The Aftermath of Paulson's Failed Bailouts

Inviting a little bit of government policy to interact with private enterprise is like inviting a little family of rats to interact with a bakery. Before long, you’ve got more rat droppings than chocolate sprinkles atop your cupcakes. And that’s just the beginning…

Every day, the rats are more numerous, more rotund…and more brazen. Every day, fewer baked goods make it from the oven to the display case. Eventually, the baker is in business to feed the rats…and there is nothing he can really do about it.

Feeding rats is expensive.

It costs money to support a rat-friendly environment. It costs money to finance bailouts, stimulus packages, liquidity injections, quantitative easings, health care reforms, financial reforms, emergency lending facilities. It costs real money that comes from real people…in some way, shape or form.

To maintain a rat-friendly environment, you’ve got to raise taxes or print dollars…or both.

Two years ago, most investors cheered the staggeringly expensive bailout schemes of then-Treasury Secretary, Henry Paulson. Hank simply reached into his bag of tricks, pulled out a few trillion dollars of bailouts and guarantees and scattered them like pixie dust over lower Manhattan.

Within a few months, the stock market was rallying and the economy was showing signs of life. The crisis was averted and Hank’s rescue mission did not seem to cost anything at all. But now we know that this rescue mission cost us everything…or almost everything.

Paulson’s bailouts destroyed the nation’s balance sheet, while also taking a hatchet to the legal precedents that had nourished American capitalism for more than 200 years. Without one single ounce of Constitutional authority, and without a demi-second of public debate between elected representatives, Paulson dispensed trillions of dollars worth of federal funds and guarantees to a handful of privileged and/or connected corporations. As such, Paulson did not change any longstanding laws or legal precedents, he simply invalidated them. After Paulson, what rules counted? What rules didn’t? No one knew? No one knows even now.

And now, nearly two years after Paulson’s hyper-active, Constitution-warping activities, what do we, the non-Wall Street portion of the American populace, have to show for the trillions he spent or authorized? An economic recovery?


The Paulson bailouts failed miserably. They double-failed. Paulson spent trillions to buy a feeble one-year economic rebound…while also saddling the nation with debts that will last decades. Even the Home Shopping Network offers better deals than that.

If a friend told you that he had cashed out his IRA and mortgaged his house to throw himself a birthday party, you’d think your friend was an idiot. But when the Treasury Secretary does something similar with the nation’s balance sheet we think he is…well…an idiot.

Last week’s economic data illustrate that the “Paulson non-recovery” is in full swing. Last Friday, we learned that the US economy shed 131,000 jobs during July. This grim report corroborated equally grim reports on consumer spending, personal income, pending home sales and factory orders.

Personal incomes fell last month for the first time since September. Meanwhile, the savings rate soared to 6.4% – the highest level in a year, as Americans reacquainted themselves with the ancient virtue of thrift.

When folks stop buying things they cannot truly afford, strange things happen. One of those strange things is that consumer spending dries up. Last month, therefore, consumer spending stagnated, while pending home sales tumbled. The National Association of Realtors’ index of pending home resales in July dropped to its lowest level since data began in 2001.

Maybe governments can’t buy economic growth after all.

Eric Fry
for The Daily Reckoning

The Daily Reckoning