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The professor called the shot

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It has been clear for a while that, unless the home price bubble were to miraculously stabilize in mid collapse, the US government itself would have to socialize the entire problem in order to solve it.

It looks like Ben Bernanke (AB Harvard, PhD MIT, Professor at Princeton) made the call. Paulson is no slouch (AB Dartmouth, MBA Harvard, CEO and Chairman of Goldman Sachs), but when the biggest financial decision of our generation was made, the geeky PhD told the Harvard MBA what to do.

NYTimes: The ad hoc approach Mr. Bernanke and Mr. Paulson had been trying was no longer enough.

Talking into the speaker phone on a coffee table in his office, Mr. Bernanke told Mr. Paulson that it was time to stop treating the symptoms by bailing out distressed companies and instead start attacking the root problem with a comprehensive strategy.

Congress would have to sign off, and it would fall to Mr. Paulson, as the envoy of the executive branch, to take the lead.

Mr. Paulson understood.

…“Going back a long time, maybe a year ago, Ben, as a world-class economist, said to me, when you look at the housing bubble and the correction, if the price decline was significant enough,” the only solution might be a large-scale government intervention, Mr. Paulson said. “He talked about what had happened when there had been other situations historically. And basically he said in his view the time might ultimately come when something like this was necessary.

Mr. Paulson said he agreed but hoped it would not come to that. “I knew he was right theoretically,” he said. “But I also had, and we both did, some hope that, with all the liquidity out there from investors, that after a certain decline that we would reach a bottom.”

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Written by infoproc

September 20, 2008 at 7:10 pm

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