Paulson’s Bail-Out: No New Jobs

Henry Paulson’s program to save the economic universe from dark powers may or may not rescue the financial system. It comes with a $1 trillion checking account which the government will use to buy bad assets from banks. It is not clear which firms will make it onto the subway before the doors close and the train leaves the station. Paulson may still allow some companies to fail.

Economists, even those with Ph.Ds in mathematics or Nobel Prizes, have not been able to articulate whether the deliverance of the American system of capitalism will work. Financial companies who are not bailed out will need to sell assets to stay in business and will race one another to the bottom in an effort to maintain some liquidity. Banks will have to write-off the difference between what the government will pay them for their toilet paper and what they have carried it for on their books for. Unless the Congress is willing to suspend the GAAP rules which have controlled financial reporting for decades, banks will have to raise more capital. No one outside an asylum will put up that cash.

Some Congressmen will roil debate with the festering question of how people who cannot make their mortgage payments will get on the dole. If the government is to provide relief for hundreds of thousands of homeowners, the salvation program might cost $2 trillion.

There is nothing in Paulson’s plan which creates a single new American job. If the base of taxpayers continues to fall the burden on each person who remains employed rises sharply. The Fed can bring in extra printing presses to push more dollars into the pockets of consumers. Inflation follows. Consumer spending moves into a moribund state. The economy dies from the ground up.

Paulson’s plan seems vast in comparison to anything that the government has had to do to right the financial system since the 1930s, but it may turn out to be less than vast enough.

Douglas A. McIntyre