“We’re dealing with something that is really historic and we haven’t had a playbook,” he said: WE CAN AGREE THAT YOU HAVEN'T HAD A PLAYBOOK

When I read this post in the FT, I thought it was some kind of joke because it was so short. However, Yves Smith manages to make something of it:

"So Paulson Say US Lacked Tools to Battle Financial Crisis?

Wellie, the incumbents are not yet out of office, yet the Bush Administration blame shifting spin doctoring is already in high gear.( IT'S PRETTY AMUSING )

Henry Paulson gave an interview to the Financial Times that appears either to have been remarkably brief (even the 10 minute Bloomberg videos typically yield more quotable material) or Paulson has gotten very good at a style of speech perfected in Japan, where nothing substantive is conveyed. ( AGAIN, I THOUGH IT WAS A JOKE )

Nevertheless, the bits that were FT-worthy were clearly an effort to make the Treasury appear the victim of circumstance and institutional/legal constraints:

He {Paulson} said that even after Congress in October approved the $700bn (€496bn) troubled asset relief program, the US still lacked tools such as an adequate special bankruptcy regime for non-bank financial firms.

“We’re dealing with something that is really historic and we haven’t had a playbook,” he said. “The reason it has been difficult is first of all, these excesses have been building up for many, many years. Secondly, we had a hopelessly outdated global architecture and regulatory authorities  . . . in the US.”

Ahem. And whose fault, pray tell, is the lack of "an adequate special bankruptcy regime for non-bank financial firms?” The Bear collapse made crystal clear what a big issue this was. Lehman, Morgan Stanley, UBS and Merrill (in roughly that order) were all perceived to be risk. This was a live issue.( CONSIDER AS WELL THE S & L CRISIS AND LTCM. WHY DO THINK ALL THESE RTC ALUMNI ARE CASHING IN RIGHT NOW ? )

Did Paulson do bupkis about it? He announced his proposal for financial regulatory reform later in the spring, and it was effectively a call for simplification and consolidation of regulatory functions under the Fed. Not a peep about bankruptcy.

Given the importance and urgency of the issue, Paulson should have made it top priority to get new legislation passed. But there is no evidence I am aware of any thinking at Treasury along this line, and certainly no initiatives.

Also note "we haven't had a playbook". A mere week and a few days ago, Paulson used the "no playbook" comment to argue that he had managed the crisis effectively:

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

I took that comment to be an admission of a lack of much (any?) planning( TRUE ); other claimed that the football imagery was used more narrowly, in the sense that the Treasury did not have pre-planned reactions to specific developments.

Perhaps Paulson has decided to shift his message while appearing consistent by using the same turn of phrase. Regardless, in the Financial Times article, Paulson almost seems to be complaining that the situation he faced was outside historical bounds, therefore they had no models to turn to. ( WHAT ABOUT THE SWEDISH PLAN? THE RTC? )

But that is utter bunk. We have pointed out before that the powers that be have ignored the Swedish model and the lessons of other banking crises as to what approaches are likely to be most effective. In fact, we noted in August that the TARP bill, which Paulson defends in the interview, was almost diametrically opposed to what an IMF study of 124 banking crises had found to be the most effective responses. An illustrative excerpt:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.

More from Paulson:

“People say banks aren’t lending enough,” he said. “I agree with them – banks aren’t lending enough. But there would be much less lending if the actions were not taken that were taken to increase the confidence in the banks.”

Yves here. Paulson's assertion is unprovable and the IMF research would suggest he is wrong. Back to the piece:

Mr Paulson said any future regulatory overhaul should emphasise “better and more effective” regulation. It also needed to make sure that infrastructures and powers were robust enough to allow large institutions to fail.

“The organisations [financial firms] cannot be too big or too interconnected to fail,” he said.

More revisionist history. Paulson was singularly uninterested in regulation, and there was NO effort to address the "too big to fail" issue. In fact, allowing (or more accurately) encouraging big firms like JP Morgan and Bank of America to acquire other big firms like Bear and Merrill only make the government an even bigger hostage of the financial system.

One might infer that was the real point of the exercise. "

That's it. This is our system. There was no Plan B to government intervention. There has been a kind of Kabuki Play that involved Lehman, which was an attempt to sacrifice a firm or two to show how dedicated the Investor Class is to the Free Market. That worked out well. The real problem has been the magnitude of the crisis and the ineffectual government responses. Other than that, what has happened has made perfect sense.

In any case, I don't believe him. The idea that the Investor Class is going to give up government support is hilarious. Bagehot's Principles are clear and would be effective, but they are not compatible with Favoritism, Lobbying, and Cronyism. Besides, he doesn't give any solutions, only a paean to effective regulations and the avoidance of a systemic collapse. Join the club.

I guess that it was a joke after all.