Paulson Defends Fed Backstop

Making the rounds on TV talk shows Sunday, Treasury Secretary Henry Paulson defended the Fed's decision to rescue troubled investment bank Bear Stearns (BSC). "The right decision here, I am convinced, was the decision that the Fed made, which was to do things, work with market participants to minimize the disruptions."

Critics said the move was no less than a government bailout, something the Bush administration has consistently argued against.

"Well, every situation is different. We have to respond to the circumstances we're facing today," Paulson said. "And my concern is to minimize the impact on the broader economy as we work our way through this situation, and again, the stability of our financial situation."

Asked whether Bear is the tip of the iceberg, and other financial institutions may be in a similar situation, he would only say: "Well, our financial institutions, our banks and investments banks are very strong," he said. "And I'm convinced that they're going to come out of this situation very strong."

"The government is prepared to do what it takes to maintain the stability of our financial system," he said.

The Fed bears the risk of 28-day lifeline it extended Friday, even though the loan will be funnelled through J.P. Morgan (JPM). It is the first time since the Great Depression that the Fed has lent in this fashion to any entity other than a bank.

Comments

[Dennis Lucey]

In response to Paulson's boast that the Bush administration will do "what it takes" to return stability to financial markets and the economy, Schumer derided Paulson and Bush, claiming their "hands-off attitude is reminiscent of Herbert Hoover" during the Depression.


Wow. Where to begin?

(1) Let us re-debunk the myth that Hoover sat idly during his administration. A noted opponent of laissez-faire, Hoover oversaw the nation's first unemployment assistance, increased public works spending in the face of economic slowdown, established the Federal Home Loan Bank to bring the dream of homeownership to people who couldn't afford it (sound familiar?), raised trade tariffs and created a worldwide trade war by signing the Smoot-Hawley Act into law, and raised income, estate, and corporate taxes. This is the kind of record that would make Keynes smile. If only Hoover had indeed done nothing!

(2) How has the Bush administration been "hands-off"? By offering to freeze foreclosing on ARMs? By offering to write $300-$1200 checks to Americans? By overseeing dramatic cuts in the Federal Funds rate? By instituting programs like the TAF and the TSLF?

(3) Schumer's statement implies that he's in favor of a hands-on solution? What would that entail? Government assumption of all MBS tendered to it? Greater government spending, just to stabilize the economy while we sort out this mess. (Of course, they'll cut spending once the economy stabilizes, right?) Keep defaulting borrowers in their homes by eliminating foreclosure?

Is Hoover regarded as "hands-off" because his actions didn't work? If so, do Schumer or Paulson feel they can successfully be hands-on?

[barfman]

I watched Paulson on one show today. He choked and stammered his way through his statements about how strong our banking system is. I've never seen him rattled like this before. He didn't appear like he believed his own words.