Paulson Plan

The "Paulson Plan", named after the US Treasury Secretary, Henry M. Paulson Jr., was introduced by the US administration as a response to the 2007-2008 financial crisis. It was passed into law as part of the "Emergency Economic Stabilisation Act 2008" . The Act enables the United States Treasury to purchase mortgage-related assets from banks, and provides for the assistance of houseowners who are threatened with foreclosure.

Background

On 24th September 2008 the President of the United States warned of the risk that, without immediate action by the Congress, the country could slip into financial panic leading to the closure of major sectors of the economy and to a "long and painful recession" .

The Plan

The Act authorised the phased introduction of a 'Troubled Assets Relief Program' (TARP) with the following provisions:

• the authorisation of the purchase and management of "troubled assets" from US banks (in return for equity-related warrants);
• the requirement to propose an insurance scheme to guarantee troubled assets;
• the required introduction of a plan to mitigate foreclosures;
• the establishment of a Treasury Office of Financial Stability, an interdepartmental Financial Stability Oversight Panel, and a Congressional Oversight Panel; and,
• The authorisation of the expenditure of $700 billion of which $350 billion is subject to further congressional authorisation.

The Act also includes provisions to set limits on executive remumeration and generally to prevent the unjust enrichment of participants.

On October 10th, Treasury Secretary Paulson indicated that the legislation could be interpreted to permit the taking of equity in US banks .

Criticisms

Political objections

Critics of the plan come from both the left and the right of the political spectrum. Senator and Democratic Presidential candidate Barack Obama criticised the original formulation of the Paulson Plan stating that it did not provide adequate protection for those facing foreclosure, that it gave rewards to Wall Street executives for failure, needed better oversight and should include provisions for paying back to the taxpayer if it succeeds. Left-wing critics of the plan argue that it is hypocritical for the banks and Wall Street firms to have preached free markets for decades, then demand government help when things get tough - they should live by their word. They also point out that providing a nationalized health care system would cost dramatically less and benefit more people, but has always been "politically impossible", but it's now perfectly possible to bail out banks. Libertarians and free-market economists have also been critical, arguing that the bail-out is creating a precedent that investment is risk-free, and that the bail-out bill will increase taxes.