The Washington Post's Steven Pearlstein has a column today gloating that he was right all along, and bailout critics were wrong, in his defense of Hank Paulson, the Bush administration and the $700 billion bailout. Based on yesterday's stock market rise, Pearlstein begins with this proclamation of vindication -- "Now, what was that about Hank Paulson having blown it?" -- and then proceeds in one paragraph after the next to deride those who criticized Paulson and the bailout by claiming that, as it turns out, it was Paulson's great leadership -- heads and shoulders above the rest of the world -- along with the virtues of the bailout that saved us all:
Since Lehman's failure, Paulson has moved faster, more aggressively and more deftly than any of his international counterparts in doing whatever was necessary to stabilize the financial system. Yesterday, he and his collaborators at the Fed and FDIC threw everything they had at it -- flooding the banking system with an unlimited supply of dollars, expanding deposit insurance, putting a guarantee on new bank debt, injecting capital into healthy banks, giving the Japanese the assurances they needed to rescue Morgan Stanley, and doing nothing to discourage free-spending Democrats from their plans to offer another big economic stimulus plan.
The result: the biggest one-day rally on stock markets in 70 years.
I hope you won't think it petty to point out that some of the people who this past weekend were complaining that the Treasury secretary was being too timid in his response to the financial crisis were some of the same people who, three weeks ago, were complaining about his audacity in demanding a "$700 billion blank check" [ed: that describes Paul Krugman perfectly, among others]. I know I speak for Gov. Sarah Palin and Joe Six-Packs everywhere in pleading that, for Pete's sake, let's cut the guy a little slack. . . .
There's a word that captures the instinct to take these kind of bold moves in the midst of a national crisis -- it's called leadership. We've seen quite a bit of it these past few weeks from public officials like Hank Paulson, Ben Bernanke, Tim Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, John Boehner -- even George Bush.
This is actually exactly backwards. As Paul Krugman detailed in Monday's column, the proposal which spawned yesterday's stock market boon -- the government injection of massive amounts of equity, otherwise known as "partial nationalization" -- was spearheaded by British Prime Minister Gordon Brown, and was a proposal which Paulson, from the beginning, vehemently rejected, even as a consensus of economists was advocating that approach. Krugman:
This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.
But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.
While Paulson and the Bush administration continued to fiddle around with their original scheme to buy toxic paper as markets around the world plummeted in response, the British, by stark contrast, "went straight to the heart of the problem — and moved to address it with stunning speed." All of that led Krugman to ask: "Has Gordon Brown, the British prime minister, saved the world financial system?"
And as Mark Landler's New York Times article details this morning, Paulson was basically forced into following the British model -- as well as the litany of other remedies for which Pearlstein bizarrely credits Paulson as the leader -- because European governments acted first to enact them, leaving Paulson with no choice but to follow along:
With the proposal, the United States follows similar plans announced Monday across Europe — almost all intended to inject money into the banks and unfreeze the credit markets. . . .The F.D.I.C. would also offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees. . . .
The Treasury’s plan would help the United States catch up to Europe in what has become a footrace between countries to reassure investors that their banks will not default or that other countries will not one-up their rescue plans and, in so doing, siphon off bank deposits or investment capital.
“The Europeans not only provided a blueprint, but forced our hand,” said Kenneth S. Rogoff, a professor of economics at Harvard and an adviser to John McCain, the Republican presidential nominee.
So what is Pearlstein talking about when he gushes with praise that Paulson -- who Pearlstein has been defending from the start -- "has moved faster, more aggressively and more deftly than any of his international counterparts in doing whatever was necessary to stabilize the financial system"? That is just false. Economists -- including Nouriel Roubini, Brad DeLong and Krugman himself, along with people like George Soros -- were urging this approach long before the bail-out was passed while Paulson was rejecting it.
Notably, Paulson wasn't the only one rejecting the bank capitalization approach. Through all his gloating, Pearlstein "forgot" to mention that he, too, wrote a column back on October 2 which attacked bailout "critics on the left and right" and dismissed the very approach which yesterday caused the market boon:
Many academic economists argue that if taxpayers are going to rescue the financial system, their money should be used to recapitalize the banks in exchange for preferred stock or stock warrants, just as Warren Buffett did with Goldman Sachs and General Electric. . . .
But recapitalizing the banking system would require much more than $700 billion, and involve the government in the ownership of hundreds of institutions. It would also be much less cost-effective than the Treasury strategy of jump-starting the market in mortgage-backed securities, which would bolster the finances of almost every bank, whether or not they wound up selling into the government-funded auctions for those securities.
Given the widespread fear of lending to or investing in banks until the full extent of their lousy lending becomes clear, there's a good chance that injecting large amounts of government capital wouldn't do much to attract additional private capital, or even get banks to begin lending again.
What we've got on our hands is a big, hairy, complicated mess. Beware of smooth-talking salesmen with hidden agendas peddling magic potions.
It's true, as Pearlstein noted, that the bailout package would have allowed Paulson to use some or even all of the $700 billion to invest in banks, but since Paulson (with Pearlstein's support) was emphatically insisting that this was the wrong approach and that he intended instead to buy toxic paper, the mere possibility that he could do so was hardly a reason to support the bailout. For Pearlstein now to gloat about how right he was -- and how heroic Paulson is -- because the bank nationalization approach they opposed has (in a very preliminary and possibly reversible way) produced good results is to engage in staggering self-glorifying revisionism.
The other point Pearlstein makes today -- that Wall Street now has various obligations to use the bailout for the public good -- is fair enough (though it's hard to understand why those steps aren't being mandated). It's also true that Paulson, for whatever reasons, did end up embracing a superior alternative than the one he originally opposed, and that's to be welcomed in a Bush administration that never abandons its course no matter how much it fails. And it ultimately matters more that the economy be saved than who claims credit for it. But still, Pearlstein's blatantly false descriptions of what has happened -- all in service of mocking bailout/Bush critics while glorifying Bush officials and himself -- shouldn't go uncorrected.
UPDATE: From The Guardian's article, entitled "US government reluctantly adopts Brown's bank rescue blueprint":
The Bush administration has reluctantly followed Britain's lead by pumping $250bn (£143bn) into shares in leading banks after a stockmarket meltdown scotched earlier efforts to shore up crumbling confidence in the financial system. . . .
Buying banks' shares amounts to a U-turn for the embattled US treasury secretary, who initially wanted to spend a $700bn emergency fund by simply picking out distressed assets from banks' balance sheets.
Paulson told Congress last month that "the right way to do this is not going around and using guarantees or injecting capital", arguing that Japan had limited success with such a policy during a banking crisis in the 1990s.
Everyone knows that this is what happened. It's not even in dispute. What kind of game does Pearlstein think he's playing -- who does he think he's fooling -- by claiming that "Paulson has moved faster, more aggressively and more deftly than any of his international counterparts in doing whatever was necessary to stabilize the financial system"?
Both Paulson (and thus Pearlstein) were vigorously opposed to this approach from the start and Paulson (and thus Pearlstein) only jumped on board with it because Europe did and they therefore had to. That's fine, but all of these events took place in the last four weeks. It's a bit early to think you can just completely re-write history to make yourself look better and think that nobody will notice.