Hank Paulson went to the Hill today to attempt to sell his $700 billion bailout plan. Surprisingly, those in congress questioned them hard about why this plan is necessary and why it is important to do something immediately.
As the hearing progressed, Paulson and Bernanke were on the defensive. Several times they admitted there were several problems with the plan. They admitted that the plan might not even work but that they had to do something and that they have to do it now. The fundamental problem they want to solve is the confidence problem that investors and the credit markets are having.
You know what the most ironic thing is? These actions, and similar ones before it, have likely caused most of this mess. Investors EXPECT the government to do something. They always come to the rescue. This is the type of moral hazard problem I fear most. Investors get used to the government stepping in, and thus refuse to do anything until a plan is revealed. This of course makes it worse the next time becaue the expectation is set, and until the government steps in, most investors will refuse to do anything.
I'm sure they will say, "Just this one time", or "This is a special circumstance". I hear the same thing at work every day when we agree to do a hack or we rush something out that shouldn't go out. Every case is a "special" case. Of course, that means none of them are, and neither is this one. The scariest thing? Pauslon is raising such an alarm and then he is asking for carte blanche in the situation. He just wants us to hand over the $700 billion with no strings attached. Want to buy the worse assets from the worse banks? Sure, why not? We wrote him a blank check. It just reeks of man with an ego too large for his own good; someone who thinks that they can solve any problem.
The plan should make sense. With this much money involved, it should be obvious what benefits it would provide. How come only Bernanke and Pualson seem to be the ones selling this plan?