Sack Paulson

Current economic conditions are nothing if not complex. Investment banks are disappearing and merging; massive insurance companies are floundering, trillions of dollars of mortgage debt is in question (and it's not even held by American companies). It's tempting to think that economics is just an inherently complicated discipline, and that these kinds of shocking events were destined to take place at one point or another. Sadly, that's not the case. We were destined for a downturn eventually, but not this.

While it's true that economies go through cycles, bringing good times and bad, what makes this particular cycle different from many past ones is that this has been about more than just low stock prices, lost jobs, and negative GDP growth. Rather, this most recent crisis has resulted from systemic failures in the very institutions that we have relied on to keep our economy going.

For the big banks, weathering the technology bubble eight years ago was difficult, but possible, given how far removed most of the companies involved were from the day-to-day operations of buying and selling. When Enron began to slip, the lights went out in California, but New York hummed along relatively smoothly. In each instance, however, hindsight revealed massive fraud, whether it was on the part of get-rich-quick entrepreneurs and venture capitalists, or Andy Fastow and his acolytes, who manipulated energy prices for their own gain (among numerous other tricks).

This time is no different. Numerous investigations will eventually reveal that the downfall of Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, and an independent Merrill Lynch were completely preventable, mired in deception, and anything but pre-determined. The people who were directly responsible for the problems at each individual firm will eventually be exposed, shunned, and possibly incarcerated. But that won't make the world a better place. If Wall Street is daycare for quantitative wizards, then the traders, analysts, and even executives responsible for selling bad mortgage loans as top-grade securities were merely the two-year-olds stealing someone's toys (and then lying) while the adults in the room looked on and encouraged them to. After all, with free market policies, shouldn't one let the market do as it pleases?

The answer, which should be all too obvious now, is "no." At its extreme -- what we just witnessed -- laissez faire economic policies encourage the less ethical among us to exploit whatever loopholes can be found, with no fear of retribution. Those on Wall Street are probably just as ethical as any sample of the American population (meaning that there are some saints, some devils, and some in-between), but throw in some intense competition, huge yearly bonuses, a trading desk, and a set of laws that is rarely comprehensive or water-tight, and with only a few misguided souls you've got yourself the potential for a huge disaster. Now that the huge disaster has transpired -- again -- the need for better regulation should be topic number one in the presidential election, or at the very least, something the press starts asking questions about.

Meanwhile, we have a Secretary of the Treasury who apparently believes that, as Paul Krugman recently put it in The New York Times, the best way to handle the current economic conditions is by playing Russian roulette. At this point, options concerning the best way to proceed are definitely limited, but they weren't always. Paulson could have pressured the SEC to keep regulations restricting short sales on the books (in order to prevent traders from profiting on stocks going down, instead of up) long after Bear Stearns collapsed, and yet the emergency provisions were scheduled to be lifted on July 29. On September 12, the Friday before the collapse of Lehman Brothers, the short sale interest in its stock was 11.68% of outstanding shares, compared to 0.68% of outstanding shares for General Electric. It's impossible to say exactly which rumors or trades finally did Lehman Brothers in, but having seventeen times as much short selling taking place as an average Dow Jones component could not have helped.

So, if I were President, I would put a new Secretary of the Treasury in place who understood why it's a bad idea to let the market cure all ills. If humans were perfect, than our markets would be too -- but we're not, and as of today, our markets definitely aren't. Paulson failed to uphold his duty to effectively regulate our financial system, and his solutions thus far have placed an unbelievable burden on taxpayers. Thousands of Lehman Brothers employees are packing their desks today. Why isn't Paulson packing his?

Aaron Greenspan is the author of Authoritas: One Student's Harvard Admissions and the Founding of the Facebook Era.

Follow Aaron Greenspan on Twitter: www.twitter.com/thinkcomp

Comments

[kaski]

Hell, forget Paulson, get rid of the commercial privately owned Federal Reserve, and create a true United States Bank owned by "We the People."

[cylindar]

Paulson isnt packing because Paulson is doing exactly what Bush has told him to do. You are looking at the wrong person to castrate. Look at Bush, Cheney, Rice and the rest of the Repubs who have master minded this mess. I think that the meltdown is a good thing as it will make a lot of well to do people poor. Poverty is a great teacher, and I am glad that many more new people will be initiated into her discipline who might have otherwise missed the opportunity. Don't be so disgruntled, just enjoy the ride and "be happy". The economy will rebound at some time in the future and all will be normal again. God is good but smarts is better.

[WIpatriot]

B ush isn't telling ANYONE what to do, the real people in charge are telling him.

[Henry]

It's Alan Greenspan who says (and I agree) that a resolution trust corportion type of gse or financial intermediary should have been set up approx one year ago to bite the bullet. This intermediary would have purchased all of the subprime loans in the form of direct assets or mortgage backed securities. It would have nationalized the problem loans. Then on a one by one basis over a period of approx seven years it would have renogtiated and/or modified each of the loans so the obligors could handle. The market would have been spared and the loss, which would have been socialized, would have been minimized. The world wide near failure of financial systems that we are now proceeding through would have been avoided. The quicker you deal with a cancer the better. This will drip drip drip and guess who inherits the problem 2009? Typical Bushwa Republican irresponsibility.

[NicoleAnon]

It's funny how Krugman has an op-ed today in NYT criticizing Paulson for letting LB fail but if he had saved the bank with government money then Krugman would be criticizing him for creating "moral hazard" instead.

There isn't anyone who could have that job and not be criticized for something because this is the worst financial crisis in recent history. The reason he took over FM is because he had his own people look over their books and they realized it was much worse than they were admitting to anyone so he is probably fed up with all of them.

If Paulson bailed out another bank you would be criticizing him. When he doesn't bail them out you criticize him. The reason that BS and LB failed is because of their own arrogance and mistakes - there isn't any proof that people making bets against them had anything to do with this. If I had money then I would have also bet that LB was in trouble - it was obvious to anyone. If they had a viable company someone would have bought it.

[Aaron Greenspan - Huffpost Blogger]

Hello,

I agree with you--Paulson is in a very tough position now, and there's really no good choice to be had. I don't envy his position.

What I'm criticizing him for isn't his performance now, however--it's the fact that we were allowed to get here in the first place. Few people are in positions of power like his, so if anyone could have prevented this catastrophe, he could have. Unfortunately, the typical Republican view that free market economies should be allowed to essentially run wild without any sort of regulation prevented any sort of preventative measures from being instituted. (How sadly ironic.)

Aaron

[Henry]

I think that Paulson is a talented guy from Goldman Sachs. He's an environmentalist indicating that he has some intellect. The bigger problem, as I watched it unfold, was John Snow who was Sec Treas as all this "unfolded". I watched Snow one day state that there was "no evidence" that the PRC was manipulating their currency. Snow was a railroad man (if I remember correctly) with no financial savy. He was either amazingly unaware or a deceitful partyline propaganda machine.
If this is all stupidity and negligence, I believe Snow was the errant and that Paulson took the position in the "worst of times".

[NicoleAnon]

I still disagree with you about that because Paulson hasn't even had the job for that long. Everything that is happening now is the result of not enough regulation as you mentioned but much of that was happening before Paulson was in office so even if he had tried to implement more regulation when he took the job we would still have had these problems.

And as someone pointed out, he isn't a typical Republican either - he has given lots of money to nature conservatories which is unusual and he said he is leaving all his money to charity. This is just a really bad financial crisis but I don't think Paulson should lose his job as you suggested.

[joebaggadonuts]

Don't be surprised if Paulson doesn't get a Medal of Freedom and a pat on the back with a Heck-of-a-Job from his master.