Paulson 'Plan' B

Secretary of the Treasury Paulson seems incapable of explaining his ideas for rescuing the economy. Originally, he proposed to buy devalued debt so that the current holders of the debt, the banks, could resume lending. Unfortunately, he could not describe even broadly who would set the price for the debt. The market price was obviously very low, arguably too low, and that is why the banks are in trouble. But why should we taxpayers pay more than the fair price – i.e., market price – for the debt?

Today, he proposed a fundamental change, let's call it Plan B (though calling the first proposal a 'plan' is being charitable). Now he proposes that we taxpayers buy parts of the troubled banks. This is essentially the British plan they announced to broad acclaim over a month ago, back when the stock market was considerably higher. At least with this plan, we can purchase those assets at well-established, market prices and share the potential gains in the future, not just buy the losses already incurred.

The simple way of determining if any plan is working is to ask: is lending increased? The answer is apparently “no”. If the rescue plan did nothing better than simply dump money into the credit markets, then lending should have increased by the amount we invested. A good plan would leverage our investment so that it stimulates more than dollar-for-dollar lending.

I think the plan was flawed because it broke the market. Government has a crucial role in managing the economy and we are suffering the consequences of 8 years of profligacy, ignorance, and incompetence. We need to let the market determine the real price – the real value – of debt, banks, and auto companies.