The Naked Emperors — Henry Paulson

Or, How a Leftist Deals With Political Opportunities

The bailout bill (HR 1424) how now passed the Senate and the House. Despite having added some tax breaks — and quite a bit of tasty pork by the DC pigs — it is at base the original Paulson Plan.

It is notable not only for the huge amount it raises the debt ceiling — from $10.6T to $11.3T — but for the unprecedented power to control financial markets it gives to one man: Henry Paulson, Secretary of the Treasury.

Former CEO of Goldman Sachs and a Harvard MBA, it might at first blush appear that Mr. Paulson is the epitome of a capitalist. After all, in the Spring of 2007 at the Shanghai Futures Exchange, he did say:

"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."

It would seem that he had changed his mind. Yet, far from ever supporting laissez-faire — which is equivalent to supporting individual rights — nothing could be further from his own self-estimate. Paulson is a long-time supporter of environmentalist causes, defender of the poor against the rich, and Democrat-advocate of long standing. In other words, a bare-faced Leftist. It is only in the topsy-turvy political world of today that such a man could be considered a symbol of free-market capitalism.

It is just one of the little cosmic jokes the universe sometimes plays that Paulson happens to resemble Mussolini so closely. Admittedly, that is just a coincidence. But that the two men have so much philosophy in common is not. Ideas are chosen, not in-borne.

Apart from biography, is Paulson even competent to administer the huge sums and breath-taking power for which he has so eagerly argued? Quoting Michelle Malkin,

Paulson’s monumental misjudgment is no surprise to those who have paid attention to him over the last year. This is the man who proclaimed the sub-prime crisis "largely contained" in April 2007; "near the bottom" in May 2007; and "largely contained" again in August 2007.

This is the man who pledged that he had "no interest in bailing out lenders or property speculators" in October 2007 and couldn’t "think of any situation where the backdrop of the global economy was as healthy as it is today."

In short, the man with some of the best resources available to monitor the entire economy got it wrong time after time. (Although, I suppose one could theorize he was simply lying in order to keep the markets from panicking. Cold comfort, that thought.)

Worse still is the manner in which he promised to tackle the problem, once he admitted it existed. His original 3-page draft plan contained this:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Let us skip lightly over the irony that it is contained in Section 8 (a mostly-forgotten euphemism derived from the military discharge for soldiers who were declared insane). Instead, note the blatant unconstitutionality of the clause. Clearly, Henry Paulson was asking for legally unlimited power to do whatever he thought best with $700 billion of taxpayer money.

Well, now he has it. Or, nearly so. The bill did establish the FSOB, the Financial Stability Oversight Board, whose charter is:

• (1) reviewing the exercise of authority under a program developed in accordance with this Act, including--
  
  • (A) policies implemented by the Secretary and the Office of Financial Stability created under sections 101 and 102, including the appointment of financial agents, the designation of asset classes to be purchased, and plans for the structure of vehicles used to purchase troubled assets; and
    
  • (B) the effect of such actions in assisting American families in preserving home ownership, stabilizing financial markets, and protecting taxpayers;
  
  
• (2) making recommendations, as appropriate, to the Secretary regarding use of the authority under this Act; and


• (3) reporting any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General for the Troubled Assets Relief Program or the Attorney General of the United States, consistent with section 535(b) of title 28, United States Code.

Given that the Board will consist of:

• (1) the Chairman of the Board of Governors of the Federal Reserve System;


• (2) the Secretary;


• (3) the Director of the Federal Housing Finance Agency;


• (4) the Chairman of the Securities Exchange Commission; and


• (5) the Secretary of Housing and Urban Development.

I'm sure I can be forgiven for a wee bit o' skepticism about how much actual constraints will exist.

What is he proposing to do? Well, if we look to HR 1424 for guidance, "The purposes of this Act are--"

• (1) to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and


• (2) to ensure that such authority and such facilities are used in a manner that--
  
  • (A) protects home values, college funds, retirement accounts, and life savings;
  
  
  • (B) preserves homeownership and promotes jobs and economic growth;
  
  
  • (C) maximizes overall returns to the taxpayers of the United States

Apart from its blatant socialism, item (1) is sheer wishful thinking. Dancing Viennese unicorns will materialize before Henry Paulson, using the power of government, will do a better a job than the free market of righting the financial system, no matter who he hires to help him.

(2)(A) is lunacy propped up by the impossible longed-for ideals of social engineers.

College funds? Retirement accounts? Quite apart from their extremely loose connection to sub-prime loans and mortgage-backed securities at the center of the storm, nothing Paulson will do will help people pay for education or retirement. Expect educational costs to rise and retirement savings to erode further under the onslaught of still more inflation.

Worse still, propping up home values for so long (by continuing policies of easy credit and therefore artificial demand, which the bill does nothing to end) is one of the reasons the problem has expanded so widely.

(B) is worse than lunacy; it is the type of flight of fancy that only unrepentant Marxists can still believe will come about from government involvement in the economy. Well, Henry Paulson is nothing if not that, his lip service to "liberalized financial markets" notwithstanding.

As a result, you can forget about (C) ever coming about. The S & L crisis in the late '80s/early '90s wound up costing taxpayers about $100 billion when it was all said and done. Based on the amounts involved, and by present day dollar values, you can expect the bailout to cost at least five times that openly, and much more in lost opportunity costs. Of course, if "maximizing returns" is nothing but a redefinition of "minimizing losses" in the usual post-modern disregard for the meaning of words, then anything goes.

Sound unduly pessimistic? We'll take a closer look at what is not in HR 1424 next time and see...