Dean,

An alternative hypothesis is that in the highly uncertain and volatile environment that Paulson promoted TARP so strongly, the main priority was to be promoting some plan strongly, and getting the government's commitment of money to stabilizing financial markets. The passage of the bailout bill did just that; raised confidence that the government was doing something. If you remember, what Paulson tried to pass first was a one page tabula rasa bailout with no specifics. It was only after it failed the first time that they invented specifics.

Under that hypothesis, it may have succeeded by preventing a worse panic and resulting downturn that would have happened had no bill been passed. So the passing of the bill was the policy, it's details were unimportant and ad hoc by design.

This seems just as likely to me as your story.

AO said: "An alternative hypothesis is that in the highly uncertain and volatile environment that Paulson promoted TARP so strongly, the main priority was to be promoting some plan strongly, and getting the government's commitment of money to stabilizing financial markets. The passage of the bailout bill did just that; raised confidence that the government was doing something. If you remember, what Paulson tried to pass first was a one page tabula rasa bailout with no specifics. It was only after it failed the first time that they invented specifics."

Paulson built up market confidence by vigorously pushing a bad plan?
The problem here is that most people, including any economist worth his salt, as well as the masses on Main Street knew from the start that Paulsen’s plan wouldn’t work and was a waste of both time and money. And now, Paulson has basically arrived at the exact same conclusion.

The simple fact is that Paulson doesn’t have a clue of what he is doing. He is guessing and worst, they are not even educated guesses, but one made from a false economic mythology.

Looks like some editing is in order:

The passage of the bailout bill did just that; raised confidence that the government was doing something very stupid.

"Under that hypothesis, it may have succeeded by preventing a worse panic and resulting downturn that would have happened had no bill been passed. So the passing of the bill was the policy, it's details were unimportant and ad hoc by design."

The economic illiteracy demonsttrated by this statement is a main reason the US and world are in such trouble. The first installment of $350 has been so quickly spent, the American public should be curious how it was spent so quickly in a way not at all envisioned when the plan passed.

I hope Buffett comes out to address this, he spent a lot of time supporting the purchase of bad assets and supportng Paulsen. Was he being deceitful or making a major mistake?

Oh, but I do love the use of the phrase tabula rasa.

This person is what I would term a "theoretical liberal."

I consider myself a real world progressive, and am so tired of people talking in passive, non committal terms about everything. Real ilfe requires choices and choices have consequences.

The focus on empathic non judgement is a waste of time and resources. We need to judge results to channel resources effectively.

For instance, the accuracy of Dean Baker in both the housing bubble and the failure of tarp should be cause to give him street cred, not to give Paulsen a hug and pat on the shoulder.

Perhaps this is the start of my long march towards conservatism.

Don't you get it?

It is a TARPaulin!

Used to cover up Paulson's rear end, and so on.

Or, kind of like Sarah's $150k wardrobe.

A cover up.

Three cheers for the political process. If the political process actually works, one idiot does not have to be right 100% of the time. In this case, smarter people in Congress crafted the bailout so it would be flexible enough to do the right thing.

Imagine where we would be if the idiotic bailout proposal was rubber stamped by a partisan GOP Congress with no oversight. The process may be slower, but it is important.

Surprisingly, on CNBC last night several of the commenters were very derisive of Secretary Paulsen. Charles Gasparino and Tyler Mathiesen both were sarcastic and spoke of his lost of credibility and that as Gasparino states Paulsen's skill set, useful when playing power corporate politics to rise to the top of Goldman Sachs, is not the same being able to understand that all the bets and side bets that were on the long side of the proposition that "U.S. House prices only go up" are now pretty worthless and the consequences that flow from that fact.

Separate issue of Larry Summers. Larry has been writing a column in the Financial Times since 2006 and, though late to the ball, he has pretty much sounded a lot of your notes. Perhaps he has had a road to Damascus moment, can use his credibility to implement a truely progressive, free market policy at Treasury and eliminate the "Conservative Nanny State."

or..he is free to abandon the stupid idea of buying up worthless MBS now that he has bailed out his intended targets (sherman hinted at China and Saudis)

we might be able to see if this was true or not if they werent fighting the FOIA req from bloomberg. They said they needed and wanted transparency.

Face it they are liars and crooks of the worst kind.

@ao: No, your story isn't likely at all. It requires far to much trust in a man whose first reaction was "give all the money to me, with none of that pesky accountability stuff", and whose second reaction was "let's just cobble some BS plan together, it doesn't matter as long as we are seen to be doing something".

If he is finally doing the right thing now, it is because he has been dragged into it kicking and screaming.

Paulson's sendind a strong signal that either he doesn't know what he's doing, or is making up policy as he goes along. The markets know this, as we're about to retest lows.

Here is a link to some of the comments I have seen on CNBC ripping Treasury and Paulsen.

http://www.cnbc.com/id/27696791

By the way, Michael Lewis long story at Portifio.com on "The End" is splendid and it also makes one feel that with Goldman Sachs running Treasury, they are going to do well (or at least much better than they deserve) and the rest of us are going to get nailed.

More than likely the reason Paulson changed course is that neither the banks nor Paulson could come to terms on the pricing of the assets. The goal of the banks would be to get the highest possible price to repair their vastly weakened financial position and the responsibility of governement would be to buy as low as possible to reduce taxpayer risk and maximize the potential for profit. But if Government was successful in driving the asset prices too low, it would defeat the purpose of buying them at all.I expect that politically Paulson found himself between the rock and the hard place, in a no win situation. Let economic and financial scholars spend the next few decades arguing over the 'best price' for those assets, but in the meantime Paulson still has to do something fast.

It is not that Paulson is incompetent. He is corrupt. He is the manager of a giant wealth transfer scheme.

NPR's Marketplace had a good segment last night on this.

http://marketplace.publicradio.org/display/web/2008/11/12/nevermind/

Mike M said:
"It is not that Paulson is incompetent. He is corrupt. He is the manager of a giant wealth transfer scheme."

That's what Michael Hudson thinks. I'm starting to think he's right.

Dean,
Would you please address Paulson's latest move to shore up consumer credit lenders? I am reading reports that he is giving money to credit card lenders, auto loan lenders and education loan lenders to try and help the average person borrow their way out of financial troubles. This seems counterintuitive to me. He seems to be asking us to believe that working people act like businesses - they borrow money to achieve growth. But can that strategy ever work for a wage-earner who is going to have the same income regardless of what he borrows and purchases?

It's very simple. The man is incompetent, and his boss is drunk.

Fresno Dan used to ask, "Did Paulson know how Goldman made money" Any answer is disturbing.

Fresno Dan now asks, "Did Paulson know how TARP was suppose to work? - does he NOW know how it is suppose to work?" For a guy who is supposedly smart, and a lifetime on wallstreet, he really doesn't seem to understand finance or economics.

Its "Three card Monty" or "The Old Shell Game". WE place YOUR 700 billion under the TARP shell, watch closely, the hand is quicker than the eye, and SORRY SIR, YOU LOSE. YOU have been robbed, ripped off. NO WHINING, since YOU will NOT fight to keep YOUR TAX DOLLAR just suck it up and blow it out yer ass. YOU got robbed and my guess is WE will let happen again before the year is out.

It appears more and more to me that Paulson is not there to try to find the best way to save the economy or to get rid of the credit crunch, but the best way to save the members of his brotherhood and make them stronger.

WE are in economic freefall. The bailout money is NOT a parachute, it IS an airbag if placed, intact, between US and the JAGGED rocks below upon impact. There is not enough material in the airbag to even come close to sewing a parachute. There IS however enough for a workable airbag.

I don't remember him saying that he needed the money to buy up troubled assets. I remember a lot of screaching about him wanting the money with no restrictions so he could do what he wanted with it without having to tell us what that was and who benefited OR ELSE THE WORLD WOULD END!!!!

More than likely the reason Paulson changed course is that neither the banks nor Paulson could come to terms on the pricing of the assets.

That's the kind way to look at it. I heard today on Fresh Air that now he's talking about putting the money through firms that will buy the assets up as they see fit. I don't know what's up with that, who will bear the risk, who will benefit and what the taxpayers will get from funneling the money through other firms but it sounds shady.

I agree with the commenter above: this is the kind of throat clearing and foot shuffling you get when you make a naked wealth grab try to look good.

See Iraq War for similar examples of high crimes that will never be prosecuted. ("I know those WMD are around somewhere.")

I don't think we're going to be happy when we find out where all that money went. Apparently Paulson gave it to a bunch of banks that were supposed to lend it out, but they put it under the mattress and then sat on the bed. (I'm sure there isn't, but I'd really like to figure out a way to take all that money back.)

Were it not for the fact that we're out a lot of money, I'd feel sorry for Paulson. He assumed that his buddies would help him out and they treated him the same way they treated the rest of us.

Call Nancy Pelosi @ 1-202-225-0100 say NO BAILOUTS. Let's take OUR MONEY back.

I've been among those who have said all along that the bailout was a giant looting scheme and that turns out to be exactly what's going on. None of the rationalizations for it made any sense to begin with.

Along w/ astoundingly large gifts for his very best friends, it looks like Paulson did one positive thing for all of us that he feels he can't talk about. By letting it be known he would reimburse investment banks who buy back toxic assets that had been peddled to China and the Saudis, he saved the dollar. The Saudis basically decide what currency OPEC uses. Given how overextended the U.S. is, and how much the Saudis were conned out of in defaulting CDAs, it follows that they would be inclined to switch to Euros. Similarly, China had good reason to dump their huge stockpile of U.S. Treasuries. If either one of those countries took the feared action the dollar would have tanked, causing economic agony here. The reason he won't openly justify his actions is because that would involve revealing the con and its perpetrators, and many of his very best friends would be vulnerable to prosecution, as well as destroying the credibility of our largest financial institutions in the world community. Most of us would say it serves 'em right, and those institutions should have to undergo reorganization under different leadership or go bye-bye. But that's just not how things are done in the tight little world of high finance, and Paulson wouldn't dream of such a betrayal of those who had treated him so well. (Not to mention what they could have revealed about him if they felt he'd double-crossed them.) Because of his secrecy we end up paying the money we would have had the big banks failed, w/o getting rid of the crooks or learning what needs regulating. The Obama team should see this as reason to appoint someone other than a total insider as Paulson's successor. But they won't.

Erich,

The self-assuredness of your statements reminds me of the Infallible Dr.Baker himself.

We're in a financial crisis that doesn't fit well with any simple model or explanation, and so the "right" thing to do is not obvious. What the economics profession, and it's observers, should have learned from this crisis is a little humility. Unfortunately, the crisis has gone to Dean's, and many commenters', heads rendering them even more infallible than ever.

I'm suggesting some humility and recognition of the uncertainty and dangerous knife-edge environment that the TARP bills were drafted in. Any who makes cocky proclamations that the correct policy is obvious in these incredibly uncertain times knows less than they think they do.