According to the Washington Post, after the initial defeat of the bailout package in the House last Monday, Treasury Secretary Henry Paulson went to see President Bush in the White House. The Post reports that President Bush asked Paulson about "Plan B." According to the Washington Post, Paulson told Bush "there is no Plan B."
Of course this was not true. Paulson could have easily designed a bailout plan that was centered on the direct infusion of capital in the banking system, as was suggested by George Soros in a Financial Times column later in the week. Virtually every economist who has written on the bailout argued that a direct infusion of capital is a far more effective approach to dealing with the financial crisis than the approach outlined by Paulson.
Clearly Paulson had not invested a great deal of time in crafting the initial proposal he submitted to Congress since it was just three pages and few of the details of the plan had yet been decided. This means that Paulson easily could have switched gears and developed a plan along the lines advocated by economists.
This alternative approach almost certainly would have passed by an overwhelming majority in both houses of Congress since it could easily be structured in a way that ensured that the banks were not being rewarded for their incompetence at the taxpayers' expense. This was a major factor behind the public's outrage over the bailout.
If the Post accurately described the meeting between Paulson and Bush (there is no source given for this account), then Secretary Paulson badly misled President Bush on the most important economic decision of his presidency.
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