Phillip Swagel, who was assistant Treasury Secretary for economic policy under Henry Paulson from December 2006 until the Bush presidency ended in January 2009, in a 50-page essay to be presented Friday at the Brookings (Institution) Panel on Economic Activity, says his former boss “truly meant” to the use the $700 billion that Congress gave him to buy assets from banks, not to buy shares, and knew he would be criticized when he changed course late last year.
Mr. Swagel describes in his paper how Mr. Paulson initially saw having “the government involved in ownership of banks” as a “fundamentally bad idea,” and that’s why he said as much to Congress, on Thursday September 18, when he sought the money. He changed his mind later, and the Treasury decided to devote the money to buying bank shares. [via WSJ]
The Treasury, continues Swagel, predicted in May 2007 that “we were nearing the worst of it in terms of foreclosure starts – these would remain elevated as the slowing economy played a role and the inventory of foreclosed homes would build throughout 2007, but that the foreclosure problem would
subside after a peak in 2008.
What we missed is that the regressions didn’t use information on the quality of the underwriting of subprime mortgages in 2005, 2006 and 2007. This was something pointed out by staff from the Federal Deposit Insurance Corporation (FDIC), who had already (correctly) pointed out that the situation in housing was bad and getting worse and would have important implications for the banking system and the broader economy. ”
For more on Swagel’s inside view in the events associated with the credit market disruption that developed into a full-blown crisis in the fall of 2008 click here >