Paulson cancels key part of financial bailout
Funds from the $700-billion program will not be used to buy troubled mortgage securities but efforts to revive the credit markets will continue.
Reporting from Washington — The Bush administration dropped the centerpiece of its $700-billion financial rescue plan Wednesday, reflecting the remarkable extent to which senior government officials have been flying by the seat of their pants in dealing with the deepening economic crisis.
Treasury Secretary Henry M. Paulson said the administration would scrub plans to buy troubled mortgage-backed securities but continue to devote bailout funds to restore liquidity to credit markets.
The turnabout underscored the challenge facing President-elect Barack Obama in creating a comprehensive and consistent strategy in the face of a roiling crisis.
"You've had a tremendous amount of improvisation here," said Douglas W. Elmendorf, a former Federal Reserve economist and an informal advisor to Obama's transition team. "Even smart people get things wrong when they have no models to follow and are acting quickly, so it's natural that there'd be some reworking."
Or as Sen. Charles E. Grassley (R-Iowa) put it: "When you see so many changes, you wonder if they really know what they're doing."
Paulson, who originally dismissed emergency government investments in financial institutions as a recipe for failure, said most of the first half of the $700 billion had already gone to making emergency investments in banks and other companies aimed at reviving the routine borrowing and lending that are crucial to the economy.
Although Paulson said those actions had helped thaw credit markets and prevent "a broad systemic event" in the global economy, he acknowledged that most financial firms are still deeply reluctant to lend.
"Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards," Paulson said during a speech in Washington. "This is creating a heavy burden on the American people and reducing the number of jobs in our economy."
He added: "First and foremost, because the system remains fragile, we must continue to stand ready to prevent systemic failures. The stability of our system remains the highest priority."
But the effort to provide that stability is in a state of flux.
"This was an opportunity for Paulson to finally articulate the principles by which the government would aid some firms and not others. He didn't do it. He is drifting," said Vincent R. Reinhart, a resident scholar at the conservative American Enterprise Institute and a former director of the Federal Reserve Board's division of monetary affairs.
