12 Nov 2008

Paulson on His Bailout: The Ol’ Switcheroo

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So you know how it was a little weird that Paulson initially asked for $700 billion to buy dubious mortgage-backed securities and other assets, and then very quickly changed course and said they needed to use some of the money to “recapitalize” troubled banks? And then remember that the first $125 billion got injected into the biggest 9 banks, most of which were healthy and some of which didn’t even want the money? And then the automakers and (for all I know) Orange Julius producers started asking Paulson for their piece of the action?

Well now the transformation is complete. According to the headlines on CNBC (but for which no story is yet available*), Paulson is right this moment explaining that not one penny of the $700 billion will actually be used to buy “toxic” assets. That’s right, about 5 or 6 weeks after asking Congress for $700 BILLION for Unbelievably Important Task A, Paulson is now admitting that he has decided in the interim that actually, that money is better spent on Super Unbelievably Important Tasks B, C, D, …

In the beginning I thought Paulson was an evil genius. Now I’m wondering if maybe that is only half right.

* UPDATE: Here is a brief story with this juicy quote:

Paulson, in an update on the Treasury’s financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program.

“Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources,” Paulson told a news conference.

So, umm, what exactly changed in the last 5 weeks? Many economists were saying from the get-go that his plan made no sense. Was it that Paulson’s staffers actually read some of the informed critiques of the plan, after they literally begged Congress for the money and warned that the world will end if they didn’t get it for their Unbelievably Important Plan? Actually, that probably wasn’t it. It was probably more like, Paulson and his staff discovered for themselves that their plan made no sense, without having read any of the outside commentary on it.

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