Hank Paulson, TARP, and an Economy on the Brink

Many of my readers know that I am: (a) Reading every single book that comes out on the economic crisis of 2008, and (b) Reviewing every single credible book that comes out about the crisis of 2008, and (c) Writing my own book about the economic crisis of 2008 – one that I want to be a truly thoughtful and credible synopsis of what really, intrinsically, fundamentally caused the crisis. I have read so many books at this point that many go in one ear and out the other. However, a handful of books, whether I agreed with all of their prescriptions or not, have been so descriptively valuable I can not imagine what my project would look like without them. Hank Paulson’s new 453-page On the Brink is all of that, and then some.

As a participant in and observer of the greatest economic crisis since the Great Depression, one of the things I yearn for is more color behind what specifically and mechanically caused the events of September 2008. I believe a worldview is required that can make heads or tails of the TARP, specifically, and overall government response, generally. I am still fine-tuning my beliefs about what exactly should have been the proper response. As is often the case, there is an abundance of simplicity being applied to this mess that is neither intelligible nor useful. There is also an abundance of wicked ideology being applied that is dangerous and at the heart of why I feel this project is so important. It is easy for those of my market-driven, conservative ideology to dismiss everything Hank Paulson did as “statist”. It is easy for a vulgar writer of a rock n’ roll magazine to determine that Paulson was a tool of a vast Goldman Sachs conspiracy to take over the solar system. I do not know which one of the two mind-numbingly retarded conclusions are more ridiculous, but I do know that readers of this review hoping that I will paint Paulson as the major antagonist of this drama will be very disappointed. And as for the Oliver Stone-nutters, well, let’s face it – you probably don’t read me anyways. Not for long.

The vast majority of the first few chapters are loaded with ammunition for what has long been a major thesis of mine about the crisis: We are being naive to minimize the role Fannie and Freddie played in causing it. I learned more from Paulson’s book about the specific mechancis behind Fannie and Freddie’s dreadful role in our financial crisis, and I actually mean a lot more than the abysmal social policy the two institutions represented. I am referring to the real connection behind the placement of those two parasite organizations into government conservatorship in early September and the subsequent failure of Lehman Brothers and AIG in mid-September. If Fannie and Freddie had never existed, I very much doubt that any housing bubble would have ever taken place, and therefore no housing implosion would have taken place. Once allowed to exist, if they had not been continually built up by powerful Congressmen who were being paid off by them, I do not believe the crisis would have ever taken place. And if once these powerful institutions had achieved their sweetheart status in our nation’s capital they had then been forced to compete with private institutions for capital (apart from the insidious “implicit” guarantee of government money), I am certain that the crisis would have been averted. And once they had functioned with total monopoly status for decades, if governmental oversight had reined them in, muting the sociopathic forces in Congress that called for them to expand their lending practices more and more, I am sure the disaster would not have taken place. But by September of 2008, we were so deep into this pile of you-know-what that it is hard to see what the options were. The placement of Fannie and Freddie into conservatorship in September of 2008 is hardly controversial. What is unforgivable is that these beasts were ever given the right to life. And what is unconscionable is that now, eighteen months after the initial action to seize these companies (which already existed by government charter and had already indebted themselves to the tune of trillions of dollars with an “implicit government guarantee”), policymakers continue to prop up these dysfunctional entities, adding more funds (unlimited funds, to be exact), rather than selling them off bit by bit and setting the stage for fully-privatized models to assume control. It can be done; it must be done; but to do so means letting go of one of the most religious tenets of government policy of my lifetime: The role of government in setting social policy through manipulation of the housing market. Anyone who reads Paulson’s early chapters on Fannie and Freddie will come away disgusted, not by what happened in July and then September of 2008, but by the entire Fannie/Freddie fiasco.

I told my wife when reading Paulson’s book that I was waiting to read one of these many books that feature a play-by play of the week of September 12, 2008 without feeling physically ill. Paulson’s book kept the tradition alive, for indeed, that horrfic nightmare of a week was told in passionate detail by Paulson, and my visceral reaction remains one of genuine physical discomfort. I have to wait until my own expanded commentary of the crisis to elaborate, but I truly believe that the obsession many of us have in criticizing the TARP is incredibly misguided. Some of the more cartoonish commentaries on the crisis that have said – “there wasn’t really a crisis; we all would have been okay; the whole thing was made up” – reflect an incredible ignorance about the global financial system. I want to believe somewhere deep down inside of me that Paulson and his crew calculated that some company was going to have to die, and that the financial system’s medicine would need to begin. But I don’t really believe that. I think they let Lehman die because they actually believed the damage would be contained, and when they saw what was happening to the worldwide financial system when it did, the panic bells began ringing without a break. We are never going to know what would have happened had no version of TARP been passed. I do not believe that the motivation of the Treasury Secretary was to expand the role of government in our lives. I have absolutely no doubt in my mind that he believed (and still believes) that there was no choice at all if we were to avoid financial armageddon. I do not believe him that at the time he argued before Congress for the imperative need of TARP his intention was for it to be used to purchase toxic assets (within a week or two of its passing he claims to have realized that capital injections into the financial firms was the more prudent way to go). The reality is that I think they knew all along that this is what the TARP was going to be. The chapter in which Paulson tells us of McCain calling the emergency meeting in D.C. to discuss TARP makes me almost glad that he was not elected President (and amused at how badly his political strategists were out-maneuvered). The attempt by lawmakers to add on their particular agenda item to the bill paints the political process in its worst possible light. And most of all, the mere history of the passage of TARP leaves a thinking human being absolutely mystified at the political environment we are in today. The Democrats do not let a day go by without villainizing the horrors of the Wall Street bailouts, yet the reality is that this was a bill fervently supported by Nancy Pelosi, Barack Obama, Barney Frank, Charles Schumer, Hilary Clinton, John Kerry, Chris Dodd, and basically every single Demoractic lawmaker of consequence from top to bottom. Somehow, some way, the Democrats have managed to sponsor, rally behind, and pass the infamous bill known as TARP, and simultaneously condemn it, lambast it, and rhetorically crush it, all with the media as a willing accomplice to their crime.

99% of what I intend to say about TARP has to do with why it never should have been necessary to begin with (because yes, government created this crisis), and why it should never be allowed to create the aftermath it is creating (things of the “do not let a crisis go to waste” variety). Only 1% of my thoughts on TARP have to do with how Congressmen voted that day. I believe that the attempts by leftist progressives to use this bill as an excuse to further the role of government in the nation’s financial systems is hardly a surprising consequence. And as Jonah Goldberg has said perhaps this “crap sandwich” should have caused some lawmakers to vote differently. But it is rather short-sighted to leave it there. Had the credit markets broken altogether, the country’s financial system would today be fully and completely nationalized. The efforts of conservatives who value individual liberty need to be focused on never, ever again allowing the perfect storm of government policy to create such a crisis. It can be done. The paradigm that Paulson and his men imperfectly navigated through in the fall of 2008 was not the paradigm we want to live in. Let’s change that paradigm, and more intelligently understand the financial crisis we went through.

Ultimately, the idea that TARP was a bailout of Wall Street is pure, unadulterated nonsense. But that rhetoric is set in stone, and nothing is going to change the national perception at this point. The nation’s financial companies could have been allowed to go into bankruptcy, as many surely would have (deservedly so). Depositors with over $100,000 of cash would have lost their funds, but depositor losses would look like a walk in the park compared to the losses of bondholders. And that, my friends, is what the bailouts of 2008 were about – a bailout of the debtholders of the world’s financial system. Why this was the case, and what it means, will be explained in my ongoing commentary. Why Paulson and others were willing to let TARP be branded as a bailout of Wall Street firms when, in fact, the common equity of those firms was decimated, is a true mystery. The vast majority of Wall Street executives actually involved in running their firms into the ground were long gone by September of 2008. The largest bailouts had nothing to do with Wall Street firms at all, but were in fact an insurer (AIG) and two mortgage companies (Fannie and Freddie). Every one of the nine firms that took the initial draft of TARP money have paid it back at huge, huge profits to the taxpayers. What TARP did in hindsight was not to bailout Wall Street but actually allow it to be far more villainized in the American conscience than it ever needed to be. The farming industry which has been pillaging the American taxpayer in ways that would make Wall Street blush for three decades is actually considered a force of heroism. The automakers may be scoffed at, but they are hardly hated. TARP made all this possible. And I suppose what I would suggest to my readers is that TARP was the worst thing that ever happened to Wall Street, not the best. But as for the vote that took place in September of 2008 (and again a few days later in early October), I will not condemn the lawmakers who voted for the legislation that their Treasury Secretary told them would be necessary to save the system from collapse. The situation warrants more nuance than many are capable of granting it.

Paulson’s book is shocking in the extent it goes to at portraying George W. Bush as engaged, thoughtful, and courageous. Paulson surely knows Bush would have made an easy sacrifical lamb, and he went the exact opposite direction. With no benefit to Paulson whatsoever, I find that intriguing. The book is anything but defensive, and in fact, he makes it very clear in the book’s powerful concluding chapters that he does not apologize for how he formulated the government response to the crisis. I believe Secretary Paulson and I would have vast ideological differences if I were ever allowed to dialogue with him directly about this crisis. But I hold him in high regard as a man and as a patriot. I do not question his intentions. You will not either if you give his book a fair read. I commend it to you wholeheartedly.