On the Level of Thought and Care That Went into the Paulson Plan

From Forbes (hat tip reader The Social Pathologist):

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

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  1. Matthew Dubuque

    Matthew Dubuque

    Yep. I heard that they wanted it to be between 500 billion and 1 trillion, so they chose 700 billion.

    By the same token however, the 5 trillion figure cited by BOTH Ohmae and Faber also looks like a very pretty round number. Is it a coincidence that they match exactly?

    It’s a little hard to be precise when you are facing uncertainty across many domains.

    One might consult Kahneman’s work, for which he would win a very recent Nobel in Economics on Judgment Under Uncertainty.


    It is the leading text on decisionmaking under uncertainty; a classic in its field and shows how to choose the best heuristics when working with noisy data sets.

    A standard central banker’s tome, although it doesn’t seem Buiter has read it.

    Matt Dubuque

  2. doc holiday

    I am now prepared to speak and write words that are the sum of all my thoughts within the last few twenty minutes or so:

    I think the markets were just about to become efficient when Bear Stearns was going under, i.e, the public had a fairly clear idea of full disclosure related to derivative manipulation and fraud — and now six months later, we have Treasury and this administration working at fever pace to rush new synthetic deals into existence — which in effect will bring about a new era of market inefficiency, where the public will have less disclosure, less information and thus this collusion and corruption, connected to congress, the senate, this administration will continue, no matter the cost. To be sure, the election is already won by lobby groups! Who cares about America?

  3. Yves Smith


    Faber and Ohmae are talking to the media on an informal basis. The Treasury is asking for the biggest peacetime expenditure in the history of man. Those are two very different exercises and levels of seriousness. The Treasury Secretary has sworn an oath of office that holds him him to a much higher standard.

  4. Yves Smith

    And the Treasury, as a bank regulator, has significant information about the banking system that Faber and Ohmae could never obtain, and can also (or should have attempted to obtain) relevant information from other US and international bank regulators.

    Using Faber and Ohmae as cover for the Treasury’s failure to do the basics is a cheap rhetorical trick.

  5. Anonymous

    in his discussions with the senate he said they had been considering this move for abotu a month.

    his entire ‘plan’ if you can call it that sounds like it was scribbled on a napkin

  6. Richard Kline

    I would dispute the idea that ‘little thought’ went into the choice of the headline _number_; quite the reverse. As has been pointed out in posts and comments here at NC, the Paulson Proposal specifically authorizes unlimimited spending: there _is_ no headline number. Paulson knows this. Key committee Congressfolks know this. What was needed was a large enough number to scare the media into pressuring Congress while small enough not to sound like ‘infinity’ to the rubes of the public. One trillion was obviously too large a quote; scare the rubes. Five hundred billion is smaller than the Pentagon’s annual chit; too small to shock and awe the media. So a number nearer the small figure than the large one was pasted on the placard.

    Now, obviously the number is fictitious, but really the Bushies and the Repubs have been, AND STILL ARE, getting away with exactly this kind of public lying about money for fiteen years (and really thirty), so of course they just keep on keepin’ on. Everyone knows that this is a stone lie except the rubes, and they beg the powers that be to lie to them everyday they hit the ‘power’ button for their godboxes.

    Paulson: “We didn’t have the time to tell you the truth, and you don’t want it anyway, so any old lie will serve. You got a problem with that? Not my job: down the hall? I deal in solutions, not problems.”

  7. JesusCrispy

    According to yesterdays WSJ $750 bil of option ARM loans were made. Coincidence or are they betting on a 93% default rate on these loans?

  8. doc holiday

    I hate to make lite of this, but it does seem like a done deal and Treasury is going to hold taxpayers ransom for hundreds of billions of dollars; no limits to the amount of corruption in this mafia run entity that used to be America! Screw these elected retards!

    See: One Hundred Billion Dollars (austin powers)


    Hang in there Yves, great job as usual!! The above is my internet hug!

  9. alphabetzoo

    I wouldn’t quote Kahneman so admiringly: who won the Nobel Prize for showing that the current debt-based financial system leads to exactly this kind of problem? Nobody. Which is my point exactly.

    (Plus Tversky was the brains behind that partnership – allegedly – but he died and they don’t award it posthumously).

  10. dh

    One more thought:

    Re: On the Level of Thought and Care That Went into the Paulson Plan

    >> I came here about a year ago bitching about The Pension Protection Act and the >> 1000 << page plan — which no one in The Congress or Senate read.

    The PPA opens the door for all sorts of nasty abuses connecting your pension funds to hedge groups that are granted exemption from all sorts of prohibited action related to cross hedging crap connected to derivatives. No one still gets this, or the consequences of allowing wall street to be directly plugged into The Department of Labor! Thank you FTC, DOJ, FBI, SEC and all the other government employees that snort wall street cocaine!

    The point being, we have a $700 Billion Plan on the backside of a napkin, pushed alongside The 1000 page PPA, and now, as the casino runs low on fun money, it doesn't matter how many people complain — government fraud will now be turbocharged!

    I know my family and friends will vote against every incumbent up for re-election in ever election we have the honor to live through – these traitors that are destroying America should not have the opportunity to continue with the fraud.

    There is one guy I would vote for here: http://www.youtube.com/watch?v=D3H1CaX91oY

  11. Steve

    The problem is that no one really knows the number, partially due to uncertainty about economic conditions in the next years, and partially due to the unknown consequences of a buyer willing to pay fictitious prices to prevent deflationary price discovery — what’s an acceptable loss severity before the government helps hide your loss? Is it 5% of book, 20%? Politicians will be pressured to help their friends off-load any loss at all, and I expect they will try to expand this new fiat pricing mechanism to any type of commercial or consumer credit. What business doesn’t have impaired assets they would like to see disappear? Why stop with the banks?
    So, what does a fool’s paradise cost?

  12. Anonymous

    Yes I still believe in the tooth fairy.
    But I do not believe that the Paulson plan was ever meant to be real in principle. I believe that it was sort of a sculpture armature around which to write a plan.
    Surely B&P had the resources to present a much more finished plan created if need be overnight. If they did not then why. When I read the part about Paulson being czar I took it as an inside hjoke of some kind
    You story makes of the 700bil number fits right in.
    They just did not figure on how concrete the thinking in Congress and the nation in General had become.

  13. Anonymous

    what are your bets on this one?

    “save the markets” 20 to 1


    “save the people” 75 to 1

    weird that it has come to this. i won’t bore you with *my* particular politics, or my stories of “back when…”

    it would seem to me that we should look to those who create video games for the outcome of this one and not economists. they’d probably have a better idea.


    out of time


  14. Steve

    I don't understand how an auction can structured when so much of this paper was bespoke. Paulson & Bernanke know that, and the impossibility of competitive reverse bids is why they tried for secrecy. The original plan was kneel and kiss my ring.

  15. smelly

    “Using Faber and Ohmae as cover for the Treasury’s failure to do the basics is a cheap rhetorical trick.”

    I scroll down whenever I see Dubuque Canned Spam. Vain, self-absorbed, verbose, and wrong two thirds of the time.

  16. Anonymous

    $700 bil is also approximately the amount of “expanded collateral” the Fed has taken on to its balance sheet since Chairman Bernanke began to deploy his “creative” solutions to last winter’s credit market dislocations. God only knows where that stuff is marked or what it’s truly worth…….

  17. Hirsch


    Thanks for posting the Video of Congressman Fazio and for his excellent comments.

    Hirsch & Vicki Gupta

  18. Anonymous

    To all dubuque shit talkers. You know it will be there every post. Do yourselves and us a favor and just skip over it without feeling the need to talk shit about every one of his comments. Thanks!!!!!!!!

  19. macndub

    How did the conversation go, I wonder?

    “How about a trillion?”
    “Is that the real number?”
    “Yeah. Like the Iraq bill. A trillion then?”
    “Too [obscene participle] big. Never get approved.”
    “$500 billion, then. Done.”
    “Too small. Not credible.”
    “Looks like we split the difference. $700?”

  20. SlimCarlos

    Sckolnick is right — they just needed a number that would send the message that “We have the means to fix this. We have the means to move markets.”

    Besides, as someone pointed out, the $700b isn’t a budget, it’s a headroom figure on the balance sheet. It’s significance is purely psychological.

    And if you are going to do something like this, they’re right: go big or go home.

  21. Anonymous

    They picked a number big enough to support a comprehensive marketing budget. 10% of 700 is 70 which should be enough to buy votes in Washington as well as lots of supportive bimbo commentators.

  22. Anonymous

    Any traders out there? If some plan is agreed to this weekend…Who amongst us will be adding to stock positions on Monday or Tuesday? I’m not trying to make a point or pushing a point of view necessarily. But the question is a valid one..Does the solution put forth by the administration and by congress compel anyone out there to buy more stocks?

  23. Dave Raithel

    Well, since everybody else is speculating, I’ll tell you what I heard, though I can’t recall where (MAYBE on Charlie Rose, but not sure): On the assumption that there is about $14 trillion of mortgages, and on the assumption that maybe 10% of that will go bad, maybe half of that will keep things moving. Seriously, I don’t know enough to make this stuff up. I think I heard Sheila Baird (the FDIC HMFIC) say that approximately $250 billion of mortgages are currently in arrears.

    On a relative note: http://www.npr.org/templates/story/story.php?storyId=95099470

    It’s a worth a listen – about how commercial paper keeps companies like Servicemaster (Terminix) functioning from day to day, and how mutual funds breaking the buck seized up commercial paper – you professionals already know this stuff, I put it here for the rest of us trolls…

  24. Anonymous

    “Who won the Nobel Prize for showing that the current debt-based financial system leads to exactly this kind of problem? Nobody. Which is my point exactly.” — alphabetzoo

    BINGO! Thank you for reminding us of the macro perspective. No one expects empty-suit KongressKlowns to understand economics, other than the street-level basics of a brown bag of Franklins slipped into a greased palm for services rendered.

    But out of the tens of thousands of PhD Econs which have been extruded from our elite diploma mills, how many have ever realized that debt-based currency is an inherently unstable pyramid scheme? Perhaps the greatest Fed critic of all — G. Edward Griffin, author of “The Creature From Jeckyl Island” — majored in speech and communications.

    Economics is a failed profession; a degenerate form of numerology cloaked in clanking medieval statistical armor.

    Anybody with a lick of sense can see that treating a debt crisis with a larger, fresh slug of debt is a brain-damaged policy. Until the fraudulent Bretton Woods II global exchange regime is thrown up against the wall, blindfolded, shot dead, and buried with a stake driven through its rancid heart, the feckless plans of the Paulsons and Bernankes are vanity, all vanity.

    They will go down in history as late-empire currency debauchers, and nothing more. Not coincidentally, both have plenty of obsequious ‘economists’ on their staffs to perform the voodoo rites of transmogrifying debt into … well, brightly-colored pieces of paper having no intrinsic value. That’s some mighty crappy magic — not even entertaining anymore.

    — Juan Falcone

  25. Anonymous

    ~ On the Level of Thought and Care That Went into the Paulson Plan –

    In the first post 9-11 Habeas Corpus Challenge case that made it to the Supreme Court, the administration vociferously argued for the right to imprison ANYONE, indefinitely, without the right to counsel or a day in court if that person was declared an ‘illlegal combatant’, such declaration to be at the SOLE discretion of the President based on criteria KNOWN only to the President.

    Sound familiar?

    The ONLY thought and care that went into Paulson’s proposal was to attempt a grab at ABSOLUTE power over the financial system and ‘settle’ for as much of that absolute power as they could get.

    For now …

    Anyone who thinks they are going to give up the White House are deluded.

    If Palin is removed and a senior general (petraeus?) is put in her place – the end of ‘America the Beautiful’ actually is near, and a whole lot of Americans are about to involuntarily give up their lives for the ’cause’.

    To vote republican, for ANY republican, THIS election cysle is an act of insanity.

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