Paulson 2 months ago:
We need $700 billion to buy the bad mortgages straight from the banks.

Paulson 1 month ago:
Ummm, instead of doing that thing I said above, we’re going to just buy portions of these banks.  The banks in turn will use the new money to fix the loans and do new loans.

Paulson Yesterday:
Sup guys.  Alright I’ve got it right this time.  We are going to use big and broad generic terms to basically say we’re going to do a lot with this money but we don’t know exactly what we’re going to do with it yet.

Paulson in December:
Fellas, we’ve decided to use the $700 billion to make an Ark out of $20 bills to sale important people (read: Me) to the Cayman islands for retirement now that it’s Obama’s problem.  Peace!

Okay I made the last one up, but I can see it coming.  The Treasury did make an announcement yesterday that it no longer intends to buy bad debt from the banks as the money was initially intended.  They will instead conduct intensive research and grant investments in certain companies based on need.  There was one mention that certain capital infusions would require private investment as well.  This means Paulson might give American Express $1 billion, but only if they can raise another $1 billion from private investment.  This is good because it would require the folks sitting on their money right now to get back into the game of investing.

The news can be read in two ways though:

First we can read into it that Paulson has completely changed his mind on how this money was going to be spent.  He went before Congress on multiple occasions and said the Treasury needs hundreds of billions to buy up the bad debt from all the banks.  Removing the bad debt will free up cash that can be lent to businesses and consumers again.  Meanwhile the Treasury would work with the folks with bad mortgages to repackage them in an affordable, safe plan the benefits everyone.  The Treasury would likely profit from these moves as they’d buy the bad debt for pennies on the dollar.  Now though, Paulson has gone back on all these ideas saying that isn’t the best way to spend the money.  Maybe he should have done a little more research before he decided it was needed.  I liken it to asking your parents for $100 to buy clothes you need, only to decide after you might not need clothes, but a skateboard instead.

The other way we can see this is that Frankenberry and his Crunchy Gang have learned that buying up the loans would be a big mistake.  Perhaps they don’t have the manpower to work with the struggling homeowners to create a solution, or they think doing so might not be “profitable” for the tax payer.  This means Paulson is trying to save us money in the long run.  The message is the banks already have the people in place to reshape these loans, and the burden of doing so must remain on them.  The Treasury will instead make targeted capital infusions (which could show favoritism) at specific companies that need it the most.  If they do require matching capital from investors then the Treasury will only bear half the risk they were before.  This gets the folks sitting on their cash investing again, and Paulson (or his replacement) can spread around the $700 billion much further.

Of note, is the fact that Paulson has no intention of using the money to bail out the auto industry.  He says the government will have to come up with new funds to do that.

Read

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics.

categories: banking, economics, government