Does Paulson’s Lie Matter?

Paul Krugman today catches Hank Paulson in a lie (chapter and video and verse at Think Progress). Does this mean that Paulson is Not To Be Trusted? That’s what Krugman thinks:

If Paulson can’t be honest about what he himself sent to Congress — if he not only made an incredible power grab, but is now engaged in black-is-white claims that he didn’t — there is no reason to trust him on anything related to his bailout plan.

It’s quite clear that Paulson (a) originally asked for almost imperial levels of power before (b) appearing before Congress and telling them that actually, in fact, he welcomed their oversight and had wanted it all along.

What explains this? I think that part of it is a simple alpha-politician’s inability to admit to making a mistake. If Paulson had apologised for the no-oversight part of his original proposal, that might have felt like a sign of weakness.

And part too is embedded in the very vagueness of this plan, whose defining element — in both its Paulson and its Dodd flavors — is the extremely broad discretion given to the Treasury secretary in terms of the price at which he buys banks’ troubled assets.

I’m not entirely clear on why such broad discretion is necessary, but at the margin I suppose it will make it a little more likely that the banking system will come out the other side of this crisis in healthy enough shape to be able to drive an economic recovery going forwards. That’s the danger with wiping out banks’ equity and even their subordinated debt, and that’s why it’s a good sign that Goldman is showing signs of being able to raise a lot of capital in this market, even as investors really have very little idea about the degree to which its new status as a bank will affect its leverage ratios and profitability.

In any event, given that the plan in any incarnation gives the Treasury secretary enormous powers and discretion, it’s maybe simply prudent for the Treasury secretary not to admit to making significant mistakes with the plan before it’s even passed into law.

What actually happened? Well, Paulson likes giving himself a bazooka, and so he drafted for himself the biggest bazooka he could muster. When Congress balked at allowing him sole unfettered control over such a large and powerful weapon, he backtracked. That’s politics, it’s nothing to write home about. And neither, frankly, is the slightly clumsy lie that he made in his testimony.

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