Paulson, Not Bernanke, Is Washington's Most Powerful Man

It used to be said the Federal Reserve Chairman is the most powerful man in Washington. He could make or break presidents. As Bob Dylan said quite a few years ago, “the times they are a-changin’.” Former Federal Reserve Chairman Greenspan had a powerful enough public aura to transcend both Democratic and Republican administrations. While in office, the maestro could do no wrong. No president was willing to endure the potential political backlash of firing him.

Former Treasury Secretary Rubin made great progress in enhancing the strength of his position, but the public never considered him Greenspan’s equal. During the O’Neill and Snow periods of the Bush II administration, the Treasury appeared weak and disorganized. With academic Bernanke in charge of the Fed, a power vacuum was left for the new Treasury Secretary to fill. Paulson did just that.

Paulson was a bit timid at first when interacting with the media. He had to balance pragmatism with the Bush “free market” doctrine. But, the Bear Stearns (BSC) meltdown gave him the opportunity to break out. I believe he directed the Fed’s actions every step of the way, and later justified shifting from free market to government intervention when necessary. Over the last two weeks Paulson, rather than Bernanke, handled all of the public relations. That’s a clear shift in power.

Paulson and Bernanke clearly disagree on the remedy for the mortgage/housing crisis. In "Bernanke’s Harsh Warning," I wrote that Bernanke wants to trade mortgage principal write downs for government guarantees. Then, in “Treasury Sec. Paulson Rejects Systemic Approach to Foreclosures,” I wrote that Paulson called this type of approach “not yet ready for the starting gate.”

The New York Times published Paulson’s “Treasury’s Summary of Regulatory Proposal.” The essence of this executive summary is to create a Federal Reserve with limitless power to react in times of crisis. But, the Fed should not interfere too much when markets are stable. Paulson is justifying the Fed’s recent actions retroactively. With a weak Fed Chairman, this power would indirectly be assumed by the Treasury. Paulson would continue to pull all the strings.

The beneficial aspect of Paulson’s proposal is the separation of the solvency regulators from the consumer protection regulators. All federally chartered financial institutions would have to be chartered by both. While he does consolidate the solvency regulatiors of all federally chartered insured deposit institutions and creates the new opportunity for federally charted insurance companies, his organizational chart is almost as complicated as Hillary-care One.

While Paulson has consolidated his power over both the Treasury and the Federal Reserve, he is heading for a clash with Congress. The President wants consumers to be taught moral hazard and Congress wants Wall Street to take a larger hit in favor of consumers. How well Paulson soothes these conflicting constituencies will determine his staying power.

I believe the big surprise is that Paulson is becoming the new Greenspan. A new Democratic administration may be forced to keep Paulson at Treasury to maintain stability in the markets.

Disclosure: Author is long BSC.

Comments

[Pauly B]

If Bear Stearns was left to fail, wouldn't have been better to then create the funding from Congress to remedy the problem after the fact? It seems that everyone was invited to fix the problem except the people paying the bill!

I get nervous when government officials have the right to raid the Federal Treasury without Congressional oversight.

Yes we would have had a market crash with Bear Stearns of at least a 1000 points on the DOW, but at least we would have known gotten the principals in front of Congress to explain what they knew, and when they knew it.

It would be great for me to bounce checks, get bailed out for my bad behavior and never answer for it. Everybody feels good now, but was this good government policy?

[the finalhorseman]

I say we throw the whole bunch of them in jail. someone made an insider fortune on the announced drop to $2 then the price krept back to $4...and then JPM announced $10 and the FED/Treasury said or did nothing. Where is the SEC in all this?