I feel like Butch Cassidy and the Sundance Kid. Who are these guys that just keep coming?
-- Treasury Secretary Henry Paulson Jr.
A great quote from a great movie opens a tough-minded NY Times piece tonight about Henry Paulson's actions (and inaction) during the current crisis. There is now ample evidence to believe that letting Lehman fail was a mistake, and nothing in this piece does anything to persuade otherwise. Meanwhile, the article adds weight in showing how the last-minute Lehman negotiations were mishandled and unclear as the government couldn't decide whether it was more worried about moral hazard or a meltdown.
More broadly, expecting that Treasury or the Fed would get every decision right in this affair is unrealistic, of course. We have been living in uncharted territory, with decisions coming fast and furious, so you will get things wrong, with the associated consequences -- which points more to the inherent instability of the system.
The again, there are things that the Feds got wrong all along. It seems clear from the piece that they initially concocted the toxic asset purchase program as an over-linear solution to the problem of messed-up bank balance sheets. By the time they took the plan to Congress the problem had mutated, however, with it being far less important to move assets than it was to recapitalize banks altogether. Trouble was, Paulson already had the former plan, and even if it was inappropriate he stuck by it until events forced him to chance directions.
More here. And I'll leave to someone else the semiotic exercise of pointing out the inappropriateness of Paulson's cowboy metaphor. Really Henry? Really?
