The costs of Paulson’s mistakes

Treasury Secretary Henry Paulson made numerous mistakes in the crucial early phases of his response to the current crisis. (Not to mention the antecedent mistakes he and his predecessors made that served to cause the current crisis. Supporting the continued deregulation of the markets being a key one there.)
Paulson’s mistakes in September were mistakes of both policy substance and political style. Substance-wise, it’s pretty clear that his aversion to the federal government taking equity in the troubled banks was a big mistake. Krugman has a pithy comment on that here.
Without the government getting equity, the fears about the viability/solvency of the big troubled banks simply remained in place. But throughout September and until recently Paulson saw the government getting equity as “a sign of failure”– whereas he claimed his $700 bailout was “about success.”
Excuse me? The taxpayers were being asked to provide a $700 billion lifeline to the banks because they’d succeeded??
Paulson has since then reversed course. Now, he apparently sees the need for the government to purchase bank equity.
So he’s wasted nearly three weeks now barking up the wrong tree.

During a crisis like the present one, three weeks is a long time. (Wasn’t Paulson the one who, back in September, said matters were so urgent that the Congress had to do just what he said, immediately?)
And he still hasn’t pulled together any mechanism to implement the TARP ($700 billion bailout) plan… Of course, getting its ground-rules right is important as he does so.
Paulson’s failures are a sign of the clear crisis of governance in Washington that has been revealed by the financial crash. Despite his MBA from Harvard Business School, Pres. Bush has been largely remote from (and apparently disinterested in) the actual detailed decisionmaking about the crisis. The only time we’ve seen him in a meeting to discuss it was that highly politicized photo-op gathering when McCain had donned his Superman cape, announced the “suspension” of his election campaign, and flew back to DC to “co-lead” the policy response to the crisis along with Bush.
In practice, though, Bush seems to have delegated the handling of the crisis completely to Paulson. Paulson had a previous stint in government, as part of the ever-revolving door between high levels of the US government and the Goldman Sachs. But his longest experience was working for, and ultimately heading, that investment bank. He is not a political leader with a broad understanding of social and political processes in the country and the world. And he’s never run for elected office. So his political mis-steps around the bailout are perhaps understandable.
Clearly, we need a new national leadership– one that is much more competent than the Bush-Paulson team at both the technical and the broad political levels. Obama needs to be thinking hard and deep right now about who he wants to bring in as his key economic advisers, and how he wants to plan his ongoing response to the crisis, once he is– as I certainly hope– elected.
Poor Obama. He’ll end up getting elected and become president at a time when the country and the world are in a state of advanced crisis regarding both the economy and the military’s horrendous and growing problems in Afghanistan? I feel for the guy.
On the other hand, given that nearly eight years of Bush’s policies have indeed brought the world to this situation, then I would far, far rather have a smart, thoughtful, and politically inclusive guy like Obama in the White House than McCain and Palin.
(Even though, usual caveat, I still don’t agree with everything that Obama is currently arguing for.)