change.

Barry Ritholtz, author of the forthcoming Bailout Nation, tallied up the numbers and ran some comparisons on his The Big Picture blog on Tuesday — with some sobering results.

Ritholtz comes up with a conservative $4.6165 trillion in bailout costs so far — not including Obama’s proposed stimulus package to add 2.5 million jobs by tackling infrastructure, energy and other improvements. “People have a hard time conceptualizing very large numbers,” Ritholtz understates, “so let’s give this some context. The current Credit Crisis bailout is now the largest outlay in American history.”

Take a moment to read that again. So far, we’re talking about more money than we’ve ever spent on anything. Ever. On anything.

Exactly what does that mean? Ritholtz had a research firm crunch the numbers to provide the context. In inflation-adjusted dollars, the bailout will cost more than everything the U.S. government spent on all these endeavors — combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551 billion, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

That’s right, fixing the credit crisis will cost more than buying half the country, fighting three costly wars, saving the country from the last depression, fixing the last home loan crisis, building the middle class, exploring space and putting a man on the moon.

There’s only one expenditure that even comes close, Ritholtz found:

World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion

Do the math: What was probably the greatest endeavor in human history, mobilizing the entire nation across the globe, cost roughly a trillion dollars less than fixing the credit crisis unfolding in today’s headlines. “Go figure,” Ritholtz observes. “WWII was a relative bargain.”

Of course, the government is trading some of its bailout bucks for warrants or other stakes in the beleaguered financial institutions — and might even wind up with some foreclosed houses to show for its stewardship of Fannie and Freddie — so the commitments don’t reflect some money that might eventually return to taxpayers.

But let’s compare apples to apples: World War II left taxpayers with more than a few returns too, including pretty much the only standing military in the world, thousands of trained pilots anxious to invent modern commercial aviation, members of the 10th Mountain Division anxious to invent the modern ski industry — not to mention defeating fascism and saving civilization. Most of the bailout and stimulus funds are intended simply to return America to the way it was a few years ago, albeit with more solar panels and fewer crumbling bridges.

Bloomberg calculates the rescue efforts at an even heftier $7.4 trillion — and that doesn’t include Sunday’s Citigroup bailout or Obama’s stimulus package. Take a look at this interactive chart to see where all the money is going.

Even though Ritholtz estimates expenditures so far at $4.6165 trillion, he cautioned against finding any safety in those numbers. “I estimate that by the time we get through 2010,” he writes, “the final bill may scale up to as much as $10 trillion.” If that’s the case, add up all the expenditures Ritholtz listed above — from the Louisiana Purchase to the moon landing, the New Deal to the Vietnam War — and throw in World War II for good measure, and it still won’t total as much as the federal government commits to solve the credit crisis over the next couple years.

The party leaders will probably try again. I doubt they have the energy or courage to renegotiate the terms in any serious way. A majority of Democrats voted for the measure, but most Republicans took a walk. They will be scolded — and pounded by captains of industry and finance — for being “irresponsible.” But I doubt the public will agree.

In all of elected Washington, representatives are closest to the people and they know a vote for this outrageous measure is going to end the careers of some colleagues — maybe many of them. This time, the dissenters can claim principle and say they are voting with the folks, while also voting to save their own hides.

It adds another deep shock to the system, both in politics and economics, but what an invigorating moment for democracy.

The financial bloodbath will continue, but unless the deal on the table changes significantly, Henry Paulson gets to decide who lives and who dies. The former investment banker from Goldman Sachs would be empowered as treasury secretary to play savior or grim reaper, the liquidator who essentially pulls the plug on some banks and financial firms or the man who rescues them from ruin. Of course, Paulson would consult with other government officials. But you can be sure that, behind closed doors, he will ask former brethren in Wall Street to help decide which club members are worthy of saving. This power to pick winners and losers would remain in Paulson’s hands until a new president arrives in January.

This is the essence of “the deal” Congress worked out over the weekend and was stymied on Monday. Some bells and whistles were added to make the transaction less obnoxious to public opinion, voters and taxpayers. They are not meaningless, but both parties lacked the nerve to tamper with Paulson’s basic proposal. This is still a massive bailout of imploding Wall Street, financed with the public’s money. And it is still a massive crapshoot for the American people.

If the billions from Washington somehow restore temporary calm and balance to global financial institutions and markets, then the usual cheerleaders will proclaim the “system” has worked. Most Americans, I predict, will not join the cheering. Too much destruction lies ahead, both in the financial system and in the real economy where people live and work. Too much bitterness and rage will be attached to the White Knight at Treasury when he dooms one pension fund or bank, but rescues others. Too much deceptive sleight-of-hand is already embedded in Paulson’s approach for ordinary mortals to even recognize what Paulson intends to accomplish.

The essential political failure, in my view, is that Congress did not step up and assert the full emergency powers of government in this epic crisis, that is, take temporary control of the entire financial and banking system so regulators and policy makers can steer the US economy to safer ground, compelling the private institutions to follow their lead. This rescue plan remains essentially voluntary. Yes, the Treasury Secretary would be awarded gargantuan personal powers, but there is not much in writing to compel the banking behavior of private interests if he chooses to rescue them. One assumes Paulson will demand some private deals and use his enormous leverage to squeeze anyone who resists. But there is nothing to guarantee this path is taken. The bailout will belong to the club and the club will manage it.

Democrats are the majority party and insisted on some qualifying terms in behalf of the populace — better than nothing, but weak half-steps. The government can claim warrants or equity ownership from firms in exchange for the public aid. It can put a lid on bloated executive salaries at the rescued banks or brokerages. It can demand more up-close oversight of how the Treasury Secretary performs. The language for all of these measures suggests to me — I need to read the text again more carefully — that these are essentially discretionary suggestions.

Paulson can do them if he chooses. Or, if he likes, he can wiggle around them in the fine print. The Democrats do not want to assert real control over Paulson’s decisions for fear they will then be blamed if and when everything fails.

Republicans, as usual, are playing their own political game — trying to evade the blame, now and later. Their proposal for an insurance program that financial firms must pay for is ludicrous. It’s like trying to buy hurricane insurance on your house after the storm has already blown it away. But the GOP already is in ruin, so its members are thinking long-term survival and creating a predicate for revival. Blame the government, blame Wall Street, blame the go-along Democrats — maybe people will start liking Republicans again.

Democrats are still in recovery from twenty-five years of deferring impotently to the wise men of Wall Street and retreating tactically from conservative initiatives. I see this crisis as the Democrats’ hesitant first step toward rediscovering their nerve and abandoned convictions. They are not there yet. But this crisis is not over. I predict they will get another opportunity to stand up for something and rather soon.

In the nature of this crisis, the next president will be compelled to clean up Paulson’s irregular mess. He will be forced to act, not only because of the rising popular anger and enveloping recession but because the Paulson approach is founded on private deal-making and his deceptive statements of purpose.

By January — whoever wins the White House — it will be clear that Washington cannot cure the disease by relying on one smart guy from Wall Street. A new federal agency will be needed to supervise the bailout and restore defined public purposes and enforce them on the system. The government will have to assert its powers forcefully, because by then it will be obvious the “voluntary” approach helped some losers to become winners, but it neglected to save the country.

Reprinted with permission. William Greider is The Nation magazine’s National affairs correspondent, and has been a political journalist for more than 35 years. A former Rolling Stone and Washington Post editor, he is the author of most recently, The Soul of Capitalism (Simon & Schuster) and — due out in February from Rodale — Come Home, America.

(Photos/Jason Kosena and Wa-J, Flickr)

As the presidential campaign heats up, the candidates are sure to intensify their differences on national security, the Iraq war and tax relief for the middle class, and they’ll no doubt tear into each other’s positions during the coming debates. But based on the contest so far, don’t look for either Sen. Barack Obama or Sen. John McCain to take on the biggest, most troublesome economic problem facing many American families and financial institutions — the credit crunch.

Like the budget deficit and rising Medicare costs, the credit crunch seems to be well on its way to earning the honor of the Issue Candidates Want to Ignore.

To begin with, it’s complicated to explain, and the vagaries of the secondary market don’t exactly engage a crowd’s attention. That complexity also makes it easy for candidates to trip up on the details, as Alaska Gov. Sarah Palin, the Republican vice presidential nominee, learned recently, when she said Fannie Mae and Freddie Mac were too expensive to the taxpayers. (Both are private companies, and their takeover by the government hasn’t cost taxpayers anything — yet.)

Beyond that problem, it’s proving difficult, if not impossible, to find a solution to the mess. Because so many sides played a part in the mortgage meltdown, any ideas to fix it carry the potential of ticking off some important constituency.

The government’s seizure of Fannie Mae and Freddie Mac should have opened the door to making the credit crunch a campaign issue. But even the biggest financial bailout in U.S. history hasn’t taken over the election cycle.

Both sides issued statements supporting Treasury Secretary Henry Paulson Jr.’s moves. McCain, the Republican presidential nominee, along with Palin, wrote a Wall Street Journal op-ed piece vowing to reform the two agencies.

But neither side is digging into the details and talking on the stump about the estimated costs to taxpayers from the bailout; the reasons why the companies got into trouble in the first place, and possible solutions to the precarious state of the country’s mortgage markets.

“Politicians don’t like to talk about things that are contentious and that get people upset,” said Allan Meltzer, a professor of political economy at Carnegie Mellon University’s Tepper School of Business and a leading expert on monetary policy. “I find it disappointing, but not surprising, that they’re not speaking to this more.”

That could change — especially if the public begins to question the candidates during debates and public appearances, forcing the issue.

Meltzer said he wouldn’t be surprised to see that happen. “People are not stupid,” he said. “A lot of people understand they’ve been handed a big slice of debt they’ll have to repay. They know they’ve been given a huge liability. The candidates may have a harder time avoiding this as it goes on.”

The Treasury Department announced Sunday it would seize the companies, to avoid the possibility of both going into bankruptcy and threatening the stability of the entire housing market. Fannie and Freddie, which were both created by Congress, account for half the county’s mortgage debt. Both have been hit hard by losses on subprime mortgages, and more recently, higher-risk loans to borrowers with good credit.

The troubles at Fannie Mae and Freddie Mac are part of a larger mortgage collapse that has contributed to 11 bank failures so far this year, and a rising number of families in foreclosure — a record four million Americans, according to the Mortgage Bankers Association. To deal with losses, banks and lenders are tightening credit and making loans harder to get and more expensive for homeowners and for businesses — holding back economic growth.

The bailout is intended to get credit flowing again, with the government buying mortgage-backed securities held by the two agencies. The Treasury Department has declined to estimate the total cost, saying it will depend on the extent of declines in the mortgage market.

To William Poole, the former president of the St. Louis Federal Reserve and a longtime critic of Fannie Mae and Freddie Mac, the candidates don’t want to get too far into this issue for a reason. The potential cost of the bailout could be huge, and people may soon begin figuring out exactly what it might cost them.

In Poole’s view, the bailout could wind up with a tab as high as $300 billion, or $1,000 for every man, woman and child in the country. That should be enough to get people’s attention, he said. So might figuring out who to blame for the mess, with suspects on both sides failing to rein in the mortgage giants as the firms lobbied Congress during the past decade. Poole, however, is not optimistic the candidates will take the bait.

“It would be helpful if we had some sort of discussion of how we got into this situation,” Poole said. “There’s going to be, I believe, a very large taxpayer cost. But it’s the kind of topic that’s extremely difficult for politicians to get their arms around. I would not expect a rousing campaign speech anytime soon.”

On the Internet, housing and financial bloggers are losing their patience with the avoidance of the credit crisis in the campaign.

From Peter Viles at L.A. Land, the real-estate blog at The Los Angeles Times:

They gave nice speeches, inspired their conventions and hit the road. What they didn’t do — neither John McCain nor Barack Obama — was dare to say how they will solve the most serious economic problem facing the country: the deepening credit crunch. They didn’t even dare to mention it.

It is bad out there and getting worse: banks are in trouble and are unable to raise capital. The current Federal Reserve, and the Bush administration, have already taken unprecedented steps to back up and prop up the nation’s financial system. And yet the crunch deepens…Detroit wants a $50 billion bailout. What would they do, Obama and McCain?

Lou Barnes, a mortgage broker and blogger, said the bailout raises the kind of questions politicians may have to answer, even if they don’t want to:

If we save rich financial guys, what of Ford, Chrysler, and GM, and their retirees? What of the impulse to save homeowners, no matter how foolish, no matter how terribly unfair to the prudent but unlucky? Not one of the four nominees has financial-market experience or evident knowledge. Better not to talk. However, election-cycle paralysis may be overtaken by events.

Maybe. But for now, both Obama and McCain are taking the strategy of offering sympathy to people losing their homes in foreclosure. Or making an issue of McCain’s houses. Or arguing over which side really represents change.

To Dean Baker, co-director of the Center for Economic and Policy Research, something far more dramatic than the unprecedented takeover of Fannie and Freddie would have to occur to prod either side to put the credit crunch front and center in the campaign.

“I don’t think they are going to talk about it,” Baker said. “The Republicans don’t have much to say, and it’s not high on their agenda. The Democrats aren’t much different. Obama’s taken a lot of money from Wall Street, and the Republicans are tied to those people too. There’s just a real reticence to get into this.”

It’s still early in the campaign, though, and it’s possible that one of the candidates may decide to elevate the credit crunch into a major issue.

Until that happens, even their critics acknowledge the candidates have pulled off something pretty impressive so far. They’ve managed the rhetorical feat of talking in generalities about jobs, housing and the economy — while dancing around the credit crunch at the heart of the problem.