Henry Paulson kills automarket to save Wall Street banks

When asked why the economy has become worse after Congress gave him the authority Henry M. Paulson said the following: “The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties. The crisis in our financial system had already spilled over into the overall economy. But recovery will happen much, much faster than it would have had we not used TARP to stabilize our system. If Congress had not given us the authority for TARP and the capital purchase program and our financial system had continued to shut down, our economic situation would be far worse today”.

But could the situation be far worse? George Soros has another point of view: “The U.S. authorities bought into market fundamentalist ideology. They thought that the markets would ultimately correct themselves. U.S. Treasury Secretary Henry Paulson epitomized this.” “Since they did not understand the nature of the problem - that the market would not correct itself - they did not see the need for government intervention,” he added.

 

 

But what has “Hank” actually done? Seeing that the US economy cannot recover itself he has developed his “rescue plan”, called Troubled Asset Relief Program (TARP). According to the plan the federal government was to spend $700 billions to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets. After long disputes and numerous amendments Paulson plan has been approved. And? And Pauslon decided to change his tactics. His main argument was that during the month spent by Congress to adopt the plan the situation on the markets has changed greatly. “By the time the legislation had passed on Oct. 3, the global market crisis was so broad and so severe that we needed to move quickly and take powerful steps to stabilize our financial system and to get credit flowing again. Our initial intent was to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities. But the severity and magnitude of the situation had worsened to such an extent that an asset purchase program would not be effective enough, quickly enough. Therefore, exercising the authority granted by Congress in this legislation, we quickly deployed a $250 billion capital injection program, fully anticipating we would follow that with a program for buying troubled assets,” he said. The US Secretary of the Treasury said that his TARP program could be more effective by investing in companies rather than buying mortgage debt itself. The reaction to this statement was immediate. According to Markit Group Ltd. the ABX-HE-PENAAA 07-2 index of credit-default swaps tied to AAA-rated securities has fallen 13 percent to 36.25. That indicates the bonds might fetch about 36 cents on the dollar.

Being driven by a desire to help one sector of the country economics Henry Paulson is strongly opposed to allot funds for saving the automarket. "There are other ways to help them,” said he the House Financial Services Committee when the three major U.S. automakers General Motors Corp, Ford Motor Co and Chrysler LLC asked for investments. Meanwhile the situation on the automarket is far from being ideal. Auto sales plummeted 32% in October, the slowest month since 1991. 

Today the government has already spent $150 billion to purchase shares of US banks and prevent them from the bankruptcy. The Chairman of Federal Reserve Ben Bernanke said that the banks have already opening up lending again however credit conditions are still far from normal.

Not all the people in government support the policy of Henry Paulson explaining that TARP is too focused on Wall Street banks. "They want some idea, do we have a plan? Where are we going? To say turning a corner, really, is not terribly significant," said Congressman Paul Kanjorski, a Democrat from Pennsylvania.

"It seems to me when you’re treating a disease, you don’t decide where the disease came from. You decide when is the prognosis, the likely prognosis. And then you take action," criticized he addressing Henry Paulson.

However the former CEO of Goldman Sachs has another point of view: “I am confident of success, because our economy is flexible and resilient, rooted in the entrepreneurial spirit and productivity of the American people.” 

January 20, 2009 is the day when President-elect Barack Obama will come to White House. Nobody doubts that he will bring some innovations however nobody knows what effect they will have. Probably, if the government has a precise and complex plan the TARP will be more effective and crisis will overcome the financial crisis with the minor losses… Probably…