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On the Record

Paulson Shifts Economic Rescue Plan to Focus on Boosting Credit

Alice M. Rivlin

Alice Rvilin and other economists discuss Treasury Secretary Henry Paulson’s announcement Wednesday that the government will shift its focus from buying troubled assets to shoring up institutions that manage credit cards, auto loans and other types of borrowing with Jeffrey Brown of NewsHour.

JEFFREY BROWN: Paulson suggested that the original rescue money should not be used to help automakers stave off bankruptcy. He called instead for modifying legislation passed this fall, which included funds to help the industry retool its factories.

And for a look at this latest twist, we turn to Krishna Guha, U.S. economics editor of the Financial Times; Alice Rivlin, a senior fellow at the Brookings Institution and former vice chair of the Federal Reserve Board; and Allan Meltzer, professor of political economy and public policy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.

Well, Krishna Guha, we just heard Secretary Paulson say that, by the time the bill was signed in early October, it was clear that the troubled asset approach wouldn’t be sufficient. But when and why did it fall off the table all together?

KRISHNA GUHA, Financial Times: Well, what Secretary Paulson said today was that his initial idea to buy assets with these funds was already looking insufficient by the time Congress passed the bill into law. That was two weeks after he originally proposed it.

He said that’s why he went out straight away and said some of the money was going to be used to recapitalize banks.

What’s happened since then is that, as they got further and further into the business of recapitalizing financial institutions, they realized that this is where they get the most bang for their buck.

And as this has gone on, the idea of putting aside some of the remaining money to by assets has become less and less plausible.

Paulson won’t say exactly when he made up his mind that there was not going to be any asset purchases, but it appears that that came relatively quickly. And that’s — relatively recently, rather. And that’s why he says that he wasn’t at any point misleading the markets or the Congress.

JEFFREY BROWN: Alice Rivlin, what do you make of today’s shift? Is it a smart move?

ALICE RIVLIN, Public Policy Institute: I think it’s a smart move. Buying the distressed assets was never a very good idea, because if you’re buying something, it has to have a price.

And if they were going to buy it at market price, that wasn’t going to help very much. It was going to mean that a lot of institutions were holding assets that weren’t worth very much.

And if they were going to buy it above market price, then that was a kind of subsidy to the banks in a rather random way. And it was much smarter, if you’re going to put in capital to the banks, to do it directly. So I think they came out right in the end.

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