Monday, November 17, 2008

Garrison to Paulson: "When I am king, you will be first against the wall."

September 20, Paulson unleashes his plan upon the world. Highlights:
  1. Buying Mortgage Backed Securities from Paulson's Wall Street chums. Nobody wanted to buy this crap once the music stopped playing. The only way for financial firms to offload it after they had lost the game was for taxpayers to foot the bill.
  2. Contracting with financial institutions to manage the transfer of wealth. Treasury hadn't hired enough people with Wall Street experience to do the operation in house. The difficultly of setting up the necessary bureaucracy belies any legitimate sense of urgency. Since this solution would take so long to implement, its flaws cannot be excused on the grounds that something had to be done immedietely.
  3. "The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time." I believe this was contradicted in subsequent reports. There's a frightening difference between being able to buy $700,000,000,000 worth of MBS and then returning the proceeds back to the Treasury, and being able to buy and sell MBS until the entire credit line has dried up.
  4. "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
Between the demand for 700 billion dollars and the claim of absolute power, this was some scary shit. There was a lot of support for this bill based on the notion that Paulson must have some reason for making such an urgent and dramatic request.

October 14, Paulson announces a voluntary capital purchase program

November 12
Finally he gets it.

November 17 Either things aren't as bad as Paulson promised, or he finally realized that as an employee, if he doesn't know what to do with his employers money, he should stop asking for more. "The Bush administration told congressional aides it won't ask lawmakers to release $350 billion remaining as part of the $700 billion U.S. financial- rescue package."

"Treasury Secretary Henry Paulson has been criticized by lawmakers for shifting the focus of the program to inject capital directly into financial institutions. His initial proposal presented to Congress called for buying troubled assets from the firms."

Paulson seems to have gone out of his way to stand out from all of the other villains culpable for this crisis. As corrupt and flawed as Fannie, Freddie, Frank, and friends are, I generally have some idea of how systematic problems encourage otherwise decent human beings to make odious decisions. Paulson is a mystery.

Edit: I am impressed by this speech by Thaddeus McCotter, who voted against Paulson's bailout. Kudos.
So you're not a Paulson fan. Can't say I am either. I do respect the fact that he's shown a willingness to adjust his strategy when it's apparent such action is necessary.

The core of this debate is to what extent (if at all) the government should intervene in the free market system to absorb the harmful social effects of an "adjustment" in the economy. I recognize McCotter's argument that the free market system is not broken. I also recognize that I haven't heard a (serious) call for the end of capitalism.

The impetus to pass the bailout package is more politics than policy, but that doesn't mean it's a bad thing. To illustrate my point- how terrible an idea was the gas tax "holiday" plan proposed by Hillary Clinton and John McCain back in May? Even the heightened insanity of partisan politics couldn't force Washington to take that idea seriously. But Bryan Caplan, an associate professor of economics at George Mason, wrote an interesting op-ed that explained why it wasn't as terrible an idea as everyone thought. Sure, it's bad policy, but the appearance of a government that's trying can yield greater positive effects in terms of consumer confidence than a sound policy. (Of course, George Mason can still suck my balls for ruining my bracket in 2006. I guess another recent ill-advised policy is God's way of telling them to fuck off.)

Good government isn't always defined by good policy. Though the best policy option in turbulent times may be to be patient and ride things out as the market works, the choice won't ease the troubled minds of consumers or investors. Bankrolling a compulsive gambler won't solve his problems, but helping him pay off his debts while he seeks treatment for addiction covers the short and the long-term.

So chill the fuck out.

Enough finance. Stupid Garrison.

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