Wednesday, September 24, 2008

The trust problem

By Paul Krugman

Andrew Leonard has an interesting theory about what Paulson and Bernanke may be thinking — namely, that mortgage-related securities are wildly underpriced, and that the Treasury can create a market that will lead to major upward revaluations, and we’ll all live happily thereafter. I would quarrel with that theory — at least so far, the losses acknowledged by the financial system still fall short of the true, “hold-to-maturity” losses we can expect given the decline in housing prices; plus, does it really take $700 billion to create “price discovery”?

But even before we get to substantive discussion of the theory, here’s the thing to notice: this isn’t what we know Paulson is thinking, it’s an attempt to infer, based on very few clues, what Paulson might be thinking. Why doesn’t he just tell us? The two striking things about the Paulson push since last Friday have been (1) demands for complete discretion, with zero accountability and (2) a complete refusal to explain the theory of the case — to explain why this thing is supposed to work, so that we can have an open discussion of whether he’s right.

The whole premise of the bailout push has been “We’re the grownups, we know what we’re doing, just trust us.” Sorry, but that’s how Colin Powell sold the Iraq war. Fool me once, shame on you, fool me twice … you shouldn’t get fooled.

And that, by the way, is why Paulson’s whopper about oversight matters. On one hand, the secretary poses as the adult providing supervision, with no need to explain his decisions; on the other, caught with his hand in the cookie jar, he offers childish excuses.

No more taking this administration on faith — and Paulson’s performance over the last few days has made it clear that yes, he is a Bush administration official, with the trademark inability to take responsibility for his own actions. Explain what you’re doing and why — or get out of the way, and let Chris Dodd and Barney Frank write the plan.

A further thought: This “price discovery” stuff is, when you think about it, closely related to the face-slap theory of central bank intervention. And $700 billion is a lot to pay for slapping markets in the face, yet again
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