Paulson & Bush: First Impressions

Where was the Congressional leadership? The Administration proposes enactment over the weekend of interventions undreamt of in seventy years without any demonstration of partisan or executive-legislative cooperation. I don't think the Democrats are easy -- Schumer was campaigning against McCain yesterday afternoon even while setting off a rally with the news that Democrats agreed in principle with McCain's MFI idea -- but why make any announcement before you've got a deal? And since you are, what's the point of warning against "controversial proposals" in the deal? The Democrats have already stated mortgage relief as their price, and now you're committed to delivering something. If you want a package fast, you might as well agree to that upfront and get this done, rather than pretend you might avoid it.

Why are we doing this now? What has changed since summer, spring, last fall? The new fact this week is the collapse of the money funds, but that is a Treasury initiated event. Clearly, the Sunday decision to let Lehman fail was a mistake, as it cratered the second most conservative asset class in the market. The optimistic, calming rhetoric since the Bear deal seems like a mistake, as it convinced the markets the government would bail out anything of similar size. And if that rhetoric was truly necessary, then Treasury had to perform the Lehman-scale bailouts it implied.

Paulson said the "bazooka" of funding authority requested to support the GSEs would never be needed because of its size, but its poor structure foreclosed private sector solutions. He's had six months, at least, to seek more effective and larger tools for market intervention. Instead he's headed into the biggest poker game since Yalta waving a pair of aces around. He's claiming to be "bipartisan" while seeking enormous new authorities for the benefit of Republican constituents without even a nod to those of the Democrats. Barney Frank gives me a stroke but even I have to agree that's completely unreasonable.

McCain's Green Bay statement this morning points to the GSEs as the crisis epicenter, calls for the RTC like entity (which would "keep people in their homes") and emphasizes the importance of economic growth. Never mind Chris Cox, he ought to call for Paulson's resignation. Maybe that's too scary for the markets, but if so he ought to hint at it.

It's hard to assess the management of economic officials, who have much better and more current information than most observers. But at this point, it really seems to me that Paulson has done a pretty poor job. I'm shocked at the mismanagement, and disgusted at the compromises of principle required to clean up the mess.