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Sticking Up For Hank Paulson (er, Again)

I mostly agree with David Brooks's two-cheers-for-muddling-through take on the performance of Bernanke and Geithner during last fall's financial crisis. As Brooks writes:

Bernanke and Geithner favored a process of constant and gradual adjustment. They were navigating in a violent sea, shifting their weight this way and that to stay upright another day. They tried to solve one problem at a time and worry about the unintended consequences later. Their method didn’t produce a set of clear principles. Their lack of a grand plan or an exit strategy worried some. But their method matched the chaos of the situation.

Indeed. A more "principled" Fed chairman would almost certainly have had the wrong principles, which would have been completely disastrous.

Having said that, I think Brooks is a little hard on Hank Paulson, the third member of the troika tasked with stopping last fall's global meltdown. Brooks says:

Occasionally, Paulson would make a bold policy pronouncement. The idea was to lay down some sort of principle so the markets would understand the new rules and feel more secure. But then events would change and he’d have to reverse course. He’d end up producing more uncertainty, not less.

I haven't yet read the David Wessel book Brooks based the column on, but this sounds a little uncharitable to me. I agree that, of the three, Paulson's performance was least impressive. (As Brooks points out, he seemed most intent on letting Lehman fail.) But, unlike Bernanke and Geithner, Paulson worked for a democratically-elected administration. And for better or worse, when you're part of an admistration, even a lame-duck administration, you have to weigh public opinion more heavily in your decision-making. My sense is that Paulson's attempt at articulating principles wasn't just designed to appeal to markets, but to the country overall, so as to build political support for his response. Like Brooks, I think he misread the situation, but his impulse was somewhat understandable.*

More importantly, I think it reflects well on Paulson that he was willing to change course when it became obvious that his initial ideas were off-base. As I wrote last month:

In fact, it wasn't just one reversal but two, with the second being possibly more important--and courageous. The first, as most people probably recall, came during the second and third week of October, when Paulson set aside his plan to buy toxic assets and instead used TARP money to inject capital directly into banks. (Paulson began the injections in a famous meeting with the CEOs of the nine biggest banks on Monday, October 13.)

The second reversal came in late October. According to [former assistant Treasury secretary Phillip] Swagel, Treasury was on the verge of returning to Paulson's original plan, using about $200 billion in remaining TARP money to buy up toxic assets. There seemed to be two goals at this point, one substantive and the other political. The substantive goal was to revive the market in mortgage-related assets. The political goal was to save face with Congress. Or, as Swagel says of a scaled-back version of the idea: "In even a modest size, this activity would have allowed the Secretary to say that he was fulfilling his initial promise to buy toxic assets."

But Paulson decided to throw in the towel--and lose face--when it became clear the plan was unworkable. Now, obviously, you'd like to have a Treasury secretary who didn't come up with unworkable plans and then bill them as The Answer. But, given what must have been unbelievable pressure to push on, I'm pretty impressed that Paulson decided to ditch it.

*Obviously part of it was simply that Paulson is, by disposition, a guy who likes to lay out principles and appear to be following them.

--Noam Scheiber