Remember when America was going to hell in a hand basket if Congress didn’t pass Hank Paulson’s bailout bill? Well, guess what? Congress did pas the bill, and the markets have been sliding ever since. Justice Litle says that’s because Pualson’s bill was a fudge…and a poorly sold one at that.

This from Taipan Daily:

Treasury Secretary Hank Paulson didn’t want things to go this way.

As the ex-head of Goldman Sachs and a die-hard free-markets advocate, he didn’t want to become a de facto socialist (buying stakes in the banks) any more than George Bush did.

But he and Bush have no one none to blame but themselves (and maybe Greenspan) in being forced to swallow this bitter pill.

Commitment to principle is worthless without the substance and the means to defend it.

As the banking crisis unfolded — a crisis of Wall Street’s making, as we pointed out in Part I — the Treasury failed to come up with any true alternative solutions.

Paulson utterly failed the Einstein test, forgetting that “no problem can be solved from the same level of consciousness that created it.”

In hindsight (which is always 20/20), Paulson was probably a bad choice to run things in the first place. As Soros points out, he “represents the very kind of financial engineering that has gotten us into this trouble.”

What’s worse, Paulson’s big idea never actually made sense. His first thought was to buy back (with taxpayer funds) the very toxic assets he had once helped create… without any logical argument as to how this would help solve the problem.

It soon became clear the Paulson proposal was a fudge — and a poorly sold one to boot.

If Treasury paid fair value for toxic assets, the banks would have to mark their huge losses to market and own up to insolvency. That would only have accelerated the panic.

If the Treasury deliberately paid too much, on the other hand, the banks’ balance sheets would have improved…but it would have been a sham transaction.

This “solution” would thus have been a de facto transfer of taxpayer money into the hands of the banks, with no equity stake in return.

What Paulson really wanted, it seems, was “capitalism on the upside and socialism on the downside” writ large.

He wanted to protect bank shareholders to as great a degree as possible, even after the banks were seen to be juggling hand grenades of their own making… and to avoid shareholder dilution even as huge sums of taxpayer money were spent.

Those in support of nationalization thus reason it something like this:

• When the entire world is deleveraging, only governments are powerful enough to leverage up (Buffett).
• Uncle Sam has to commit hundreds of billions (maybe trillions) no matter what, as the alternative is no real alternative at all (total systemic collapse).
• If taxpayers have to pony up no matter what, they might as well have an ownership stake.

Free Markets on the Back Foot

Now that we’ve bitten the nationalization bullet, the next step is to “rebuild the financial system,” as Volcker puts it.

If there were a master checklist, the first item would be “stop the panic.” With that box checked off (assuming it is checked off), the next item would be “recapitalize the banks”… the process that is in the works as you read this.

After that, a few candidates vie for next-up priority: sorting out the good banks from the bad banks (and shutting down the bad ones as quickly as possible); dealing with the mortgage problem on the consumer side; figuring out how to arrest the free-fall in home prices; figuring out how to get credit and commerce flowing again.

It’s all a very top-down, heavy-handed way of going about things. These are the days of mass intervention and bureaucratic innovation. Free-market solutions are on the back foot. Government solutions are No. 1 with a bullet. (Make that a paper currency bullet.)

It’s a remarkable turn of events. Things have gotten so gummed up that even aggressive free-market advocates - yours truly included - now have little to say in defense of principles long held dear. We know the government is going to bungle things badly moving forward. But will they bungle them even more than the free market did? Maybe… but at this point it’s hard to see how.

In letting Wall Street run rampant, we screwed up. The greatest beneficiaries of the free-market system got so greedy and stupid - with the world cheering them on - that they all but killed the goose that lays the golden eggs. Now you and I, as taxpayers and voters and citizens, are paying for our lack of vigilance.

The Trouble With Leadership

It’s hard to know what to wish for more in the days ahead: leadership or lack of leadership.

Historically, America seems to do better when Congress is gridlocked. The pols can’t do as much damage when they are constantly at each other’s throats.

But in times of real danger, chaos and buffoonery at the top can be frightening. (Note W’s confidence-inspiring contribution to the public record: “This sucker could go down.” That’s one for the history books.)

Paul Volcker, for one, pines openly for a steady hand on the tiller. His interview last week ended on a nostalgic note:

I have been reading about Roosevelt’s fireside chat when the banks were all closed in 1933. And it is the most convincing speech he ever made. Eight days I think, maybe four days after he was inaugurated. My Fellow Americans, I want to talk to you. I want to talk to you. [There are] bankers who know a lot of this, but I want to talk to a lot of other Americans who don’t understand it all. Then he, in very simple terms he explained what the difficulty was.

It’s an interesting point. He said, we’re going to open up the banks again, the ones that are in good shape. We’re going to open them up basically next week. They opened them up next week, the ones that were conceptually in good shape – I don’t think anybody knew whether they were in good shape or not, how could you know after seven days – the banks they opened up, people brought their dollars back and reopened their deposits because they had confidence! They had confidence that Roosevelt had fixed things up, and they believed him.

The next American president, be it McCain or Obama, will get a chance to reprise FDR’s historic role. Not exactly, of course, but in spirit… and he will get to do it sooner rather than later.

The “lame duck” nature of the current administration, coupled with the seriousness of the times, means the new man will be taking the psychological reins of the country as soon as the final vote tally is in. (If we have another “hanging chads” episode, prepare for martial law.)

Washington is already abuzz with talk of new stimulus packages - this time aimed at Main Street rather than Wall Street. More spending will come. More promises will come. Sadly, more foolishness and idiocy will come, too. This is all but guaranteed. The hour of big government - gargantuan government - is at hand.

So what might this all mean for the dollar… and for gold… and the “Green New Deal” headed our way?

Source: The Return of FDR, Part II: Nationalization Sweeps the Globe