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Paulson’s Pliable Plan
In retrospect Paulson's conduct verges on bad faith.


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Rich Lowry

Here’s the three-point program for determining how the $700 billion of the Paulson bailout plan will be deployed: 1) Listen to what Treasury Secretary Henry Paulson says he’ll do with the money; 2) Wait a few weeks; 3) Watch him do the precise opposite.

A few weeks ago, Paulson insisted that troubled U.S. automakers “fall outside” the original purpose of the bailout program, which “was aimed at the financial system.” That’s quite categorical. Clearly, funds can’t be used for a purpose for which they were never intended. At least that’s what the civics books lead us to believe.

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The books should be sent back for a rewrite. Last week, the Bush administration all but committed bailout funds to the — in the great economist Joseph Schumpeter’s phrase — “hopelessly maladapted” auto companies. Congress held multiple hearings on what to do about the auto companies and had a fierce debate culminating in a tense, high-wire meeting between Tennessee Sen. Bob Corker and United Auto Workers officials.

They were all play actors in a simulacrum of democratic deliberation. The Bush administration had the Paulson slush fund that it could choose to tap or not at whim. It’s hard to see how General Motors or Chrysler constitutes a financial institution. Never mind. Logic will be tortured to shovel them money as necessary.

When Lehman Brothers went down in September, the financial system faced a crisis. Paulson needed the flexibility to adjust to dire and unpredictable circumstances, but in retrospect his conduct verges on bad faith. His $700 billion program is called the Troubled Assets Relief Program for a reason: It was premised on relieving financial institutions of their troubled assets through government purchases of them.

Paulson ended up instead injecting capital directly into banks, an idea he had repeatedly opposed during his TARP testimony. He can certainly change his mind, but Congress deserved a clearer window into his thinking before it handed him hundreds of billions of dollars. Paulson told the Washington Post that his staff was working on an option to inject capital directly even as he was declaring to Congress he wouldn’t do it.

Democrats wanted to limit the pay of executives, so they inserted a provision stipulating that any firm taking TARP funds had to restrict executive compensation. But the administration insisted on adding a sentence saying the restriction only applied to firms selling their troubled assets to the government, thus gutting the restriction since the funds have never been used for that — its stated — purpose.

It was Federal Reserve Chairman Ben Bernanke who originally suggested to Paulson that he go to Congress. Bernanke worried that there wasn’t enough democratic accountability in the two of them deciding on their own authority how to deploy tens of billions of dollars in case-by-case bailouts. Maybe they figure it’s the thought that counts?

Bernanke and Paulson have said they didn’t bail out Lehman — generally considered a near-catastrophic mistake — because they didn’t have the legal power. This excuse is, as Abraham Lincoln put it, “thinner than soup made from the shadow of a pigeon that starved to death.” Bernanke and Paulson strained for any plausible authority to do anything else they wanted during the crisis, with the Federal Reserve drastically increasing its power with a raft of new lending programs whose obscure initials — TAF, TSLF, PDCF, etc. — put the New Deal to shame.

Paradigm shifts in American politics usually begin before the figures who are associated with them in history actually take power. Herbert Hoover broke with the minimalist governing vision of Calvin Coolidge before Franklin Roosevelt won the White House. Jimmy Carter began implementing deregulation before Ronald Reagan was elected. Now, through TARP, George W. Bush has removed any restraint on Washington spending and extended a lifeline to automakers in a step toward pre-1980s industrial policy, thus paving the way for the ambitious activism of Barack Obama.

If asked, surely Paulson would have said this wasn’t what they intended — in yet another inoperative assurance.

Rich Lowry is the editor of National Review.

© 2008 by King Features Syndicate



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