Paulson Defends Changes To Rescue Plan
Treasury Secretary Henry Paulson sat down with Jim Lehrer of PBS in a candid interview where he defended the implementation thus far of the $700 billion rescue plan. Much of the problems the economy is currently facing built up before he took office but he along with Fed Chairman Ben Bernanke are in charge of dealing with the crisis.
I have always said that at the heart of the problem is the housing correction. And until the biggest part of the price decline in houses is behind us, we will have stresses in the financial markets and in the economy.
And I can’t give you a date for when that’s going to get better. But I can tell you, because we’re dealing with that, and we’re dealing with that as effectively as anyone can come up with an idea, stabilizing Fannie and Freddie, and while we’re dealing with that, we sure as heck better stabilize our banking system, which we did.
If people think the financial system is going to return to normal in a few short weeks, they are sadly mistaken. No matter how much money we throw at the problem, things only seem to get better for a little while until something else goes wrong.
That something right now is a potential auto industry collapse, which could cause over a million job losses and could see a worsening unemployment rate shoot towards 10%. Paulson so far, has been reluctant to use funds from the rescue package as some from Congress have been clamoring for.
With nearly half of the $700 billion allocated thus far, it will take Congressional approval for the release of the second half of those funds. A major portion of that money now plans to be focused on consumer lending rather than the buying up of illiquid assets which was the original plan.
Why the change now? Well, you give all this money to the banks but you don’t know if they are going to lend it out, use it to cover future writedowns or what. I think that’s why they went for the capital for equity route in the beginning, it gives the government more say on how they use those funds.
As staggering a number $700 billion seems, it can’t fix the problems of the banking system overnight. The fundamental way banks have done business over the past decade is out the window.
The financial system has stabilized somewhat but the failure of the originate to distribute model of put a serious dent in credit generation and no amount of capital is going to bring that back anytime soon.
