Paulson's big defense: I'm just like John Maynard Keynes

The Bad Sleep Well or Rashomon?

Here's Bloomberg on Paulson's testimony. You're right, you're right, to me it's a bit like Rashomon:

"Nov. 12 (Bloomberg) -- U.S. Treasury 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.

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said today in a speech at the Treasury in Washington. ``This is creating a heavy burden on the American people and reducing the number of jobs in our economy.''

His remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn't delivered what was promised. Paulson sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets, and he may encounter resistance from Congress for the remaining $350 billion after using most of the first half to buy bank stakes."

No kidding?

"Lawmakers will ``put his feet to the fire,'' said Kevin Petrasic, a former official at the Office of Thrift Supervision, now an attorney with the Paul, Hastings, Janofsky & Walker law firm in Washington. ``I'm not sure how you get around dealing with what is clearly the congressional intent.''

Charles Grassley of Iowa, ranking Republican on the Senate Finance Committee, said the shift makes ``you wonder if they really know what they're doing.'' Grassley, in a letter to Paulson and Federal Reserve Board Chairman Ben Bernanke, raised the possibility Congress could block appropriation of the remaining $350 million under the rescue package.

``Congress can act any time to revoke the Treasury's authority,'' Grassley said. ``They will be watched and they will be questioned.''

Well, here's my take:

1) He doesn't really know what he's doing

2) He doesn't need asbestos shoes ( Between Waxman, Frank, and Grassley, I don't know who scares me less )

"Paulson said he has no regrets for the revised plan. ``I will never apologize for changing a strategy or an approach if the facts change,'' he said."

God, don't quote Keynes.

"Officials are considering using a portion of the bailout money to ``encourage private investors to come back to this troubled market,'' he said.

The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital. Buying ``illiquid'' mortgage-related assets -- the reason the program was established a month ago -- is no longer being considered, he said.

``We will continue to examine whether targeted forms of asset purchase can play a useful role,'' he said."

So far, no one yet knows what this public/private plan is, except, that it's public/private, which, correct me if I'm wrong, it already was.

``A collapse of the American automobile industry would be the worst possible thing that could happen at a time when we are already weakened,'' Frank, a Massachusetts Democrat, said in an interview on Bloomberg Television. He also said he disagreed with Paulson's decision to forgo buying bad assets."

I like Frank, but that's hyperbole. This business is slowly dying. This is simply a way to allow workers in roughed up states to transition more easily over time. I understand the human dilemma.
He also said he disagreed with Paulson's decision to forgo buying bad assets.

``That was an important part of the way we sold the program, and I think he's making a mistake,'' Frank said."

Talk about moral hazard. These are empty threats.

"Paulson said he has no timeline for notifying Congress of his intent to use the remaining TARP funds, and reiterated that he's ``comfortable'' that $700 billion is ``what we need'' to stabilize the financial system."

I know that this follows from my Austinian philosophy, but this system talk leads to fruitless analysis.

"Some lawmakers are also calling for greater oversight over use of the funds. Senator Charles Schumer of New York today reiterated his calls for Paulson to require banks taking public capital to increase lending rather than use the money to finance takeovers.

``The TARP really gave no incentive for the banks to lend the money, carrot or stick, and that's a big problem,'' he said on a conference call with reporters."

And you know, dummy bloggers like me said that.
Maybe instead of Rashomon, we should view The Bad Sleep Well again.

Clearly Paulson was making an allusion to John Maynard Keynes. And what is so bad about that? Although he came over time to have a well-developed economic theory, Keynes was clearly an advocate during the Great Depression of trying practical steps to fight the Depression until something worked.

We should not today belittle economic policy-makers who, in the face of the greatest financial and perhaps economic crisis since the Depression, try good ideas. It sure beats doing nothing!

One of the most important lessons from Keynes - extremely topical with the G20 meeting about to happen - is the importance of international economic cooperation. As others have been pointing out, Keynes advocated internationally coordinated economic policies (e.g. monetary or fiscal stimulus), and effective international economic institutions like those he helped create at Bretton Woods that would help to provide conflict-reducing and stabilizing management of the international economy. He thought that if this couldbe achieved, then free trade was very desirable. (All this is set out in Donald Markwell's book "John Maynard Keynes and International Relations".)

In the face of a wildly unpredictable wave of financial and economic problems - the worst roller-coaster since 1929 - Paulson has helped provide leadership, both nationally and internationally, so far, and we need to strongly encourage the Obama administration to provide strong US leadership in international cooperation over the months and years ahead. I am sure that Keynes would have supported this.

Is it so wrong to allude to the sensible attitude of one of the greatest economists and practical economic policy-makers ever?

Hi Mr. Fox,

I just read Bill Saporito's excellent Time article on GM and whether it's worth saving. Care to weigh in, or would that be stepping on your colleague's toes? With all the financial misery going around, I'm not looking forward to anyone letting a company that big(with so many dependents/supporters) fail. I like Saporito's idea of giving them enough money for restructuring, plant-closing and brand-chucking. Maybe we CAN let GM fail... just not all at once? Break the fall, then let them finish the rest of it? Dying to hear what you think.

Thank you for your time,
Matthew Hissong