JEFFREY: Trusting Paulson

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By Terence Jeffrey

COMMENTARY:

President Bush's trusted treasury secretary, Henry Paulson, is setting the stage for the all-Democratic government that comes to power in January to vastly increase government control over our economy.

At an Oct. 23 briefing, CNSNews.com correspondent Fred Lucas asked White House spokeswoman Dana Perino whether Mr. Bush wanted there to be a timeline for the Treasury Department to give up the stock it planned to buy in American banks. This was important because the bailout law passed by Congress does not require the government to do so.

"The president is trusting his team over at the Treasury Department to design this program, and he believes that they're doing it the right way," said Mrs. Perino. "I don't have details for you on it. So we'll let them - we'll just trust our Treasury secretary and those that he's tasked with to implement the program."

On Sept. 23, Mr. Paulson told the Senate Banking Committee he would use the $700 billion he was requesting from Congress to buy "complex illiquid mortgage and mortgage-related securities to unclog our credit and capital markets." He specifically said he had considered and rejected the idea of buying stock in banks.

"Could you just in a few minutes describe several of the proposals that you considered, telling us in... specific terms why those proposals were deemed inadequate by both the Treasury and the Fed?" Republican Sen. Richard Shelby of Alabama asked Mr. Paulson.

"The root cause is housing and the housing correction," Mr. Paulson responded. "And until we get at that, we're not going to solve it. And as we looked at the - how we get at that, there were some that said we should just go and stick capital in the banks, put preferred stocks, stick capital in the banks. ... But we said, the right way to do this is not going around and using guarantees or injecting capital, and there's been various proposals to do that, but to use market mechanisms."

Three weeks later, Mr. Paulson did an about-face. "Today I am announcing that the Treasury will purchase equity stakes in a wide array of banks and thrifts," he said.

In fact, Mr. Paulson had virtually ordered nine major banks to sell ownership stakes to the government and accept some government restrictions on their activities.

Mr. Paulson did not pump money into these banks because they were in trouble, but to give government leverage over the banking industry. "These are healthy institutions, and they have taken this step for the good of the U.S. economy," he said.

A month later, Mr. Paulson announced he might not use any of the $700 billion to buy mortgage-backed securities. "Our assessment at this time is that this is not the most effective way to use TARP funds," he said at a Nov. 12 press conference.

So, what did he plan to do with the $450 billion not used to buy ownership in banks? He signaled he may use it to buy bad securities made up of "credit card receivables, auto loans and student loans and similar products."

Yesterday, Mr. Paulson told the House Financial Services Committee why he gave up on buying hundreds of billions in bad mortgage-backed securities: He did not have enough tax money left over after he bought the ownership interest in the banks: "It became clear that, while in mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact, half of that sum, in a worse economy, simply isn't enough firepower."

How much tax-backed "firepower" would be needed? Mr. Paulson did not say. But as CNSNews.com correspondent Matt Cover reported this week, the Federal Reserve revealed in its latest report on "Flow of Funds Accounts of the United States" that as of second quarter 2008 Americans owed $11.2 trillion on their home mortgages. Of this $11.2 trillion, $6.6 trillion had been bundled up in mortgage-backed securities.

Even as Mr. Paulson testified in Congress last Tuesday, the Federal Reserve was revealing that home mortgage delinquencies had jumped from 4.39 percent in the second quarter to 5.08 percent in the third. In the 17 years the Fed has tracked delinquencies, this is the first year it has broken 4 percent, let alone 5 percent.

Five percent of $11.2 trillion in mortgages means $560 billion in bad mortgages. With unemployment going up, that number is also bound to go up.

So is the power and influence of government over our lives.

In a Page One feature in The Washington Post last Tuesday, President Bush's trusted Treasury secretary revealed he was working on a new plan with President-elect Obama in mind. "Paulson said he will unveil proposals in coming weeks urging President-elect Obama and the new Congress to endow the federal government with broad new authorities to take over any failing financial institution, not just banks," said The Post.

Terence P. Jeffrey is a nationally syndicated columnist.