Safe in the Hands of Henry Paulson
.The House passed it. Seven hundred billion or so, and that’s possibly just for starters. Unprecedented powers to Henry Paulson, who gets to spend that money more or less any way he wants.
Was it clear that Palson was in charge of Goldman Sachs just before becoming Treasury Secretary? In other words, one of the big shots whose banking endeavors are responsible for the current problems? Even if that didn’t compromise him at all, the fact would remain that he would have their view on the markets—a view that’s proved badly flawed.
Not only in hindsight, either:
Likewise, the government-sponsored institution Fannie Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry, their large staff of scientists deem these events ‘unlikely.’
—Nassim Nicholas Taleb, The Black Swan (2005)
That’s what Taleb was saying in 2005. Wikipedia has a number of lines from Paulson which would be damning if anyone were seriously concerned about his ability to do the right thing for the economy (and I mean “economy” there in its literal broad sense, rather that its narrower “the wealthy” sense so commonly used by the press):
An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention.
—Henry Paulson, Mar 2007
Clearly, that’s working really well right now. So was he lying then, in which case one must ask why we’re giving a liar control over seven hundred billion dollars, or was he incompetent, in which case a similar question applies.
[I]t’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.
—Henry Paulson, 20 Jul 2008
Here you could argue that he has a responsibility to reassure people… but still, “our regulators are on top of it” looks rather egregious in hindsight.
Going back a little further, you find this:
In addition, we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place. This means that needed net capital reform is likely to come only when the SEC is prepared to conduct these risk management examinations with its own staff or is confident that SROs have the capability to perform them. This degree of oversight will require development of staff experienced in this area. We believe there is little incentive for the SROs to meet this responsibility.
—Henry Paulson, 29 Feb 2000
That “net capital rule” he wanted to overturn? Well, before the SEC changed it in 2004, it required investment firms to have a debt-to-capital ratio of 12 to 1. Five major investment banks, including Goldman Sachs, pushed hard against it and eventually got it altered (just for them) to much higher ratios… which is now considered to be one of the key reasons that these banks are now in enough trouble to threaten the rest of the economy.
Again, he was either lying, or terribly wrong. I haven’t heard much about Paulson admitting his mistakes and emphasizing how he’s learned from them. Rather, his approach is till that of a person who thinks he knows exactly what’s going on. This makes him more dangerous, either because he’s a completely brazen liar, or because despite vast evidence, he still doesn’t perceive the extent of his own incompetence (and that of the entire approach taken by the investment banks).
I suspect that none of that will prevent him from further ensuring his own comfort and security throughout whatever troubles the country goes through.