It's all too easy to mock Henry Paulson for what now appears to be the complete abandonment of his original plan for the government to buy "troubled" mortgage-backed securities from tottering financial institutions. The Troubled Asset Relief Program (TARP) will not be delivering any relief to anyone through the purchase of troubled assets. As one of the people who spent many hours the week "the Paulson plan" debuted attempting (and failing) to figure out exactly what the Treasury secretary was envisioning, it's a bit of a shock to hear that the original rationale has been so unceremoniously dumped. There is a case to be made that this endless string of ad hoc maneuvers expose Paulson and the Bush administration as bumblers who have no idea what they're doing.
But I also have more than a little sympathy for a stance of flexibility in the face of chaos. Paulson should be commended for telling a reporter this morning that "I will never apologize for changing a strategy or an approach if the facts change." Isn't one of the most telling criticisms of President Bush the accusation that he never changed course, on anything, no matter what the facts declared?
Furthermore, I think, as a nation, we're better off owning stock in the banks that we are injecting capital in, rather than owning toxic assets that are probably never going to be worth their original valuations. I can envision a future in which Citigroup and JPMorgan and Goldman Sachs end up doing pretty well, once the economy recovers -- an Obama administration may even be able to unload the new equity stakes in Wall Street financial institutions and make a profit.
But we'll see about that. The most troubling aspect of Paulson's update on the financial rescue plan on Tuesday morning, to me, came in his spotlight on problems in consumer finance.
We are examining strategies to support consumer access to credit outside the banking system ... Specifically, the asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards ... We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment. By doing so, we can lower costs and increase credit availability for consumers.
Translation: The alchemy of securitization has allowed American consumers to enjoy cheap access to car financing, student loans and credit cards. Wall Street's appetite for securities that bundle such loans together lowered the cost of providing those loans, just as Wall Street's appetite for mortgage-backed securities resulted in a proliferation of low-cost mortgages. But the "market is currently in distress" because of the pullback in consumer spending and the overall credit crunch. So now costs are going up -- a point brought home to me in quite concrete fashion by a piece of mail I received last week informing me that the top rate on my credit card was about to go up to 29 percent.
But here's the problem -- Paulson now is looking at injecting capital into various consumer finance-providing institutions so as to bring down the cost of consumer credit. But do American consumers really need cheaper credit? We're overextended as it is -- the entire economy is suffering the aftereffects of decades of bingeing. It is quite rational for individual consumers, right now, to feel wary of making a car purchase or maxing out their credit cards.
I understand the paradox here. The drastic falloff in car sales threatens to bankrupt American car manufacturers, which in turn, some argue, could turn a recession into a depression. Some level of economic activity is necessary to, well, have an economy. But while I understand the necessity of ensuring that banks are willing to lend to other banks and corporations and thereby grease the underlying infrastructure of the economy, I'm not at all sure that encouraging Americans who are already carrying a lot of debt to take on more makes a great deal of sense.
However, like Henry Paulson, I reserve the right to remain flexible in the face of infinite confusion.
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