So Paulson Say US Lacked Tools to Battle Financial Crisis?

Wellie, the incumbents are not yet out of office, yet the Bush Administration blame shifting spin doctoring is already in high gear.

Henry Paulson gave an interview to the Financial Times that appears either to have been remarkably brief (even the 10 minute Bloomberg videos typically yield more quotable material) or Paulson has gotten very good at a style of speech perfected in Japan, where nothing substantive is conveyed.

Nevertheless, the bits that were FT-worthy were clearly an effort to make the Treasury appear the victim of circumstance and institutional/legal constraints:

He {Paulson} said that even after Congress in October approved the $700bn (€496bn) troubled asset relief program, the US still lacked tools such as an adequate special bankruptcy regime for non-bank financial firms.

“We’re dealing with something that is really historic and we haven’t had a playbook,” he said. “The reason it has been difficult is first of all, these excesses have been building up for many, many years. Secondly, we had a hopelessly outdated global architecture and regulatory authorities  . . . in the US.”

Ahem. And whose fault, pray tell, is the lack of “an adequate special bankruptcy regime for non-bank financial firms?” The Bear collapse made crystal clear what a big issue this was. Lehman, Morgan Stanley, UBS and Merrill (in roughly that order) were all perceived to be risk. This was a live issue.

Did Paulson do bupkis about it? He announced his proposal for financial regulatory reform later in the spring, and it was effectively a call for simplification and consolidation of regulatory functions under the Fed. Not a peep about bankruptcy.

Given the importance and urgency of the issue, Paulson should have made it top priority to get new legislation passed. But there is no evidence I am aware of any thinking at Treasury along this line, and certainly no initiatives.

Also note “we haven’t had a playbook”. A mere week and a few days ago, Paulson used the “no playbook” comment to argue that he had managed the crisis effectively:

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

I took that comment to be an admission of a lack of much (any?) planning; other claimed that the football imagery was used more narrowly, in the sense that the Treasury did not have pre-planned reactions to specific developments.

Perhaps Paulson has decided to shift his message while appearing consistent by using the same turn of phrase. Regardless, in the Financial Times article, Paulson almost seems to be complaining that the situation he faced was outside historical bounds, therefore they had no models to turn to.

But that is utter bunk. We have pointed out before that the powers that be have ignored the Swedish model and the lessons of other banking crises as to what approaches are likely to be most effective. In fact, we noted in August that the TARP bill, which Paulson defends in the interview, was almost diametrically opposed to what an IMF study of 124 banking crises had found to be the most effective responses. An illustrative excerpt:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.

More from Paulson:

“People say banks aren’t lending enough,” he said. “I agree with them – banks aren’t lending enough. But there would be much less lending if the actions were not taken that were taken to increase the confidence in the banks.”

Yves here. Paulson’s assertion is unprovable and the IMF research would suggest he is wrong. Back to the piece:

Mr Paulson said any future regulatory overhaul should emphasise “better and more effective” regulation. It also needed to make sure that infrastructures and powers were robust enough to allow large institutions to fail.

“The organisations [financial firms] cannot be too big or too interconnected to fail,” he said.

More revisionist history. Paulson was singularly uninterested in regulation, and there was NO effort to address the “too big to fail” issue. In fact, allowing (or more accurately) encouraging big firms like JP Morgan and Bank of America to acquire other big firms like Bear and Merrill only make the government an even bigger hostage of the financial system.

One might infer that was the real point of the exercise.

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  1. Anonymous

    He’s a war criminal. No different than a NAZI. After the fall of the US
    he will be hunted like a rabid dog.

  2. Peter

    No he won’t be hunted down. As part of the TARP legislation, Paulson and several others are immune from prosecution.

  3. Anonymous

    Regardless of what the TARP says, the people will revolt, and I believe that if necessary he will be killed, or his children will be kidnapped and held until he admits his fraud. I do not wish anything bad upon his children, but I do for him. The consequences of his actions do include potential safety issues for his family, and he may end up learning of these consequences the hard way.

    On a related note, I know someone who knows the daughter of a current bank CEO, and I believe that it would be rather easy for her to be threatened to get this CEO to admit his wrongdoings.

    I am not posting this to suggest anything, just to point out that this type of event is possible.

  4. Anonymous


    You can sum up this entire post in a few words, re: Paulson –

    “We really didn’t know what we were doing!”

  5. wintermute

    King at the BoE is echoing the same excuses as Paulson. They claim they lacked effective tools to prevent the credit crisis. Total and utter LIES.

    The credit crisis could easily have been prevented with simple regulatory edicts – strictly enforced. In case those idiots read this – here is a sampler:

    a) No mortgages over 80% of purchase price (set by independent valuer). No vendor financing. No interest-only mortgages.

    b) All credit card companies must require minimum card payment of 10% of outstanding balance per month.

    c) No Tier 3 capital allowed in banks. No OBVs allowed – must roll all controlled/owned companies into one unit for capital adequacy requirements. No re-use of Tier 1 capital.

    d) No naked CDS positions allowed. Must be equal to, or less than value of bonds held.

    I could go on, but it is clear that regulatory institutions waste 99% of their time and money focusing on detail and bureaucracy – instead of simple controls.

  6. bg

    You do make it hard to give Paulson the benefit of the doubt, and god knows I was spitting mad at him more than a few times.

    But I will certainly agree that his recent words (“I took the least bad approach with poor tools and it did help some”) does seem to backup your view that alternative ideas were not getting to the plate.

    So if I accept the “no plan, out of touch ideologue” explanation for Paulsons actions, how do I explain the legions of first tier macro economic intellectuals not in open rebelion? Krugman, Summers, Roubinni, et al?

  7. But What do I Know?

    Thanks again, Yves. To me, what you wrote is “news,” not the self-justifying excuses that Those in Power promulgate when they grant “exclusive” interviews to the media. The MSM does a terrible job at calling people on their bullshit; that’s one of the reasons I’d rather read responsible bloggers like yourself a thousand times more than this Bloomberg “story.” I suppose that you might appear too negative to some by consistently parsing Paulson, but for heaven’s sake you’re one of a handful doing it.

    Happy New Year and I look forward to reading you in 2009.

  8. fresno dan

    Unable to restrain myself:
    “Did Paulson know how Goldman Sachs made money?”
    any answer is disturbing

    Honestly, what does the man actually know? It doesn’t seem to be finance or economics – it seems he was just a deal maker.

  9. Anonymous

    May Mr. Paulson gain some insight about the crisis by reading this article: What is the Economic Crisis?

    I really enjoyed the analysis. Seems to be logical. I suggest for you from the blog to post the article here. It would be interesting to see reader’s opinion.

  10. Anonymous

    We trust our decision makers to plan for all eventualities and to make sure they have the tools for every circumstance.
    The treasury and everyone in it, including the incoming failed to perform as expected. Not only did they fail but are continuing to fail to plan for all eventuallities.
    If you were in the business of demolition and you destroyed a set of flats with people in it by mistake you would be held accountable. I guess accountability is not for decision makers. How can the US electorate see there representatives vote against something and then that is just ignored. I thought only the european parliament did such things.

  11. Anonymous

    One would of course LOVE TO KNOW: was there a Bernanke-Paulson-et al-Madeoff connection? Seems sure there was.

    Did Madeoff try to get TARP or other Treasury/FED dough?

    How many other Madeoffs are being saved by Treasury/FED dough and will, as a result, never be discovered?

    Who exactly is responsible for investigating all of this obvious CRIMINALITY? Sure seems like there should be special legislation hiring hordes of investigators/prosecutors who would presumably come from Monasteries, preferably not located near DC or NYC.

    And, by the way, Paulson immunity may only apply to Federal activity. I would assume that there might be a State or two who as Victim might be willing to prosecute Paulson and others particularly if there might be significant political benefit to doing so. Good step to the national stage. Any GOVERNORS or AGs who are not presently dating expensive prostitutes reading this?

  12. ruetheday

    There are PLENTY of tools available to policymakers to fight financial crises. What Paulson meant to say is that there are no tools available that effectively let them fight the crisis AND ensure that the princes of Wall Street are kept whole and do not lose any money.

  13. Ken Stremsky

    Happy new year.

    Congress should have learned from the savings and loans crisis.

    Congress should have required down payments on homes and fixed rate mortgages.

    Allowing mortgage backed securities to be sold based on no money down mortgages was nuts.

  14. Anonymous

    I guess it would be different if Paulson doesn’t come across as a lying sack of shite. He makes used car salesmen look good.

    Yet, what do you expect from the Bush administration? Competency?

  15. Suzan

    This may just be a shot in the dark, but why not impeach both Paulson and Bernanke? The impeachment proceedings alone (consider Clinton’s for consensual casual sex) would be worth the expense even if they don’t lead to conviction. Imagine the information that would be exposed about the Goldman, Sachs connections, etc. We’ve gotta find a Ken Starr of the left (Fitz?).

    I think you could make an argument that enough people have had their lives threatened, money stolen (devalued, etc.) as a result of what these guys have done to reach the level of impeachable offenses. The TARP guarantees against prosecution could be considered illegal self dealing (since they themselves came up with them) by the Supreme Court (which may even have less wingnuts on it by then), always the final arbiter on all suits it agrees to adjudicate.

    The thought excites me. Anyone else?

  16. Eric L. Prentis

    The entitled American financial plutocracy is too greedy, hypocritical, incompetent, double-dealing, corrupt and requires too much bailout money to remain in power. A peaceful revolution is required, starting with Mr. Bernanke, Chairmen of the Federal Reserve, and Summers/Geithner, they all must go.

  17. Anonymous

    Paulson laments not having the tools to deal with the crisis.
    We lament the incompetent and coomplicit Secretary of the Treasury who was in charge.
    Has anyone ever heard of any Goldman Sachs employee admitting any shortcoming?

  18. Anonymous

    Sy Krass said…

    Suzan that’s a great idea , but the powers that be (congress) with power to do that are bought and paid for just like Paulsen and Bernanke. By the way, Fitzgerald is a Republican and the same popel advising Bush are advising Obama, then man we will all soon be calling, “Black Bush.’ No offense intended.

  19. mmckinl

    “Paulson was singularly uninterested in regulation, and there was NO effort to address the “too big to fail” issue. In fact, allowing (or more accurately) encouraging big firms like JP Morgan and Bank of America to acquire other big firms like Bear and Merrill only make the government an even bigger hostage of the financial system.

    One might infer that was the real point of the exercise.”

    Exactly, the United States government itself is being held hostage by the financial industry.The tax payers will pay for the greed and incompetence and politicians will do little or nothing to stop this from happening.

  20. Blurtman

    This fellow Paulson’s firm, Goldman Sachs, sells the very bogus securities that are bringing down the world’s financial markets, and he has the gaul to claim he hasn’t got the tools to batle the very crisis that he caused? Perhaps a stretch in a federal pen may help him adjust his perspective.

  21. Anonymous

    The underlying rationale of the Bush administrations 8 yr. long ginormous transfer of public/borrowed funds to the private sector has always seemed to be “Our backs are to the wall, we have to do something, we have NO choice”. But, choices WERE made, and it is in those choices that lie the problems. The administration chose to go into Iraq (10-12 billion a month), the Bush administration chose the route of voluntary regulatory compliance (WTF). The treasury has chosen to NOT throw the money where it would have done the most good, at the mortgages that were at risk and were the cause/center of the actual problem. I’m just a punter,for sure, but to me, the whole thing, the financial crises, the Iraq war, the response to Katrina, etc., just seems like business as usual for this crowd; that is, the publics money CANNOT go to the public, it MUST be transfered to the private, by any means necessary, and if you have to consistently engineer crises to have a reason to do it, then get engineering. Please notice that in Philadelphia (my neck of the woods) there is talk of privatizing the library system, not to mention toll roads, bridges,etc. America is for sale. The Bush administration seems to have successfully IMFed us. Next will be the austerity measures, followed closely by the social “adjustments”.
    Am I just being paranoid?

  22. Suzan

    I like your perspective, Blurtman,

    So go ahead and tell me how you really feel!

    My original comment wasn’t that Congress would impeach anyone – heck – they could still impeach Cheney, Bush, Rummy, RiceyDicey, and all the other criminals if they wanted to – there’s still time.

    No, what I was trying to subtly suggest (too subtle, huh?) was that we, the people, could force them to begin impeachment proceeding at least against the thieves who are stealing our money in plain sight. It’s not higher math. Anyone can work out the figures and know how much they will be losing as a direct result of this “highway robbery” today. No need to wait for the devaluation and eventual currency replacement.

    If we’re going to take to the streets eventually – why not now when the wounds are fresh?

    Just saying.


  23. Suzan

    If paranoia means seeing reality clearly, then yes, anonymous, you are paranoid – also quite clear sighted.

    That was the plan all along as far as I could see – and coming from the economics student’s perspective of my past life, events certainly never seemed unintended or incompetently managed; as a matter of fact, it was superbly accomplished right up to the wide-eyed stares stammering their explanations about how he (Greedspan) and they (Paulson, Bernanke, Summers, Geithner, et al. ad nauseam) had gotten it “wrong.” So please give us the rest of your money (pretty please)!

    You are dead on the money shot (so to speak).

    When you know the people can be taken to the cleaners regularly, you march them to the cleaners – and make those lines straight!


    the whole thing, the financial crises, the Iraq war, the response to Katrina, etc., just seems like business as usual for this crowd; that is, the publics money CANNOT go to the public, it MUST be transfered to the private, by any means necessary, and if you have to consistently engineer crises to have a reason to do it, then get engineering.

  24. Glen

    I wonder if this is a pre-cursor to something big happening soon? You know, get in early, “It’s not our fault. We did all we could with what we had” before that “too big to fail” bank goes under or could it be that Obama’s administration is going to inherit a mess far greater than is being portrayed? Sounds like a classic ass covering exercise to me.

    The Bush administration had 8 years to right any wrongs in the system and failed to do so. The justice for us is that all of these players will still be around in years to come when students are taught how NOT to do things and they will be the reasons why.

  25. Anonymous

    I somewhat agree with the first poster. Paulson is a traitor to his country and must be held accountable. The same applies to many in charge of this sorry excuse of a government.

  26. Anonymous

    Is impalement considered to be cruel and unusual punishment? If so maybe we need to start by redefining a few terms.

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