Picking Paulson’s brain

I’d guess it’s a pretty scattered and frightening place at the moment. BusinessWeek interviewed him, and his main points were an “orderly” bankruptcy for troubled automakers might be the best outcome and he now favors oversight of hedge funds and “any institution whose failure could jeopardize the financial system.”

From the link:

Paulson was interviewed by BusinessWeekEditor-in-Chief Stephen Adler as part of the 10-year-old Captains of Industry series, which features leading newsmakers.

Among other points, Paulson said:

• An economic downturn remains much more of a risk than inflation from the money that’s now flooding the system. “That’ll be a high-class problem when we can start worrying about growth and inflation again,” Paulson said, adding: “The real cost would be to not do enough and then have the economy go into a free fall.”

• Banks that took U.S. funding should lend more, but he defended the Treasury’s emphasis on getting them money right away without strings. “Our first priority was always, and we were clear from the day we went to Congress, to prevent the collapse of the financial system.” He said, “There was literally a wave, just a string of financial institution failures or near-failures.” Paulson added: “They need to lend more. We don’t want them hoarding, we want them lending.” However, he also said, “It is not in my judgment practical or prudent to have government…saying ‘Make this loan, don’t make this loan.'”

• He defended the amount of disclosure by Treasury on the Troubled Asset Relief Program, or TARP. Paulson said, “We have been moving with lightning speed,” and added, “We’re building this organization as we’re going.”

• “The No. 1 thing we need to do is stem the housing correction.”

• The government lacked the authority to prevent the failure of Lehman Brothers, the investment bank that went under in September. But he said that Lehman’s failure was “in my judgment a symptom, not a cause” of the financial turmoil.

• President Bush “is very current and he’s on top of everything we’ve done.” He said, “I know that’s not conventional wisdom among some people but it’s absolutely true.”

• China and the U.S. should be good partners. “We won’t always have the same view, but engagement in my view is exceptionally important.”

Adler’s final question to Paulson was what advice he would give his successor, Timothy Geithner, who is now president of the Federal Reserve Bank of New York. Paulson said Geithner doesn’t need his advice, but added, “It’s important when you’re going through a time like this to define your job expansively.”

Funds rate below half a percent

It was expected the Fed would drop the funds rate to a historic low of 0.5 percent from the previous record-tying 1 percent.

Instead the rate is going to be a floating point between 0.25 and zero percent. And that decision is not expected to change anytime soon.

I keep writing this, but man, we’re into seriously uncharted waters. I just get the feeling Bernanke and Paulson are adrift without a paddle or a clue. I hope I’m wrong.

From the link:

The central bank typically sets a specific target for its federal funds rate instead of a range. The rate had previously been at 1% and this marks the first time the Fed has cut rates below 1%. Most investors were expecting the Fed to cut rates to either 0.25% or 0.5%.

The federal funds rate is an overnight lending rate used as a benchmark to set rates for a variety of loans, including adjustable rate mortgages, credit cards, home equity lines of credit and business loans. This marks the tenth time it has cut rates in the last 15 months.

Several banks announced they were lowering their prime rate to 3.25% in light of the Fed’s decision. Typically, the prime rate is 3 percentage points higher than the fed funds rate. It was 4% before Tuesday’s rate cut.

Despite the dramatic nature of the Fed’s move, some economists questioned whether it will have much effect on the economy. They said the problem for consumers and businesses right now is not the cost of borrowing, but the availability of credit and the weaker economic fundamentals.

“Lowering rates to this level is purely a psychological move made to send the message that the Fed is committed to righting the sinking economic ship,” said Rich Yamarone, director of economic research at Argus Research. He noted the previous rate cuts did little to stop home and auto sales from plunging.

Power shift — Wall Street to Washington

Irwin Stelzer sees a radical shift in power from Wall Street to DC and puts the blame squarely on Hank Paulson’s shoulders.

And the corporate socialism goes on …

From the link:

The continuing series of bailouts, and potential bailouts, has Irwin M. Stelzer of The Weekly Standard bemoaning “a profound change in the nature of our government.” The check on government power imposed by the Constitution’s separation of powers will be weakened by full Democratic control of both branches, he notes. But the bigger change is the end of markets as a constraint on government. And for this, Stelzer pins much blame on Treasury Secretary Hank Paulson. “Paulson, of course, continues to preside over the billions-going-on-trillions that will be made available to whatever industries make the best case for a hand-out. You might recall that the Treasury secretary came to Washington after heading up Goldman Sachs, a firm now reporting billions in losses after abandoning its business model in favor of status as a government-sheltered commercial bank. Nothing more clearly demonstrates the shift of power from Wall Street to Washington than the Paulson saga. Once the man who raised private-sector funds for private-sector businesses from his perch at Goldman, he is now the man who distributes taxpayer funds to private-sector businesses from his perch at the Treasury.”