Yesterday, Treasury Secretary Henry Paulson sat down for an interview with Bloomberg, to discuss the effectiveness and future of the Troubled Assets Relief Program (TARP). Paulson has faced significant criticism for refusing to use any TARP money to address the housing crisis. When asked why he hasn’t used the TARP this way, Paulson said he was “reluctant to move ahead with a foreclosure plan” because it would not give “maximum bang for the buck.” Watch it:

Addressing foreclosures is key to combating the economic crisis, but evidently Paulson believes that more “bang for the buck” comes from throwing money at banks and letting them do with it what they will. According to a new report from the TARP’s congressional oversight panel, Treasury “still does not know what the banks are doing with taxpayer money”:

The recent refusal of certain private financial institutions to provide any accounting of how they are using taxpayer money undermines public confidence. For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore.

Last month an Associated Press report revealed that no bank receiving taxpayer funds is willing to report what it has done with the money, even though, as the oversight panel noted, “it is within Treasury’s authority to make such reports a condition of receiving funding.” Reportedly, banks are simply hoarding the money, eliminating any “bang” it might have had.

To counter this, Rep. Barney Frank (D-MA) has proposed legislation “to tighten the rules of the government’s $700-billion financial bailout program and channel a large portion of it to home foreclosure prevention.” His plan includes a version of the foreclosure modification program proposed by FDIC Chairman Sheila Bair (which would cost just $24 billion), and requirements that banks “tell Congress how money received from the government is being used.”

Congress is also working on a “rewrite of bankruptcy law” that would “let bankruptcy court judges cut mortgage debts to help bankrupt homeowners.” These moves could significantly lower the number of foreclosures occurring, giving homeowners plenty of “bang for the buck,” while also repairing the tattered economic system.

Today, Treasury Secretary Henry Paulson added to his growing list of ill-aimed responses to the financial crisis. Treasury is reportedly “considering a plan to intervene directly in the mortgage industry,” under which it would “buy securities that finance newly issued loans for home purchases.” The justification is that “subsidizing lower mortgage rates with taxpayer dollars would help revive the housing market.”

Now, Paulson is finally headed in the right direction, offering a plan to purchase mortgage securities. However, buying securities for newly issued loans does nothing to stem foreclosures, and thus misses the point of purchasing securities entirely. The problem in the financial system was not caused by recently issued mortgages, but by toxic mortgages that are already on the books.

Chairman of the Federal Reserve Board Ben Bernanke last week took an important step by directing the Fed to purchase mortgage backed securities from Fannie Mae and Freddie Mac. In a speech today, Bernanke explained the “public policy case for reducing preventable foreclosures”:

Foreclosures create substantial social costs. Communities suffer when foreclosures are clustered, adding further to the downward pressure on property values. Lower property values in turn translate to lower tax revenues for local governments, and increases in the number of vacant homes can foster vandalism and crime. At the national level, the declines in house prices that result from the addition of foreclosed properties to the supply of homes for sale create broader economic and financial stress.

Bernanke endorsed a “promising proposal” — similar to one crafted by the Center for American Progress — which “would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them,” and thus “take advantage of the depressed market values of such mortgages.”

Already at the forefront of the push to stem foreclosures is Sheila Bair, Chairman of the Federal Deposit Insurance Corp. However, Bloomberg reported today that Timothy Geithner, the incoming Treasury Secretary, is looking to push Bair “out of office.” The Obama economic team has allegedly decided that “she won’t play a central role in policy,” even though Obama said yesterday that “We’ve got to start helping homeowners, in a serious way, prevent foreclosures.”

If Obama is serious about helping homeowners, it would be a mistake to freeze Bair out. At Bloggingstocks, Jim Cramer explained why Bair is “the franchise player to build around“:

When Indymac was seized (something I wish she had done earlier, but she waited as long as she could), she and her organization became the laboratory, the great central testing zone for what will work and what won’t work to stem foreclosures, the root cause of all of our financial problems. She was ignored, systematically ignored, even though she had the knowledge base.

Paulson has insisted on doing everything except addressing foreclosures. Bair, meanwhile, has found a formula that works. To purge her makes no sense at all.

Today, the Wall Street Journal reported that the “number of consumers with delinquent mortgages is poised to almost double by the end of next year, hitting its highest level in at least 16 years.” In the fourth quarter of 2009, it is estimated that 7.17 percent of consumers will have mortgages that are 60 days or more past-due.

The Wonk Room has been arguing for some time that addressing the housing crisis is the best way to stem the overall financial meltdown. At the forefront of the effort to offer mortgage modifications is Sheila Bair, Chairman of the Federal Deposit Insurance Corp. (FDIC). Bair has put forth a plan that — for $24 billion — would help 1.5 million Americans avoid foreclosure. Thus far, however, Treasury Secretary Henry Paulson has rebuffed her request to pull that $24 billion from the $700 billion Troubled Assets Relief Program (TARP).

Today on CNN, Bair was asked where the “the logic” is in Paulson’s refusal to let her implement her plan. Bair only laughed, later saying she and Paulson have “different perspectives on this issue.” Watch it:

A report being released today by the Government Accountability Office states that Treasury has “yet to address a number of critical issues” in combating the financial crisis. Elizabeth Warren, chairwoman of the Congressional panel overseeing the TARP, said that Treasury seems “to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.”

However, there might still be hope for Paulson seeing the light. Yesterday, he signaled that Treasury is “actively engaged” in developing new financial rescue programs to be presented to Congress when they are “ready for implementation.”

Bair’s plan is ready. It would behoove Paulson to give her the money to act on it.

On Saturday, the Bush administration officially revealed its plan for a $700 billion bailout of troubled financial institutions. The New York Times called the plan “stunning for its stark simplicity,” and noted that the administration is “requesting unfettered authority for the Treasury Department.”

Yesterday, Think Progress pointed out that the Bush administration has a history of squandering taxpayer money, but that the bailout proposal has no oversight mechanism. And the man who would wield the “unfettered authority” is Treasury Secretary Henry Paulson, who, prior to the recent financial turmoil, consistently maintained that the U.S. banking system is “safe and sound.”

Last night, Paulson appeared on Fox News Sunday, where he was reminded of an interview six months ago in which he said “I’ve got great confidence in our financial market…Our institutions, our banks and investment banks, are strong.” Watch it:

As Paul Krugman wrote:

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

Krugman added that, “basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.”

However, an oversight mechanism is essential to ensure that the bailout benefits more than just the investment banking industry. As David Abromowitz and Andrew Jakabovics wrote for the Center for American Progress, “with appropriate oversight mechanisms, Congress and the public can monitor use of these authorities to ensure that America’s taxpayers, homeowners, and communities—not simply our investment firms—benefit from this extraordinary intervention and that the benefits are lasting.”