Is Paulson’s Plan Mysterious or Non-Existent?

October 31st, 2008 by Phil Mattera

Those who regard Treasury Secretary Henry Paulson’s bailout program as a step toward socialism should remember that such a system involves not just government ownership but also some degree of centralized economic planning. With all the twists and turns in Paulson’s actions, it is difficult to determine whether he is indeed trying to guide some aspects of U.S. business but is doing so in a way we mere mortals cannot understand.

Especially puzzling is Treasury’s approach to deciding which banks should receive capital infusions. It was no surprise that the first $125 billion went to nine of the country’s largest financial institutions, since Paulson believes that shoring up the big guys is key to restoring stability to the system. But when he then turned to regional banks for smaller injections, it was unclear why some were on the list and others were not (at least not yet).

As Fortune points out, Paulson seems to have deliberately omitted Cleveland’s National City Bank (which is now being sold to PNC) because of its precarious portfolio of bad home loans, but he included similarly situated ones such as Milwaukee’s Marshall & Isley. Now that Paulson, under pressure, is reportedly planning to extend the capital program to privately held banks, whose finances are less transparent, it will be more difficult to figure out if there is rhyme or reason to Treasury’s picks.

Paulson was so lackadaisical in structuring the bailout that the banks getting the federal investments did not hesitate to signal that they would use the funds not to make loans but rather to finance acquisitions and continue paying out dividends and probably big executive bonuses.  Presumably responding to criticism from other quarters, ranging from members of Congress to the United Steelworkers, some banks are promising that they will take steps to ease the credit crunch. Yet it is unlikely these limited gestures will be enough to shore up a financial system that grows weaker by the day.

So, are things going according to Paulson’s plan—or is there no real plan but simply an ad hoc set of measures that desperately seek to prevent a collapse? Paulson seems to want it both ways. He is willing to push through an unprecedented partial nationalization of banks but is unwilling to use that investment to pressure banks to put the public interest before their selfish objectives (which now means lending as little as possible in a enervated economy). We end up with a bizarre form of socialism in which firms get government investment but continue doing what they damn well please.

While Paulson would like to be seen as the mastermind of a brilliant rescue plan, he may be, like the individual Dorothy and her friends discover is frantically manipulating a bunch of levers behind a curtain in Oz, just not a very good wizard.

Note: Since Treasury has been slow to announce all the banks receiving capital infusions, the investigative website ProPublica is filling the void with its own running list compiled with information from other sources.

2 Responses to “Is Paulson’s Plan Mysterious or Non-Existent?”

  1. Jack Lohman says:

    Because the banks won’t make loans, the taxpayers should open their own bank and compete, like the US Postal service does with UPS and FedEx. That will spring loose the cash in a hurry!

  2. Doug Hoffer says:

    If memory serves, North Dakota has a state bank. Although it stopped doing retail banking years ago, it might still have statutory authority to do so. Does anyone know?

Leave a Reply

You must be logged in to post a comment.