When the world was about to cave in; when Hank Paulson assured us that the only way to keep the world from caving in was to do what he said, now; when he told us it had to be unreviewable or else-- What he said to be done was this: for the Treasury (meaning us) to buy up the nonperforming assets of the large banks (meaning Hank's friends and colleagues).
Various members of Congress, for various reasons, balked. (Or, as Sarah would say: blinked.) And in reaction: the market tanked.
In that short interregnum, on either side of the Jewish new year, between the vote failed and the vote successful, some people said, maybe Hank's plan isn't the best plan. Among them was the UK's Prime Minister Gordon Brown. Among them were several Doubting Democrats, q.v., Marcy Kaptur (D-OH). Among them was NYU economist Nouriel Roubini, who, because he had been so damnably prescient about so many things, was disregarded. Said Roubini:
Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system.....
In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead - in most cases in which it was used - made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).
But Paulson said no--he'd rather spend the money to take the bad assets off the books of his pals. He was adamant about it. As he said to the Senate Banking Committee on September 23:
Some said we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure. This is about success.
So Hank got what he wanted (plus another hundred fifty billion or so of inducements to the members of Congess). He had his bank. And then he... sat there. While the market, in reaction to the rescue, tanked and tanked and tanked some more.
So now, several tanks later, Hank seems to have come to his senses. He seems poised to do what he said shouldn't be done. He seems finally to understand that failure's no success at all. As The New York Times reported:
Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation's banks -- in effect, partially nationalizing the industry.
Can Hank have seen the light? Is he going to do what must be done? Is he going to do what Sweden, but now also the UK, and, as of this weekend, France and Germany are doing? Is he going to take his Big Pile of Cash and buy us some banks?
Well, almost. Because Hank's no socialist, no. He's willing, after so much tank, to fill his syringe with cash and do some injecting. He's just not willing to do it in a timely fashion. (He could have announced the details today, when the G7 announced its plans. He pointedly did not.) As Chuck Schumer (D-NY) put it this weekend:
''I am hopeful that tomorrow, the Treasury will announce that they're doing it. And they have to do it quickly ... markets are waiting."
What's Hank's hesitation with the Swedish model? Well, Hank's not willing to let us really own the banks we're now injecting that cash into. He emphasized that he'd use our money only to buy "nonvoting shares," and that the Treasury wouldn't tell "healthy" companies what to pay their CEOs, or how to do their business.
In other words: when Warren Buffet gives Goldman Sachs five billion dollars, he gets ten percent guaranteed return, and the option to buy one tenth of the voting shares. When Hank gives firms like Goldman Sachs billions of our money, we get no interest, we get no votes.
That would be too Swedish.
Hank is clearly worried that if he gives our money to his pals, we'll want something in return. That in this diner, we'll point to Warren's plate and say, "I'll have what he's having."
At the end of the day, Hank may realize that the only way to save the world is for us to buy out his pals. Is to listen to those who were right all along, as opposed to those who were wrong-- Or those who got us into this fine mess in the first place.
But Hank, having told us that the world was coming to an immediate end, now takes his time. When pressed, he said
"We are going to do it as soon as possible. We are not wasting time. People are working around the clock."
But in his world, the clocks seem to have no hands. Perhaps, in the end, he prefers to follow the other Swedish model...
...the one where he sits down, and plays chess with Mr. von Sydow.