Back in September, Paulson's unprecedented $700 billion bailout plan was pushed through with such urgency because everything in the U.S. financial system appeared to be on the verge of collapse. Immediate action was needed to give stability to the stock markets.
However, only six weeks later the secretary of the treasury has just announced a dramatic switch: His original plan was to use the $700 billion to buy "toxic" assets from banks. Yet since then, Paulson and his team have not used the unprecedented power Congress gave them to buy as much as one such asset. Instead, Paulson declared Wednesday he now wants to buy bank stocks.
U.S. stocks have dropped about $1 trillion in value the last three days -- about $600 billion after Paulson's news conference Wednesday.
Paulson's credibility with investors, financial institutions and the markets has now melted down to zero. The Dow Jones Industrial Average closed at 11,388.44 on Sept. 19, when the bailout was announced. It closed at 8,282.66 Wednesday.
Paulson said the original plan to buy bad loans would take too much time. His new idea is to buy bank stocks and encourage the banks to resume their normal lending practices. But there is no provision to direct any of the money to the three big carmakers in Detroit, which together directly influence around 10 percent of the U.S. economy. General Motors has asked for an urgent $25 billion bailout. Huge as that appears, it is less than 3 percent of the funds Congress approved for Paulson in September that he has not yet used.
But the crisis is far bigger than the United States. Germany is now clearly in economic depression; British officials say they are ready to lower interest rates to zero if needed. Prime Minister Gordon Brown's much heralded rescue plan proved just a drop in the ocean.
The Russian stock market -- again -- had to halt its trading Wednesday after a 12-percent drop. Even China, the economic powerhouse of Asia, now has plans for a $526 billion spur to its economy.
What is the next step for Paulson & Co.? The clock is ticking. It appears increasingly doubtful they can get anything done before President-elect Barack Obama takes the oath of office Jan. 20.
Given the lack of confidence everywhere in Paulson and lame-duck President George W. Bush and their clear inability to come up with anything that can restore confidence to the terrified markets, there is a strong case for Bush to admit defeat and just hand over the entire mess to the Obama administration. Such a move would require some special fast-tracking through Congress, but the Democratic leadership there would likely love this idea. And the 110th Congress is going to be returning for a lame-duck session next week anyway.
We're certainly well into the very dark tunnel, but how many twists and turns are cutting off the light that may be at the end of the economic mess?
The crisis is mounting just before the weekend economic summit on which so many hopes have been pinned. But as we have warned repeatedly in these columns, historically such "super-summits" at the height of financial crises and stock market panics invariably have proven ineffectual. Indeed, they tend to be dangerously counterproductive, because they distract the policymakers and bureaucracies in all the nations involved from crafting more immediate and specific measures to cope with the problems in their own financial back yards.
Bush's lame-duck status is also hardly going to present credible leadership in an area where he has never been able to display it before.
It is interesting to note that not one "troubled asset" has been bought under Paulson's original scheme, which now looks incredibly unwieldy -- largely because of the difficulty of pricing those assets.
If they were bought at current value, it wouldn't help the institutions holding them much, while if you set some above-market value, it would lead to market distortions, moral-hazard issues and be a convoluted way of injecting capital that would be better done directly.
The Bush administration's current focus is on loosening the consumer credit market. The Washington Post reported Thursday that the average interest on car loans has doubled between July and September, while the deposit required on a $20,000 car has risen around $2,000.
The new Paulson plan does not have any element in place to help homeowners facing foreclosure to restructure their mortgages. He seems not to be against it, he just hasn't addressed how to do it -- to the great disgust of Rep. Barney Frank, D-Mass.
Paulson has to go back to Congress to draw down the second $350 billion tranche of the original $700 billion authorized for him. Yet he has indicated that he is in no hurry to do this and basically may just kick the problem to the incoming administration, leaving them to clean up the mess.
Given the twists and turns, dramatic reversals and clear lack of credibility that Bush and Paulson have been showing in their efforts to deal with the crisis, Obama's judgment in steering clear of endorsing their efforts appears vindicated.
Obama clearly has been following the precedent set by President-elect Franklin Roosevelt during the banking crisis in the spring of 1933, when FDR refused to endorse or get entangled in lame duck President Herbert Hoover's frantic efforts to resolve the crisis that his own retroactive taxing policies had initiated.
But there are still more than two months to go until Obama formally takes the oath of office. How much more damage will be done before he receives the powers he needs to combat the escalating crisis?
The American people and the wider world are well into a very dark tunnel, and there are still many twists and turns ahead, cutting off the light at the end of it.