Last week, the Treasury Department quietly announced it was moving ahead with plans to purchase toxic assets from banks, but in scaled-back form. To my colleague John Judis, this must have been welcome news. For months now, he and I have debated whether President Obama’s efforts would be best spent fixing the financial sector or reviving spending by consumers and businesses.
Hank Paulson's testimony yesterday was informative, if only because it illustrated that he himself still understands little about the origins and nature of the global crisis over which he presided. Perhaps his book, out this fall, will redeem his reputation. A fundamental principle in any emerging market crisis is that not all of the oligarchs can be saved. There is an adding up constraint--the state cannot access enough resources to bail out all the big players. The people who control the state can decide who is out of business and who stays in, but this is never an overnight decision written
I finally got around to reading Phillip Swagel's account of the financial crisis from inside the Bush Treasury department--Swagel was assistant secretary for economic policy from late 2006 till the clock ran out this January. It's a pretty interesting document--slightly self-serving in the ways you'd expect (most, though not all, of the mistakes Swagel concedes fall into the category of "we didn't do a good enough job explaining ourselves"), but overall a pretty illuminating look at what Treasury was thinking and doing as the world melted down.
The big story yesterday (and into today) was that Hank Paulson and Ben Bernanke basically forced Bank of America to go ahead with its merger with Merrill even after BofA realized it would be on the hook for over $15 billion in Merrill losses. The two officials also seem to have pressured BofA CEO Ken Lewis to keep quiet about the losses (or at least gave him the strong impression it was in his interest to do so) so that his shareholders wouldn't torpedo the deal.
Tina Brown makes the somewhat counter-intuitive case here. Not quite sure I buy it, but the guy clearly had a good day yesterday. Here's Brown: Even as Obama drops to a 59 percent approval rating from 64 percent last month and is starting to give his supporters little flutters of panic, Geithner’s geekiness has started to feel reassuringly authentic. The market—that testosterone-fueled imponderable—certainly loved his bank plan, and the beleaguered Treasury secretary is now being helped by the lowered expectations built up by his botched debut. Maybe thoughtful is OK after all!
Two quick AIG thoughts, both of them relating to who it is we're bailing out by propping up AIG. First, as the Times points out in an editorial today, and Josh Marshall has repeatedly observed, one company that clearly had a lot to lose if AIG failed was Goldman Sachs, the former employer of Bush Treasury Secretary Hank Paulson. As the Times writes: The serial A.I.G. bailouts are especially problematic for their connection to the Wall Street bank Goldman Sachs. At the time of the first A.I.G.
When Hank Paulson, a successful investment banker turned Republican treasury secretary, caps his career by nationalizing two financial institutions so large that even Norman Thomas in his socialist heyday would have paused before taking them onto the government's balance sheet, and a conservative central banker agrees to bail out an insurance company to the tune of $85 billion, you know that a fundamental change is underway. The day when that engine of capitalism, the financial market, was allowed to operate more or less unimpeded by government has passed.