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Paulson Repudiates Paulson Plan

November 13, 2008

George Santayana once said that those who forget the past are condemned to repeat it. Karl Marx said that history repeats itself, first as tragedy, second as farce. If Marx was right then Santayana must be also. What is happening now does have all the elements of farce, but I at least don’t remember this happening before.

To review some recent events: a little under two months ago, Treasury Secretary Paulson came to Congress asking for $700 billion dollars with which to buy mortgage backed securities from distressed firms. At the time we were told that it was essential that this plan was enacted and enacted quickly. There was no time for real debate or examination of the plan or its alternatives. We had to act now! Those who opposed the plan were heaped with scorn. Indeed, some even suggested that the Paulson plan made sense simply as a money making venture, and that ideally the government could do away with taxes altogether in favor of raising revenues through such schemes.

In any event, two weeks later the plan was passed by Congress and signed into law by the President, and then… nothing. Nothing happened. Don’t worry, said the Treasury, we never intended to actually start buying distressed assets so soon. Still working out the details and all that. But soon. Soon.

Another two weeks passed with nothing much happening. Former Goldman Sachs C.E.O. Paulson announced that former Goldman Sachs Vice President Neel Kashkari (sound it out) would be in charge of the program. Then, on October 14, Treasury announced that it was giving a good chunk of the bailout money to America’s nine biggest banks, in a transaction described as being “not voluntary.”

Since then, all sorts of folks have lined up to get their share of the bailout money. U.S. auto makers have made headlines over their plea to get some of the cash, but bailouts have also been proposed for everyone from boating to the Ethanol industry. And earlier this week Treasury announced that it was using precisely none of the bailout money granted by Congress for the Troubled Assets Relief Program to, you know, actually buy troubled assets.

Who knows what the next two months will bring?

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23 Comments
  1. jonathanjones02 permalink
    November 13, 2008 10:39 am

    The Blowhards raise some excellent points:
    http://www.2blowhards.com/archives/2008/11/taking_it_to_th.html#005680

    How is it that the Fed receives so much reverence? And they have no democratic accountability whatsoever. Big business and big government with hardly any accountability is a recipe for disaster.

  2. jonathanjones02 permalink
    November 13, 2008 10:43 am

    BA this is also interesting from the libertarian perspective.

    http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/

  3. joseph permalink
    November 13, 2008 10:54 am

    Let’s start putting the pieces together.

  4. November 13, 2008 11:11 am

    Decent point.

    Looking back, I think I fell for the plan too easily — in great part because it seemed like something that made sense by analogy to the numbers business that I deal with on a daily basis, and thus it seemed like a, “they understand this and can fix it” kind of problem.

    Of course, as per Hayak, thinking that you understand something, and thus can “fix” is, is often exactly the problem.

    I suppose I like that having been given the discression, they have now not used the money to buy up assets which appear to have started to circulate enough (or at least, been accounted for and worked around enough) that the credit markets have unfrozen a bit. However, I’m not impressed that there now seems to be a move to simply use it as a good-ideas-fund for whatever seems like it needs doing at the moment under the general heading of “helping the economy”.

  5. November 13, 2008 2:02 pm

    …and then… nothing. Nothing happened.

    That is just a flat-out falsehood. Banks were recapitalized through preferred stock investments, commercial paper and money markets were backstopped, and Ted spreads have come down to where the credit freeze is effectively over, or on its way to being over. And for the record, I’m against all these add-on Keynsian bailouts like what is being proposed for GM, which have to do with moderating a recession as opposed to stopping a full-fledged meltdown of the financial system. The two are entirely distinct. Without a functioning financial system the free market literally comes to a halt.

    Mind you, the government is going to make money on its equity investments in the banks too. But I was always against that approach for reasons already discussed ad nauseum. (Even so it is better than doing nothing at the time, which would have emptied out financial institutions and literally halted the economy. Paulson saved your ungrateful sneering butt, whether you believe it or not).

    The government should, in theory, be able to sustain itself without levying any mandatory taxes. There might be other, policy reasons to levy taxes; but “in order to generate necessary revenue for a wealthy centuries old institution, which cannot operate without them” isn’t one of them.

  6. blackadderiv permalink
    November 13, 2008 2:11 pm

    Paulson saved your ungrateful sneering butt, whether you believe it or not

    I think you have me confused with Goldman Sachs.

  7. November 13, 2008 2:25 pm

    Nope. He saved your personal butt.

  8. November 13, 2008 2:26 pm

    Question for Zippy:

    Didn’t we backstop the money market before the bailout even passed? And to the extent commercial paper has recovered prior to our actually buying distressed assets — isn’t that at most the result of the promise of a bailout rather than the actual buying of assets?

    Now given the sequence of events, it seems quite arguable that the credit markets unfroze in great part to the passage of the bailout — and thus the guarantee that the market for debt wouldn’t cease to exist for a while. I could see it as being the case that the promise of the 700B was enough to unfreeze things even without actually spending it, while refusing the 700B might have left the markets frozen for longer (and involved a lot more pain in the interim.)

    But it does seem like at this point a lot of the money is probably going to be frittered away in not very wise ways…

  9. blackadderiv permalink
    November 13, 2008 2:39 pm

    Nope. He saved your personal butt.

    Really? My own personal patootie? What a guy!

  10. November 13, 2008 3:12 pm

    “Really? My own personal patootie? What a guy!”

    If you are in management at GM, this may be true…

  11. November 13, 2008 3:29 pm

    BA: Yes, yours personally, unless you live in a bunker somewhere.

    Darwin: Yes, markets respond immediately to credible expectations of future events. I continue to expect the TARP to make money; I make no corresponding predictions with respect to other shenanigans.

  12. November 13, 2008 3:36 pm

    I take your point, and if the money is spent that way even now, I won’t object.

    If it ends up all being put into other things… Well, who knows. I think its arguable that knowing the money was available substantially helped loosen the blockage in the credit markets. However at this point I wonder if it would really be much harm if congress simply repossessed the remaining cash.

  13. November 13, 2008 4:03 pm

    It makes a lot more sense to direct the money to other channels at this point. There will a sharp decline in tax revenues next year, and there is only so much money the U.S. can borrow.

  14. Zak permalink
    November 13, 2008 4:16 pm

    Isn’t the Ted spread quite a bit lower than before the bailout passed? I’d suggest that is partly the result of Paulson’s actions.

  15. blackadderiv permalink
    November 13, 2008 4:39 pm

    Isn’t the Ted spread quite a bit lower than before the bailout passed? I’d suggest that is partly the result of Paulson’s actions.

    The Ted spread kept rising after the bailout passed. It started to fall on October 13th, which coincidentally or not was the day Paulson announced they were going to use the bailout money to “recapitalize” the major banks rather than buy up troubled assets.

  16. Nathan permalink
    November 13, 2008 5:22 pm

    F.A. Hayek won a Nobel Prize for a brief essay called “The Use of Knowledge in Society,” in which he explained that government is intrinsically helpless before most social and economic problems because the knowledge needed to solve them is too widely dispersed among the members of society. It cannot ever be made known in a timely fashion to a central authority, and even if it could, that authority would lack the godlike coordinating ability needed to use that knowledge effectively. Adding to the difficulty, much of this knowledge is tacit knowledge, not consciously known or articulated by the individuals who have it.

    Where our Founders saw very little that government could do, and even less that it should do, Americans see no area of life in which government should not be involved. Too often we see government as the leader, all-knowing, all-providing, all-powerful. The worse the crisis, the more frantically and counter-intuitively we seek government solutions. Just now we are suffering through a government-generated economic debacle from which (we are assured) only government can save us with the only way to allocate resources is by government fiat–a few, far-removed individuals making choices for us all, perhaps with the best of intentions but in near-total ignorance.

    As a result if you include all forms of taxation, government confiscates about 40 to 50 percent of our income every year. What we receive for this robbery in goods and services is a pretty poor trade by any measure. Our schools turn out ill-mannered ignoramuses by the millions, many of them not fit for anything but Congress. Our health care system is a shell game where Peter is robbed and Paul doesn’t even get paid. Our social security system is a transparent Ponzi scheme that, if perpetrated by an individual, would earn him life in prison. The U.S. Treasury is the world’s greatest counterfeiter, inflicting on us an invisible form of taxation called inflation.

  17. November 13, 2008 7:13 pm

    Yes, the debt markets started to like it when Paulson started coordinating actions with the Europeans, even though the mechanism was different than what he originally proposed. And even I have to grudgingly admit that there was some reason to do so in order to avoid some really bizarre arbitrage distortions.

    And?

    I can’t help but think that something in BA’s makeup simply will not let him accept the fact that a Goldman Sach’s guy saved our a** throug prompt and at least somewhat competent action which was almost successfully blocked by Republican ideologues in Congress. The facts just won’t wedge themselves into a BA-friendly narrative.

  18. Cantor permalink
    November 13, 2008 7:20 pm

    Zippy:

    “…blocked by Republican idealogues in Congress”?

    You overlook the great number of Democrats that similarly were against the first plan.

    Though, come to think of it, a situation brilliantly orchestrated by Pelosi to make things seem that way shouldn’t likewise be also a consideration that would come to mind.

  19. blackadderiv permalink
    November 13, 2008 7:24 pm

    I can’t help but think that something in BA’s makeup simply will not let him accept the fact that a Goldman Sach’s guy saved our a** throug prompt and at least somewhat competent action

    Funny, I’ve had analogous yet opposite thoughts about you.

  20. November 13, 2008 7:59 pm

    Cantor:

    Perhaps, but I expect Democrats to be ignorant ideologues.

  21. Zak permalink
    November 13, 2008 11:36 pm

    Blackadder,
    You’re right that recapitalization seems to have had more of an effect than the idea of buying mortgage-backed securities. But that was still made possible by the bailout legislation, which gave Treasury the assets to do it. So even if it wasn’t as urgent as previously stated, it has had the intended effect.

    Rod Dreher had a post today citing an Asia Times article about how the yield on inflation-adjusted treasury bonds has shot up (which one wouldn’t think likely, given the fact that US treasuries have been seen as a safe investment as equities, commodities, corporate bonds, and foreign currencies all suffer). If it is as big a problem as the article suggests, maybe we are seeing the downside to the government’s loan-backed pump priming.

  22. Liam permalink
    November 14, 2008 8:04 am

    The MBS’s aren’t the problem. It’s the vastness of the synthetic instruments that’s the problem. The actual MBS’s are a drop in the bucket compared to the synthetics.

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