Post Claims Paulson Misled Bush on Bailout
According to the Washington Post, after the initial defeat of the bailout package in the House last Monday, Treasury Secretary Henry Paulson went to see President Bush in the White House. The Post reports that President Bush asked Paulson about "Plan B." According to the Washington Post, Paulson told Bush "there is no Plan B."
Of course this was not true. Paulson could have easily designed a bailout plan that was centered on the direct infusion of capital in the banking system, as was suggested by George Soros in a Financial Time column later in the week. Virtually every economist who has written on the bailout argued that a direct infusion of capital is a far more effective approach to dealing with the financial crisis than the approach outlined by Paulson.
Clearly Paulson had not invested a great deal of time in crafting the initial proposal he submitted to Congress since it was just three pages and few of the details of the plan had yet been decided. This means that Paulson easily could have switched gears and developed a plan along the lines advocated by economists.
This alternative approach almost certainly would have passed by an overwhelming majority in both houses of Congress since it could easily be structured in a way that ensured that the banks were not being rewarded for their incompetence at the taxpayers' expense. This was a major factor behind the public's outrage over the bailout.
If the Post accurately described the meeting between Paulson and Bush (there is no source given for this account), then Secretary Paulson badly misled President Bush on the most important economic decision of his presidency.
Paulson had one goal -- to expand his own power.
October 6, 2008 9:16 AM | Reply | Permalink
More likely, it was his acceptance of Bernanke as his guru.
The conventional wisdom is that Japan delayed removing toxic assets from bank balance sheets until 1998 -- eight years into its "lost decade."
Since up till then Japan had followed Bernanke's(1990) prescription without success, he apparently convinced Paulson that it must have been the toxic assets left on the balance sheets which prevented recovery rather than a failure of his earlier diagnosis and recommended treatment for a deflation.
October 6, 2008 10:27 AM | Reply | Permalink
C'mon Destor - give Paulson some credit (figuratively)...
He also needed to acquire bailout funding for his buddies at Goldman! After all, he's out on his ear in January - what's a guy supposed to do for a living, what with the economy and all? I wonder how much of $700 billion it would require to buy a position on the GS board.
October 6, 2008 12:14 PM | Reply | Permalink
Plausible deniability.....BS They were hoping to take the money and run.
October 6, 2008 9:22 AM | Reply | Permalink
This alternative approach almost certainly would have passed by an overwhelming majority . . . . Dean Baker
Highly debatable.
The majority party had to lead and was willing to lead the bailout but only if a sizable portion of Republican legislators joined its position. Don't want to be painted as the party for Wall Street and against the taxpayers, do we?
A "socialistic" direct infusion of equity or loans in the banks (and either would have been accompanied with some restraints on corporate prerogatives) would have run up against much more resistance (on political and ideological grounds) from the Republicans -- most of whose constituents live in Krugman's "Flatland" and aren't yet feeling the pain.
Whether enough Republicans would have joined our sell-out Democrats to give them adequate cover for a pure recapitalization of the banks with taxpayer protection is questionable.
October 6, 2008 10:40 AM | Reply | Permalink
Today's events may change some minds.
October 6, 2008 10:46 AM | Reply | Permalink
Which way?
Side note re "Flatlanders": Case-Shiller shows Denver, Dallas, and Atlanta home prices up July over June. Year over year Denver, Dallas, and Charlotte are down low single digits. The true pain hasn't hit them yet.
"We didn't go along with these Yankees and their Bubble. Why should we be bailing them out?"
October 6, 2008 10:57 AM | Reply | Permalink
Ellen,
they just announced a "breaking" on CNBC, that the Treasury is putting out an urgent call for accounting and asset managers to be hired by Oct. 8. I believe they also said auctions will be starting Oct. 15, though I don't know if I heard that right--something is going to happen by Oct. 15 using those asset managers.
Are you going to be applying? Even though I don't always agree with your view of things, I'd certainly love to see someone like you there, irritating them all with questions, putting flies in ointments, etc. :-)
October 6, 2008 4:39 PM | Reply | Permalink
P.S.
All Your Financial System Are Belong to Neel Kashkari
Meet Neel Kashkari, who’s been charged with overseeing the infamous $700 billion pot of gold....
cont. @ Yglesias, Oct. 6, 4:50 pm
October 6, 2008 9:59 PM | Reply | Permalink
Bush could care less, he's already picking out furniture for his dacha in Texas, Paraguay or whatever hidey hole he plans to spend the next 2 years in.
Paulsen is trying to figure out how to get some quick cash for himself and his cronies before they get the boot in January.
Hold onto your wallets!
October 6, 2008 11:32 AM | Reply | Permalink
Oh, my heart aches for those poor widows and orphans who are losing their assets today! Surely this is now an emergency that justifies calling Congress back into session to pass a 2 trillion dollar bailout, most likely a bailout on the order of golden parachutes for all of the poorest of the wealthy executives who need our protection from the wolves at their door.
Sorry for that outburst.
Paulson was chosen by Bush. Why does anything else need to be known about the man? Of course he gave Bush bad advice, when looked at from the perspective of an ordinary citizen. But, he gave Bush excellent advice when looking from the perspective of executives in the finance industry who are stuck with worthless paper they "invested" so much money in. Given that it will be another month before any of that worthless paper is actually purchased by us, I suppose today's stock market reaction isn't too surprising. And, with a 35 yr old former Goldman Sachs minor executive in charge of the $700,000,000,000 program, I find it odd that anyone really expects something positive to come of it, other than for a few finance industry executives.
If I seem pissed, that's because I am pissed.
October 6, 2008 11:33 AM | Reply | Permalink
Now you know why they desperately wanted a clueless idiot in the WH...
October 6, 2008 12:41 PM | Reply | Permalink
Ah yes, poor Shrub is such an ingenue--it's not like he has any real business experience. He's just our first 'MBA President' who promised, when elected in 2000, to 'run this country like a business.'
Tony Soprano would have loved these guys!
October 6, 2008 12:49 PM | Reply | Permalink
Actually, he has quite a bit of business experience. He ran a couple of companies that went belly up so this is a familiar scenario to him..
October 6, 2008 5:04 PM | Reply | Permalink
I keep waiting for Daddy Bush to send his friends in with open check books to save little George. Why not? It worked well the other times. And, one of Daddy Bush's friends can certainly afford it. (The one that wears the white robe all the time.)
October 6, 2008 11:40 PM | Reply | Permalink
Silly Silly you.
Who do you think will by up the bonds to bail out the failing banks?
Between China and Saudi Arabia we should be fine. Russia is looking like a bad company to buy into right now anyway.
October 7, 2008 12:28 AM | Reply | Permalink
An excellent NPR 'This American Life' [worth a re-hearing on the web] - which does an outstanding job on untangling the mess in all its profound glory, points out that the concept of using a 'stock injection' plan [correct term?] at the Treas Secr's discretion was inserted into the Senate Bill passed by the House.
The person who found this little-noticed plan being inserted into the Senate text sounded as tho he had found a secret cache of gold to save the economy.
The point of this being a discretionary alternative plan in the existing legislation means that the choice of who is running Treas will be even more crucial to implementing this better plan. If Obama's advisers stay as good as they are and result in a better Tr Secr, one can hope that only a portion of the funds will be wasted in buying garbage.
October 6, 2008 12:57 PM | Reply | Permalink
Maybe he "found" a treasure map leading him to the pirates' "secret cache of gold."
But seriously, what's the statutory citation?
It is the case that the Treasury Secretary has the discretion to take an equity participation when purchasing "troubled assets," but where is he given the authorization to inject capital directly into a bank?
-- whether he does or doesn't get anything in exchange for the loan or equity investment.
October 6, 2008 1:57 PM | Reply | Permalink
This is Highly Recommended, follow the money and you find yourself a double ouroboros:
3 Questions the Government Doesn't Want You to Ask About the Financial Crisis (and 3 shocking answers)
Robert Prechter
Elliott Wave International
http://www.biiwii.com/guest4/ewi/11.htm
The final paragraph sums it all up:
"One might be tempted to charge therefore that Congress makes its laws for the purpose of helping banks. This idea, too, is incorrect. Helping banks is merely a side effect. The reason that Congress creates privileges for bankers is to benefit politicians."
October 6, 2008 1:50 PM | Reply | Permalink
Off topic. This is getting ridiculous.
German Govt Rescues Hypo Real Estate: Cost $68 Billion
And why did Hypo need rescuing?
It seems Hypo bought Depfa, a Dublin- based lender, last year. Depfa had sold (underwritten) a package of municipal bonds with an attached condition. If the bonds' ratings were downgraded, the buyers could put them back to Depfa -- that is, Depfa (now Hypo) would have to buy them back for cash.
So, some ratings agency twit downgrades them*, and Hypo has to come up with billions it doesn't have. "Crisis" in Berlin!
* Maybe the twit had a bother-in-law running a hedge fund that bought these municipals: "I'll write down the ratings; you sell the stuff back to Hypo; and then, you and I can retire to Tahiti."
October 6, 2008 2:44 PM | Reply | Permalink
Misled by someone in the Bush administration? Finally George is one of us.
October 6, 2008 5:51 PM | Reply | Permalink
That would be what we call a misunderstanding - George was never really in charge of much. So for him to be "mis"led would require one to assume to actually judge the leading as a act. I suppose you could say he misfollowed. Mostly I would say he followed along perfectly. Executed flawlessly.
Perhaps not from appearance perspective, but the mission was indeed accomplished as the government has been effectively crippled with excessive war and bank financing obligations. Think of the government as the sacrificial lamb at the altar of free market capitalism.
It is clear that all Bush can do is repeat what he is told. Sure there is lots of theater in which he nods and agrees or tosses a few questions. In the end Bush is a true empty suit - a vessel for the handlers. Lots of bark, but the bite is at the discretion of those holding the leash.
Why else do we end up with his media performance on the bailouts - he only showed up for the press release.
Alas.
I suppose it is suiting that shows like American Idol hold such sway - substitute survival mechanisms where the viewer can participate in life or death decisions. Watered down gladiator games with no blood. Hell we NEED torture to get off after such neutering.
October 7, 2008 1:01 AM | Reply | Permalink