Paulson uses medical terms to describe the state of the financial system.
Paulson told ABC it was essential to prevent the financial system from clogging up, "because if it does clog up, this is going to have an adverse effect on people’s abilities to get jobs, on their budgets, on their retirement savings, on lending for small businesses and so that’s where the first priority has got to be."
Bernanke too:
Sen. Charles Schumer, D-N.Y., discussing statements that Federal Reserve Chairman Ben Bernanke made to the Senate Banking Committee Tuesday, said he "told us that our American economy’s arteries, our financial system, is clogged and if we don’t act the patient will surely suffer a heart attack _ maybe next week, maybe in six months, but it will happen."
The fear is that losses and deleveraging on Wall Street will lead to scarcity of credit on Main Street.
But as David C. Johnston points out, there is little evidence that such scarcity exists:
Ask this question — are the credit markets really about to seize up?
If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.
So for one we wonder if Paulson’s diagnosis is correct at all.
But let us assume for a moment that it is. What is then the best therapy for clogged arteries.
Any practitioner will tell a person with that diagnosis to first stop the bad habits. Stop smoking, eat less fat and cholesterol heavy stuff, do sports. I have yet to see the Fed, the Treasury and Congress to make any step into that direction. Where is the regulation that will prevent the clogged financial arteries from immediately clogging up again after this proposed bailout? Where is the behavior change that is needed?
To repair clogged arteries doctors have developed angioplasty. Inserting and expanding a tiny balloon at the site of the blockage. The Paulson bailout would provide the balloon to widen the financial arteries. But doctors usually combined angioplasty with the implantation of a stent, a small metal coil that will keep the artery open. The stents that will keep the financial arteries open are not part of the Paulson program. Instead of some permanent solution, Paulson would have to repeat the balloon trick again and again.
Sometimes arteries are damaged so badly that they can not be reopened. Lehman or Indybank come to mind. In such a case either other arteries must take care of the blood flow or the doctors will install a shunt: a segments of a leg vein is sewn onto the arteries to shunt blood around blocked areas.
Paulson argues for other arteries to take over. He wants to donate taxpayer money to Wall Street so Wall Street can lend it to Main Street. Is he sure that those arteries are in better shape than Lehman and Indybank? The shunt solution may actually be the better one. If the U.S. government really can spend $700 billion on this problem, why not shunt them around Wall Street?
If there is a scarcity of credit on Main Street, is there any reason why the government can not lend directly to Main Street, i.e to consumers and producers of real products? The government does not use Wall Street to collect taxes. So why should Wall Street be used to distribute taxpayer money?
Paulsons diagnosis may be correct and the arteries may really clog up. There certainly was some trouble in the arteries of interbank lending last week. But the therapy he is pressing for is not the best one and it is unlikely that it will lead to permanent healing. The patient needs: a. behavior change and b. a better blood distribution system. The Paulson’s program does not provide either.
Congress needs to take a wider view on this issue. Paulson rushes in as a doctor with a ready diagnosis and a therapy and wants immediate approval for emergency action. His diagnosis may well be wrong, the therapy he proposes will not lead to permanent healing and the case for an emergency has yet to be made.
And what if the doctor is the real problem here and this the real diagnosis?
We have a treasury secretary in America – Hank Paulson. I’m afraid he’s gone insane. He’s become like the Colonel Kurtz of Treasury Secretaries. He’s gone native. He’s co-opted trillions of dollars of American taxpayers’ money and he’s playing hedge fund like a rogue trader. We have got a rogue trader in the Treasury Secretary’s office. He’s being aided and abetted by Ben Bernanke who’s been discredited as the entire Federal Reserve Bank has been utterly discredited. We’re looking at a possible inflationary depression in America and the worse is yet to come, much worse is yet to come."
$700 billion is a lot of money and there are many alternative uses. For example – the money could pay $35,000 per year to 2 million people for 10 years to do something sensible like repairing bridges and levees. That would have lots of positive secondary effects on production, local development and taxes. Saving a few thousand jobs at Wall Street hardly looks like the optimal way to spend so much money.
For once, let’s try bubble up instead of trickle down.