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Paulson interview: Why the Treasury and the Fed's previous actions failed

As Hank Paulson seeks to resubmit his action plan to save the US financial system, Euromoney considers whether he was ever the right man for the job, asks the questions that he desperately needs to answer, and analyses the mistakes he has made which mean, whether his bill is eventually passed or not, he has failed as Treasury secretary.

Q: Every time you’ve spent money, you’ve said it would solve the problem. What’s different this time?

Fannie Mae and Freddie Mac were off-balance-sheet conduits for the federal government designed to disguise the extent of the public debt taken on to sustain the housing market boom. They ought to have been consolidated on the nation’s balance sheet years ago.

Yet when they were finally nationalized, no immediate risk to their capital positions and access to funding was apparent. Why did Paulson feel he had to spend money to do this now – was he held hostage by the threat of a Treasury and GSE bond buyers’ strike of investors from California to Beijing?

Maybe he had no choice. But estimates of the cost to the public purse of nationalizing Fannie Mae and Freddie Mac range from $200 billion to $300 billion. Doing so was meant to stabilize financial markets. They continued to deteriorate.

On September 17, the Treasury announced a supplementary finance programme to support the Federal Reserve’s balance sheet depleted by weeks and months of liquidity provision to the markets. No number has been put on this: private sector estimates suggest $100 billion and this was before the extension of swap authorization limits with foreign central banks to $620 billion from $290 billion to ease dollar liquidity, and the increases in term auction facilities secured against a wide variety of collateral to ease the system through the year-end.

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