2 posts tagged “hank paulson”

The bailout package should be called a survival package.  Without it the Federal Reserve system will have limited power to contain the toxic effect of the subprime bubble.  By all accounts this pile of instruments is sitting on the books of financial institutions valued at approximately $1.2 trillion.  The amount that has been asked for by Hank Paulson is therefore about 58% of the total outstanding.  The amount that is authorized is almost as important as the spending of the money itself, indeed, if the market believes that this money might be used it might not have to be used at all.  It is, like all of the capital markets an issue of trust, confidence and a measure of risk.

Why bail out these greedy institutions?  Because as if the amount outstanding of $1.2 trillion is not a large enough amount, these institutions have multiplied this figure as a normal function of their job.  Leaving aside whether they multiplied this by a figure that was too large in a time of plenty, the immediate eradication of this money in the economy would have an abrupt effect on economic activity and jobs.  The dual effects of falling stock markets as well as the seizing up of the capital markets will choke off investment in firms, and this will lead to job losses.  There is, therefore, no tension between capital and people or between Wall Street and Main Street.  The real tension here is between the politicians who try to explain this to the people and those that want to act out partisan, divisive and class theatrics to the people of America.  Let us hope that the former politicians prevail over the latter.

There is no choice to the recovery plan suggested by Hank Paulson Secretary of the Treasury.  The political parties play games with this package at their peril.  The price tag of the recovery package standing at $750 billion may seem like a staggering amount, and it may seem as if there is not enough political oversight but now is the time for swift and decisive action if this problem is to be contained.  The political debate and the blame game can start in earnest once the situation has stabilized: Indeed, everyone recognizes that there will be more oversight and regulation of the financial services sector hereafter.

But that debate must happen after the brittle fabric of trust in the market has been at least partially mended.  The very fear that the package may not go through has let the S&P today drop by more than 3.5% (which constitutes an evaporation from the market of at least four times the cost of the package itself). ‘Political oversight’ of this critical, executive and professional recovery plan is a dangerous thing as it slows down the speed that is required for this operation and it is precisely at this point that special interests and lobbyists climb aboard.  It should be remembered that Democratic chairman of the house services committee, Barney Frank, who has been the loudest critic of the plan as it stands has not only been one of the great apologists for Freddie Mac and Fannie Mae, but has presided over the predictable demise of these monsters.  The Presidential candidates for their own benefit as well as that of America should side step this issue rather than turn it into a political football.  They can start to clean up Washington or change the way it works by signaling that they support this package and thus allowing the Treasury a free hand in cleaning up the financial services sector as they see fit.  This is not undemocratic this is a democracy rising to the challenge in the face of a crisis.