I am disappointed with Hank Paulson. As an old Goldman leader I would have expected something else. But should I really be surprised? High finance is not a world of fine ideologies....
What I am talking about are the (three) non-market interventions suggested by the US treasurer; (i) the proposed freeze on mortgage-rates, (ii) the so-called SIV-superfund and (iii) the pressure on Fed to lower interest rates.
As a free-marketer I am critical of all three. Particularly the totally and outrageously silly and moral hazard inducing bail-out strategy suggested by Bush.
It sounds pretty much like Japan in the early 90s. And we all know how well japan has performed the last 17 years! I cannot understand how a US “market liberal” can suggest such an ad-hoc bail-out plan as this one. For instance, it punishes those who have kept paying their mortgage-payments while it saves those who recklessly borrowed above their potential. OK, encouraged by their real-estate brokers, but still. And it might very well lead to a range of law-suits; I mean, to me this sounds like a violation of traditional contract law (I know nothing of US contract law, I admit) and how can it not affect holders of the mortgage instruments (in the other end). That is of course a reasonable thing to expect (their pain), but it should be solevd on a case-by-case basis. And on the initiative of the borrower-lender couple, not the US government! Let the crisis work its way through the system! And most important, keep the tax-payers (completely) out of this mess!
When it comes to the superfund (which I doubt will be a success, in any case) I really like the unilateral actions taken by HSBC and Rabobank to save their SIVs much more (each and everyone for himself, the traditionally very american viewpoint).
Regarding the interest rate, I know I am naïve but, please; leave it to the Fed! I have given up trying to predict central bank actions long ago, but I hope they leave it unchanged (or max 25bp cut) tonight, though.