JOLLY DAYS

What's It All About Henry Paulson?

In trying to understand what happened to the financial system I listened to and read a number of experts. The dismal science is normally just that, dreary, but current circumstance makes it of interest. The big question is whether the Paulson plan, as yet not announced, will work. No one is in agreement about that — even the premises of the plan. It appears the Congress is trying to protect itself by seeming to give oversight and not be rushed into anything. But the details of what is happening are not available to any but the most sophisticated economists. Oversight sounds great but it's not much help to read the map carefully if you are going in the wrong direction. Congress doesn't know. Paulson might not be correct. Congress is covering its butt in a most familiar way — the Democrats don't want to appear snookered with the operative word being “appear”; the Republicans want to help the wealthy.

Warren Buffet said that you shouldn't invest in a business you don't understand. If a company sells a soft drink, you get that. But these mortgage securities are a house of cards. Only a few people understand fully what is happening, although snips of the errors made are trickling out. The “black swan” phenomenon, where expectations provided by statistics don't fully account for anomalies. In this case, computers assessing risk failed to take into account that the statistics were based on the value of housing continuing to rise. Then there is Andrew Cuomo's relaxing the requirements to get a mortgage so poor people could get a piece of the pie. This seems to have exfoliated in the markets — things got relaxed. In other words, it wasn't a single event, but a long, hard to follow series of mistakes, with many at fault.

So we are in doubt as to whether the plan will work. As to whether it even addresses the right thing. Shouldn't we give this money directly to the country itself — maybe some form of WPA (a plan Obama was reportedly sympathetic to) — rather than try to prop up the financial markets? Maybe those markets should shrink. No one knows. If that outcome doesn't improve things by cleansing the system, we would have the disaster we fear and the Despair of Shoulda. Something of the way Paulson went about this makes me wonder if he is just familiar with and trying to restore what was. That he is afraid inaction is worse than any action. Maybe this whole house of cards, these mortgage derivatives, should be disallowed from the financial system. Not just oversight — elimination. At least that is what some experts are saying.