Has Hank Paulson Been a Good Treasury Secretary? 13 comments
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Now that Hank Paulson is a lame duck, and we’ve seen the majority of his contributions as Treasury Secretary, we can begin to assess whether he has been handling the unfolding economic downturn effectively, or as some might suggest, made it worse. As is usually the case with economic policy, we can rarely determine with certainty what was a ‘correct move’ for several months if not years afterward. My opinion is that Paulson has done an adequate job so far in terms of avoiding a deeper recession or depression, but has made some questionable moves and has been less than sensitive to the needs of Wall Street.
First things first: many would agree this recession was brought on by a housing bubble which has left millions of Americans in foreclosure who were either encouraged in some way to become a homeowner (when they weren’t quite ready) or straight up duped by a bank or other broker into taking on a confusing mortgage product which would presumably be beneficial in the long-run. So, it would seem to me that preventing future foreclosures would be an equally important priority, especially from a moral perspective, as protecting the banks which ultimately take on the mortgage losses.
Taking the ‘moral high road’ hasn’t really happened, or at least hasn’t been pushed strongly enough. Some people in my office weren’t even aware of the ‘Hope Now Alliance’ which was established over a year ago by Bush, Paulson and their other advisors to help financially troubled homeowners avoid foreclosure. As far as I know, the quantity of foreclosures has increased dramatically in 2008, certainly outnumbering the people aided by this program. And when the details of the TARP (Troubled Asset Relief Program) otherwise known as the ‘$700B Bailout’ were revealed, among the major criticisms was the focus on helping banks rather than troubled homeowners.
I also believe Paulson could have been a bit more sensitive to the precipitous drop in the markets, the worst of which we saw last week when all the major market indexes touched intraday levels not seen since the 90’s. Granted, it is not the Treasury Secretary’s job, nor is it the Fed’s job to intervene with the daily movement of the stock market. If they did, and it helped to push markets to unnaturally high levels, it would lead to more economic problems rather than the stated goals of moderating inflation and sustaining reasonable levels of economic growth.
Even so, there is more Paulson could be doing to moderate these unprecedented levels of volatility. This recession is the worst we’ve seen since the Great Depression; many financial institutions have either collapsed, been diluted by the government, or sought an enormous influx of capital. Investors are scared about where and when the next shoe will fall. As the stock and bond markets deteriorate, the recession gets worse. As people’s homes and retirement accounts decline in value, they spend less as a cautionary measure, often exacerbating the existing problems and forcing the government into enormous spending patterns.
One opportunity Paulson had to moderate these declines was to suspend the mark-to-market accounting rules which have nearly crippled the balance sheets of financial firms along with the bond market over the past few months. Market-to-market accounting essentially forces companies to value the securities they hold (such as the mortgage-backed stuff) at their fair market value—essentially the current market price. Because much of the collateralized debt market has nearly disappeared, the market prices are often 50-80% lower than they were a year ago.
Some organizations such as the The American Bankers Association have argued that mark-to-market accounting doesn’t work in extremely volatile and turbulent markets. It’s designed more for markets in which the securities have liquidity. And because of bank requirements regarding capital levels, write-downs due to mark-to-market accounting force banks to raise more money, raising eyebrows and snowballing the problem further. It should be noted that scaling back these accounting rules still remains on the table for the SEC, despite Paulson’s support against doing so.
Others would argue Paulson handled a certain investment bank failure very poorly. I can’t say the name of the bankrupt bank for compliance reasons but it should be fairly obvious considering it’s the only one Paulson let fail. The result of this failure was a crisis in the commercial paper and money markets. The ‘systemic risk’ of letting such a large and diverse global bank fail was sending shockwaves through every institution doing business with the bank. That is precisely what happened and the stock markets got much worse in September and throughout November. If Paulson is going to become the bailout guy, don’t discriminate—save each business which has a reasonable chance at surviving after this recession pans out.
Finally, and most recently, Paulson has been very ambiguous when it comes to details for spending the TARP funds. If you’re going to dump a mega-bailout on taxpayers, the least you can do is provide the same transparency for taxpayers which you’re promising investors. Paulson has bent the rules such that public and private institutions—basically anybody who can cough up a reason why their business failure may pose a systemic risk to functional markets, can ask for a piece of the pie. The updates on the program have been unclear and the distribution of funds has already been questionable.
I’ll give Hank Paulson one thing: John Snow and Paul O’Neill had it much easier than him. Even Larry Summers, who was Treasury Secretary during the dot com bubble, had much less to deal with than a global financial meltdown. Paulson may have been dealt the worst cards in memory and the fact that we’re not in a deeper recession already is a credit to him.
As always, questions and comments are welcomed.
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This article has 13 comments:
We will not begin to improve until Paulson is replaced. I dont know if Geithner will be a great Tres Sec or not; but the bar is so low from Paulson that he will look like a great Tres Sec regardless.
If he stops helping Goldman Sachs,
no one can.
I'll give him this much. He's energetic. But that's all I'll give him.
2) Binary policy decisions, binary message to the investment community. Why did Bush/Paulson need to announce an about face on purchasing toxic assets? The market does not like surprises. Ultimately, it probably was the best decision that could be made to consider other more effective uses of the money. But why not strongly suggest reinstating the uptick rule and promote a return to Glass-Steagall while stating that Treasury had additional stimulus measures of offer? Talk about out of touch with the people of this country.
3) Yes, it was evident to any investor with half a brain Paulson was looking after his own first. This unfortunately happens in the real world but damn, he treated the investment community like we were all ignorant sheeple, like portions of the uneducated American voting bloc. Creating urgency in Congress to pass one of the rounds of $700 B (meanwhile Fed loading up $2 T on its balance sheet) with a flimsy 3 page executive summary that talked more about protecting his own skin was VERY unprofessional and again smacked of arrogance.
4) Bush/Paulson failed to realize that when an entire economic is failing, all investors get a haircut, that includes those 'investors' overseas. Yep, most investors do not keep sinking money into a bottomless hole because of terrible management, so it was time to tell the truth to the American people and take the risks together, as one nation, meeting our fate and ultimate victory of recovery together. So now foreign nations dictate monetary policy for the U.S.? Guess our hubristic government never saw that one coming.
Here's another thought: Even the poor benefited from the 'big irresponsible' party, so what was wrong with telling the public we all would endure the hangover together and all take equal haircuts? This futher revealed the public and majority of investors are now viewed as servicing the American government, not being public servants and stewards they should be.
On a scale of 1-10, I give the man a rating of 3. Decent moves at first, corrupt and self-serving. Just to hard to break a mold of an entire business culture gone mad on excess liquidity I guess.
On Nov 25 06:13 PM SHADuck wrote:
> I can't figure this out, when Paulson was a most competant CEO of
> Goldman Sachs, why do such executives become lethargic when they
> become govt officials
When confronted with the collapse of Lehman, Paulson did not defuse the situation. If it had been handled successfully along the lines of Long Term Capital Management, the problems in the financial system and economy would have been easier to solve.
> jack