Cutting Paulson Some Slack

by: John Lounsbury

Damien Hoffman has an article at the Wall St. Cheat Sheet entitled "The Treasury Department Endorses Lying to the Public". Basically, Damien is critical of attempts by Hank Paulson to calm investment markets last fall.

So, if the Secretary told investors the truth, would we be any happier with him? Wouldn't it have been something like yelling "Fire" in a crowded theatre?

Of course, he could have refused to answer any questions that could be interpreted as giving investment advice. Then, I'm sure, there would be many who would criticize the lack of openness.

The perception in the fall of 2008 (I think correctly, and continuing into 2009) was that loss of confidence was a major problem. Paulson (and other officials) did what they could to minimize panic. That was probably the best course of action, even if there were lies of omission and, to some extent, commission.

I am no fan of Paulsen. I think he (and the Fed) remained non-responsive to a developing crisis for a long period of time. I think his basic premise that we needed to preserve the status quo regarding financial system structure is debatable.

But, those criticizing his emergency actions should cut him a little more slack. Mistakes were made, but things could have been much worse.

Unfortunately, the mistakes made, that are of major importance, address much bigger issues than how investors were affected, as badly as they were hurt. The major mistakes made involve trying to continue to develop and stabilize a financial system structure without replacing or repairing a crumbling foundation.