Paulson Flails About With His TARP

Yesterday, Treasury Secretary Henry Paulson announced that the Treasury Department has altered the way in which it is going to implement the $700 billion Troubled Assets Relief Program (TARP). Paulson has now “officially abandoned his original plan to buy troubled assets from financial institutions,” and instead aims “to reinforce the stability of the financial system by providing sorely needed capital to banks, and even non-bank institutions that securitize credit card, auto and student loans.”

As Matthew Yglesias noted, “On the policy merits, I think Paulson’s shift into recapitalization was the right idea.” Indeed, this was the path recommended by many economists, including Nobel Laureate Paul Krugman.

But Paulson’s shift does lead to an important question, laid out at Economist’s View: “[W]hy are they still trying to figure out how to design the program? This program shouldn’t be in the design phase, it should already be in place.”

As Joshua Zumbrun wrote in the Financial Times:

Maybe it’s the right way to go, maybe not. But as the government’s efforts to shore up the nation’s economy and financial system continue to balloon, the man running those efforts is putting the most important asset he possesses right now — his credibility — at increasing risk. By changing tactics and communicating poorly, he may be inadvertently recreating the same failed ad-hoc approach to the crisis he’s been trying to escape.

Indeed, in September Paulson told Congress that the original bailout plan was “the single most effective thing we can do to help homeowners, the American people, and stimulate our economy.”

Furthermore, this plan, while potentially better than the original bailout plan, still does nothing to address the root cause of the financial crisis: the failure of the housing market. As Sen. Chris Dodd (D-CT) explained:

[I]t is becoming increasingly apparent that a robust and aggressive program to stem the tide of foreclosures sweeping across the nation is critical to any policy to put our economy back on track…it is my sincere hope that Secretary Paulson collaborates with [FDIC] Chairman Bair to get this program up and running as soon as possible. There is no legitimate reason why they would be unable to do so.

The Wonk Room noted yesterday that Fannie Mae and Freddie Mac took an important first step towards restructuring bad mortgages. Now, an across the board mortgage restructuring plan needs to be implemented, instead of Paulson throwing money at, seemingly, anything that moves.

Update:

Dean Baker asks “where’s the ridicule?”

This was the bailout that Mr. Paulson said was absolutely essential for the economy’s survival back in September. The opponents of the TARP were widely derided in the media as ignorant economic know nothings…Even Secretary Paulson now acknowledges that the rescue plan that he presented to Congress was the wrong course of action. The media has an obligation to present these facts clearly to the public.