November 12, 2008
The Market Might Not Like It, But We Do: Paulson Changes Rescue Plan
"U.S. Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets....Buying 'illiquid' mortgage-related assets -- the reason the Troubled Asset Relief Program was established a month ago -- is no longer being considered, he said."
∙ Paulson Shifts Focus of Rescue to Consumer Lending [Bloomberg]
∙ $700 Billion Bailout Bill Round Two: One Down, One To Go [SocketSite]
First Published: November 12, 2008 9:15 AM
Comments from "Plugged In" Readers
Oh yeah, give the consumer some more cheap money so they can buy garbage from China and Detroit. This will sure solve the problem.
Posted by: anon at November 12, 2008 9:25 AM
This means buying stakes in banks and they are proposing matching private capital requirements. Only a few hundred million dollars along this begins to resemble what the Swedes were recommending based on their experience. None of this is going to prop up housing values, but it could limit the economic turbulence. So far this is still cheap compared to the war or what is going on with Medicare.
Posted by: Mole Man at November 12, 2008 9:39 AM
Oh thank god. The mortgage market is working fine for most of America: Fannie and Freddie continue to write mortgages and so the attention of the country has now shifted to other areas.
The fact that Fannie and Freddie cap out at $625K is perfectly sufficient for most of America. In areas in which it isn't sufficient, prices are probably on their way down to where it will be. Either that or it will force prices down.
Problem solved! Next issue...
Posted by: tipster at November 12, 2008 10:03 AM
WOO HOO!! FINALLY some common sense prevails. Its only a matter of time before everyone realizes that high housing prices are the PROBLEM not the solution to our current crisis.
Posted by: Jimmy (Bitter Renter) at November 12, 2008 10:45 AM
It's great that Paulson has now fully admitted that his original plan was a complete mistake. I hope all of the congress folks who voted in favor of it take note. I don't accept anything that Paulson says at face value. But, as bad as he has been (and continues to be), my biggest fear is that his successor will be even worse.
Posted by: FSBO at November 12, 2008 11:03 AM
I wonder how much better or worse Paulson would be doing with this if he was a trained economist.
Posted by: EH at November 12, 2008 12:21 PM
Probably worse. People who approach a technical problem from a rigid conceptual framework (e.g. a certain school of economic thought or a political bias) often miss key details and as a result make poor decisions. Much better to be able to assess a problem objectively, and craft a response that is not guided by emotions or bias.
Which would largely exclude all politicians from the decision-making process.
Posted by: Jimmy (Bitter Renter) at November 12, 2008 12:25 PM
Its not great that Paulson has been blowing smoke up the American peoples asses since Lehman went down. He tried to push some BS 3-page "plan" on us as if the end of the world were happening. This latest change of course can also be called by its other common name -- "bait and switch".
Regardless about whether the new course of action is best (I have no idea) - one wonders what else will be changing now that Treasury as a big wad of cash to throw around.
Paulson and his staff cannot be trusted on anything at this point. He needs to be removed before Jan. 21.
Posted by: wanker at November 12, 2008 12:26 PM
It should be clear to everybody right now that the Government has no plan. Instead, ad hoc decisions are being formed from crisis to crisis. It isn't really government's fault. There is no solution to this mess. Thus, they will try to limit the damage to our country/economy and also give handouts to their friends/family/supporters.
the current administration has it's ideals which focus on the financial sector being the backbone of our economy. Thus they give corporate welfare to the banking system and other financial entities, while letting GM fail as example. The next administration will likely have a different focus, we'll see what it is. (likely infrastructure programs and stimulus checks and probably an autoworker bailout).
but as I've said before, it is impossible to make any rational analysis of any market right now as they are all massively influenced by just a few people (maybe 10 people). as their whims change so will the markets.
in the end it is likely they will fail, but that is only because our worldwide economic system is rotten to the core. There is little chance of reflating the overleveraged overindebted mess.
just like the lung cancer patient. if found too late, the cancer is terminal. the "treatment" was to never smoke. once you have terminal cancer then we simply try to limit the pain in your life and change expectations for your future... but there is no cure.
it is possible that our economy has SARS instead though... highly contagious, no treatment. but if we do enough support (IV fluids, Respirator, etc) then maybe the patient can cure himself. we just gotta keep'em alive until he does the work.
Posted by: ex SF-er at November 12, 2008 1:12 PM
In contemplating the silliness of what Bernanke and Paulson have attempted and are continuing to attempt, it's worth really reading the history of the Great Depression. Most people today really think Hoover was "hands off" and that FDR "saved" the economy with the New Deal. Although there is no overarching plan (probably), the outcome is assured now IMO.
Here's an excerpt from a book I came across (I haven't read this book, but I do recommend Amity Shlaes' "The Forgotten Man" and Rothbard's "America's Great Depression" for good accounts of the New Deal and Hoover's interventionism and refusal to let markets correct).
"But in May 1939, Morgenthau had a problem. The Great Depression -- the most devastating economic catastrophe in American history -- was not only persisting, in some ways it was getting worse.... Here was Morgenthau, the secretary of the treasury, an expert on finance, a fount of statistics on the American economy during the 1930s; his best friend was the president of the United States and the author of the New Deal; key public policy decisions had to go through Morgenthau to get a hearing. And yet, with all this power, Morgenthau felt helpless. After almost two full terms of Roosevelt and the New Deal, here are Morgenthau's startling words -- his confession -- spoken candidly before his fellow Democrats on the House Ways and Means Committee:
'We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong...somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises....I say after eight years of this Administration we have just as much unemployment as when we started....And an enormous debt to boot!'
In these words, Morgenthau summarized a decade of disaster, especially during the years Roosevelt was in power. Indeed average unemployment for the whole year in 1939 would be higher than that in 1931, the year before Roosevelt captured the presidency from Herbert Hoover. Fully 17.2 percent of Americans, or 9,480,000, remained unemployed in 1939, up from 16.3 percent, or 8,020,000 in 1931. On the positive side, 1939 was better than 1932 and 1933, when the Great Depression was at its nadir, but 1939 was still worse than 1931, which at that time was almost the worst unemployment year in U.S. history. No depression, or recession, had ever lasted even half this long."
- from "New Deal or Raw Deal" by Burton Folsom
I can't imagine the new New Deal that is coming is going to be any better. We're still picking up the pieces of the mess created by the first one (entitlement crisis anyone?).
Posted by: Laughing Millionaire Renter in Marin at November 12, 2008 1:52 PM
although I too strenuously disagree with what has been done, you must concede a point:
-you only know what happened in the past, you have no way of knowing what would have happened had other (or no) interventions been done.
It is true, the public spending did not avert the GD. but we have no information on what would have happened otherwise-only THEORIES of what would have happened. one possibility (I assign no percentage of probability here) is that without said stimulus our economy could have collapsed worse than it did
again, using the SARS example:
if a patient has SARS there is no treatment. We can do nothing and leave the patient be. They will probably die.
we can also dump tons of resources into that patient, Oxygen, Respirator, Feeding tubes, etc. Doing this does not affect the SARS. but it can stabilize the patient keeping them alive until they clear the infection themselves. now the patient my have improved odds. but our interventions do nothing for the SARS itself.
Outsiders would look and say "look, despite all your intervention, this patient still has SARS and still got very sick". and that would be the truth. but without said interventions the patient will die. so it's probable death and lots of pain if we use the interventions, or certain death if we don't.
I respect all of your analysis. however, there is NO evidence to support the claim that the free market can succeed here.
that is not to say that I believe we're doing the right things. Far from it. I think in fact that we're doing the wrong things.
I see 2 equally horrific "solutions". neither are palatable.
1) withdraw all govt support. our economy could possibly collapse
2) nationalize all failed companies in necessary industries. again, our economy could possibly collapse.
(third option is to do what we are doing which is an unholy combination of crony capitalism and political lobbyism/partisanship which is worse than the above two).
There is precedent for govt intervention "working", however... the so called Swedish banking crisis.
Posted by: ex SF-er at November 12, 2008 2:17 PM
In case you guys haven't heard yet, our own San Francisco has joined a list of cities that are now requesting bailout funds from TARP (New York, Chicago, LA, and Phoenix are on the list, too). Balanced budgets be damned!
Posted by: Dude at November 12, 2008 3:25 PM