When he arrived in Washington as Secretary of the Treasury in the summer of 2006, Henry M. (Hank) Paulson Jr.'s top priority was to make certain that his department would have independence and clout. If he was giving up the top job at Goldman Sachs, he wasn't doing it for a sinecure.
Mission accomplished. Mission overaccomplished.
"I've always said I don't want to be irrelevant," Paulson said during an interview in mid-December, his 6-ft. 1-in. frame folded into a big chair in the corner of the office where such legends as Andrew Mellon and Henry Morgenthau once worked — and where he has presided over some of the most momentous Treasury meetings ever. "But, boy, I do not want to be this relevant."
Paulson, 62, has come to play a historic role at a historic time. A lame-duck President has given him nearly complete control over the country's economic policy in the midst of an epic financial collapse. Congress has given him close to $1 trillion to repair the financial system. Along with his partners in panic, Federal Reserve Chairman Ben Bernanke and Federal Reserve Bank of New York president Tim Geithner — who will take over at Treasury in January — Paulson has led a government economic intervention on a scale never before seen in the U.S., except perhaps during World War II.
For a brief period in late summer, before the collapse of Lehman Brothers brought the crisis into a new and much more dire phase, Paulson's new clout was greeted by widespread acclaim. He was hailed on magazine covers as KING HENRY and PAULSON TO THE RESCUE. Congressional leaders of both parties (but especially the Democrats) sang his praises. If anybody could lead us through the crisis, it would be the hard-charging former Dartmouth College football star known as the Hammer.
You don't hear that kind of talk anymore. Paulson has become an unpopular, controversial figure, the target of harsh criticism on Capitol Hill and in the media. If there is a face to this financial debacle, it is now his — exuding an air of perpetual embattlement.
What does Paulson think about this change in his fortunes? "I just haven't had time to focus on it," he said near the beginning of a long conversation, during which he made clear that he had focused on the criticism and saw most of it as unfair. "I don't think we've made mistakes on the major decisions," he argued. "We've done the right things."
Is that true? As Paulson said in another context, "I think five years from now it will be a lot easier to put all of this in perspective." Today the facts point toward two conclusions:
1) Given the political and economic realities he faced, there is no obviously better path Paulson could have followed.
2) Paulson is really bad at explaining why he made the choices he did.
To arrive at the first conclusion, you have to believe that we were on the brink of disaster in late September and early October. "The alternative we were looking at was a cascade of failing institutions," Paulson said. "We were looking at a downward spiral or a free fall." This fear was widely shared by economists and financial-market participants. What we've ended up with instead — an ailing financial system, a deep recession and a few trillion taxpayer dollars at risk — is vastly preferable to that. Give the man a little credit.
O.K., we will: "He's smart. He listens to all the right arguments. He's decisive at a time when few people have been willing to make decisions," says Glenn Hubbard, dean of the Columbia Business School and a top first-term Bush economic adviser. "I can't think of somebody I would have rather had doing that."
Yet Hubbard has been a frequent critic of the "lurching from crisis to crisis" that has characterized the government response ever since markets began behaving strangely in August 2007. This can't all be pinned on Paulson. In late 2007 and early 2008, most of the lurching was done by Bernanke and Geithner, and everyone in government has been hobbled by what Paulson calls an "outdated and outmoded set of regulatory policies and authorities" that kept a tight rein on commercial banks but encouraged the growth of a vast shadow banking system. The investment banks that dominated this second system spewed forth unfathomable amounts of securitized paper, like the now infamous collateralized debt obligations, over which regulators had far less control.