Paulson the Hammer – Looking for a Nail

By Tim Holland

There is an old saying that if the only tool you have is a hammer then everything seems to look like a nail. Well, I’m afraid Secretary Paulson has earned the nickname: The Hammer. Paulson is a market guy, a financial system guy; he knows how they work so his solution always focuses on market system solutions and he doesn’t seem to be able to see anything else.

From the way he has approached the financial crisis you can begin to see a pattern. Bad paper, in the form of Collateralized Debt Obligations (CDO) were the problem so let’s buy up the paper from the market place and that will stabilize the system. But wait, let’s pump more money into Fanny Mae and Freddie Mac so they can guarantee the eligible mortgages that might be part of the paper making up the CDOs. But wait, maybe it’s the Credit Default Swaps that were designed to provide insurance on the CDOs so let’s shore up AIG that created the Swaps and that will solve the problem. But wait, maybe we should just pump money directly into the banks to restore confidence in the system.

Bang, bang, bang, bang. I wonder where the next nail is? There’s got to be one around here someplace because the economy is still tanking and the decline seems to be accelerating.

Okay, its time for the Treasury Department to stop wandering around Wall Street looking for more nails because they’re not there.

Let’s start following the bread crumbs back to where the problem is and see if we can figure out how to stop the bleeding. The mortgage crisis was the straw that broke the camel’s back but it was only the last piece; it was not an eight hundred pound straw; it is not what is now tanking the economy.

Secretary Paulson says he now has figured out where the problem is and it’s the consumer. His solution: let’s shore up the banks a bit more and add the credit card companies to the mix. The answer he sees is to get the banks to expand their credit lines to the consumer (that’s how Wall Street views people – their not individual beings but consumers – a vehicle to create earnings). According to the Treasury what we need is for the “consumer” to start spending again.

Excuse me – that’s how we got into this mess in the first place: too much easy credit.

So what’s the real answer: job retention.

The unemployment rate is at 6.5%, on the way to 8%, and then after the first of the year 10%. Giving someone more credit so they will buy more things they can’t afford and certainly can’t pay off, so that banks and credit card companies can charge higher rates and fees to people about to lose their jobs and homes and are facing bankruptcy is a perfect example of the kind of thinking that got Wall Street into trouble in the first place.

People are worried. The people who are still able to spend are not doing so because they are tying to cut expenses to protect against an uncertain future. If you want them to start spending again you have to mitigate the uncertain future. There is much rhetoric for the need to create jobs as a way of doing that but in reality the best way is to stop, or at least limit, the loss of jobs.

There have been a number of instances in the past where the U. S. Government has subsidized the private sector with regard to hiring the so-called unemployable. How about subsidizing the employable for a change; pump some of that $700 billion into companies in an effort to stop them from laying people off. In the long run it’s a good deal more efficient to keep someone working where they are, with all their benefits in place, than having them lose their homes in a foreclosure, default on their credit card debt and turn to hospital emergency rooms for medial care.

Yes, I know, such action would be an enormous philosophical leap for the current residents at Treasury but what do we have to lose? If it works, or at least slows down the slide, we’ve managed to buy some time. If it doesn’t work it won’t make things worse than they would have been anyway but at least a valiant effort has been made.

The key point here is that the focus has to be on jobs and keeping people (not consumers) employed. A person without a job and an income is not the kind of borrower anyone needs at this point. Hasn’t that been the criticism that both sides of the aisle have been leveling over the past few months – credit risk has been ignored and the credit scoring system has proved to be a terrible rationale for making loans?

Focus on jobs for people – retaining them now and creating them later – and not more credit for consumers.