Thank God for Henry Paulson.

Seriously, after two years of “strong dollar” policy—policy that saw the dollar lose some 16% of its value before this recent rally began—Henry the “Hammer” Paulson has really come into his own as a financial blunderer.

Indeed, his actions of the last 18 months are much more deserving of the nickname “Hammer” than anything from his college football days—hammers are neither particularly sensitive nor precise instruments. In fact, a review of his actions throughout the financial crisis show a rapid shift towards weapons of greater and greater scope and power… none of which hit their target: stopping the financial collapse.

Throughout much of 2007, Paulson asserted that the subprime problem was “contained” and that the global economy was the “strongest” he’d seen in his “business lifetime.” By the time he finally figured out things were not contained and that we were heading towards a systemic collapse it was July 2008.

At that time, things had already progressed to the point that a mere upgrade from a hammer to a gun wouldn’t suffice, so Paulson went for a “bazooka”—his metaphor for the blank check Congress granted him to potentially bailout Fannie Mae and Freddie Mac. At that time Paulson asserted, “if you have a bazooka in your pocket and people know it, you probably wont have to use it.”

Setting aside the strangeness of this symbolism—a bazooka IN his pocket—Paulson obviously had no clue what he was talking about. Both Fannie and Freddie were clearly insolvent before he even went to Congress. And the financial system had only stayed afloat thanks to the SEC’s decision that short-sellers were the real problem, banning short-selling on several financial firms.

The SEC’s short-squeeze only lasted a month. And by September, Paulson had whipped out the bazooka, taken aim and… solved nothing apparently. Despite the Frannie deal, home values continued to fall, credit markets remained tight, and the stock market only rallied for one day.

If you can’t hit your target with a bazooka, a nuclear warhead is really the only option left. Paulson went back to Congress, this time to request $700 billion for a fund to buy Wall Street’s junk debt. What’s truly staggering is that even with the nuclear option Paulson still missed entirely. His proposed plan really offered no value for Americans, had little or nothing to do with mortgages, and EVERYTHING to do with helping his buddies on Wall Street—guys who he admits to being in regular contact with despite the obvious conflicts of interest and insider trading violations.

Even more startling was the fact Paulson admitted the $700 billion was an “arbitrary” amount—as though anyone in their right mind would call $700 billion arbitrary. And let’s not forget, Ben Bernanke, his partner in crime on the bailout proposal was soon pumping nearly $1 trillion a week into the financial markets… which really raised the question, “Why even ask for the $700 billion to begin with?” I mean, did Ben and Hank not even bother to discuss how much they should ask for?

Which brings us to last weekend. Paulson suddenly did a 180º and suggested the US government start taking stakes in bank—a move his former bailout plan did not consider. I have to admit, it’s actually a half decent idea since it would offer capital to banks—the crisis is one of solvency, not liquidity—AND it might actually make some money for US taxpayers, assuming the banks are permitted to buyout the government stake at a premium sometime in the future.

Sadly, the idea wasn’t Paulson’s own: the Brits have already begun implementing precisely such a strategy. UK Prime Minister Gordon Brown was even kind enough to state, “This is not the American plan. The American plan is to buy up these bad assets by a state fund. We know that the taxpayers’ interest has got to be protected at all times, and that is why we are ensuring that it is an investment stake in the banks. We are not just simply giving money.”

Seriously folks, this is getting embarrassing. At what point is Henry Paulson going to be relieved of his post? The guy’s track record regarding the financial crisis has been completely unblemished by success. In fact, his ideas are so poor that they’ve become a punch line for foreign leaders.

Someone please put the Hammer back in the tool shed.

Last 5 posts by Graham Summers

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