Hank Paulson on Budget & Economy
Not a man known for histrionics, Bernanke opened the meeting on a dramatic note. "I am a student of the Great Depression," he began. "Let me state this clearly. If we do not act in the next few days, this will be worse than the Great Depression." He let the statement sink in, just long enough for Senator Chris Dodd to gasp audibly, before he continued: "Investors have lost confidence in our capital markets. It is a matter of days before we will witness a series of catastrophic failures."
Why was it important for banks that didn't need a capital injection to agree to take one? For cover. Paulson said he'd tell them they must take it so that their less fortunate brethren wouldn't be marked as in desperate need of a government infusion. Such a decline of confidence in those institutions could trigger a "run."
Geithner then rattled off the amount each bank would be given. Bank of America; $25 billion; Citigroup: 25; Goldman Sachs: 10, JPMorgan: 25, Morgan Stanley: 10; State Street: 10; Wells Fargo: 25.
The quid pro quo, Paulson stressed, was that the banks use this money to lend.
But--and this is crucial--focusing on the housing market alone was just the last in a parade of claims about the root problem. There are other sectors that have suffered, in finance, car manufacturing, services, retails, and stocks. These are all merely symptoms of a deeper problem: the Fed and its role in sustaining an unsustainable paper-money system.
I was intrigued to see that even the Treasury secretary senses that, at some level, the crisis is connected to central banking.
Congress embraced Paulson's idea of giving an unelected official with close ties to Wall Street complete, unchecked power and $700 billion to take charge of the situation.
And with blank check in hand, Paulson almost immediately began to spend out taxpayer dollars differently than he originally said he would. He shifted from purchasing assets to purchasing equity ownership stakes in troubled institutions, including $17 billion to prop up failed Detroit automakers--after Congress voted against doing so.
The plan called for the government to buy hundreds of billions of dollars in toxic assets. This was impractical because no one knew what anything was worth; within weeks Secretary Paulson would revise the plan into a more classic bailout, but in the meantime legislators with any sense of responsibility knew they had to do something to confront the crisis.
The Democrats were prepared to set aside their misgivings and bail out the banks. It was the Republicans who balked. Free-market conservatives, particularly on the House side, began an active rebellion.
If the "systemic risk" that Paulson worried about was plenty real, the response was disturbingly indiscriminate. A big question that would persist for years was whether there was a way to structure some of the early deals so that the government got better terms. Even by late 2009, when every major bank except Citigroup had paid back its TARP money, the impression of a colossal injustice remained--that fabulously wealthy bankers would be made whole, but ordinary Americans would not.
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