Paulson the Wallflower

Earlier in the week we spoke about Henry Paulson’s spiritual journey, which today took a new turn as he finally agreed to buy equity in nine struggling US banks, rather than simply throwing money at some of their toxic debts.

But is this really Paulson’s decision, or are his ideologies now so out of favour (and his confidence so shaken) since the failure of the $700 billion bailout plan, that, like European leaders, he is clinging to the coattails of Gordon Brown’s “nationalise or be damned” approach? Has he simply become a wallflower in the international financial recovery?

It would seem so. When he let Lehman’s collapse, Paulson was still harking on about letting the market do its work and not spending any taxpayer dollars:

“What we are going through in the short term doesn’t make anything easier. But in the longer term, it’s going to make things better, because we’ve got excesses we need to work through.”

By the bail out plan, he’d dropped that ideology, although no one was sure what he was really replacing it with, least of all himself:

“It just happened dramatically… There was no political calculus. It was overwhelmingly obvious.”

Or as Nobel Prize winner Paul Krugmann said in today’s Guardian:

“[H]e called for government purchases of toxic morgage-backed securities, based on the theory that… actually, it never was clear what his theory was.”

Now that the US government has decided to buy equity in its failing banks, Paulson doesn’t just sound confused, he sounds undermined:

“Government owning a stake in any private US company is objectionable to most Americans — me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”

Is there still a role for Paulson in this crisis? Or is his ideological faith (and accompanying state of denial) – in a free market that has so spectacularly imploded – so strong that Paulson’s ideas are no longer relevant?

Is he now forced to accept, like the shy wallflower, it’s not worth saying what he thinks because no-one wants to listen?

Posted by Daniel Stacey in Hot Money | October 14, 2008 6:36PM |