Regular readers know that the Bush Administration adopted the Japanese Model and policies that were designed to protect bank book capital levels and banker bonuses at all costs. The costs of course being the destruction of the real economy of the US and its social contract.
This choice was not surprising given Mr. Paulson's previous career as the head of Goldman Sachs.
When President Obama came in and every day since, he and his Administration have had the choice to change directions and adopt the Swedish Model for handling the bank solvency lead financial crisis. Under the Swedish Model, banks are required to recognize their losses upfront rather than go through the long process of default and foreclosure.
Under the Japanese Model, the burden of the excess debt is place on the real economy with the best outcome being a long-term Japan-style economic slump.
Under the Swedish Model, the real economy is protected and the outcome, as recently shown by Iceland, is strong economic growth.
Under the Swedish Model it is entirely possible that a firm like Goldman might not survive, so it is pretty clear given his work history and who he knows that Mr. Paulson had an incentive not to choose the Swedish Model.
The possibility that the Obama Administration might change directions and that Goldman might not survive raises an interesting question. Is Goldman's demise bad for the real economy where goods are produced in the US?
Your humble blogger confesses to having never seen a compelling argument that says why Goldman's demise would be bad for the real economy. After all, it is not likes its investment bankers and traders won't find other jobs on Wall Street.
The fact that the Obama Administration could still change direction today and adopt the Swedish Model is why Hank Paulson praises Tim Geithner for not changing with the policies of the Bush Administration. Mr. Geithner is the key to maintaining the policies under the Japanese Model that favor bankers over society.
By praising Mr. Geithner for maintaining failed policies, Mr. Paulson is attempting to suggest that it is too late to change from these failed policies.
It is simply not true that the Obama Administration needs to continue to pursue the Japanese Model. As Ireland is showing, the Swedish Model can be adopted years after the financial crisis begins.
“You learn a lot about someone in the midst of a crisis,” Henry Paulson, Treasury secretary under President George W. Bush during the bailouts, said in an interview. “He was a terrific partner and had great energy and stamina, someone who was always very calm.”
Paulson said Geithner deserves “great credit for skillfully navigating a very difficult transition and balancing the tendency of a new president to change direction while understanding the need to maintain stability and build on what had been put in place to restore the markets.”