From Krugman: Paulson solution is to throw money at the problem without understanding it

Paul Krugman suspects that Paulson and Bernanke had no idea what to do about the credit crisis except to throw money at it. The "explanations" for how the bailout will work have been dreamed up only ex post facto - after they realized that Congress wasn't going to just give them a blank check with no explanation of how it would be used and no oversight as they requested in the Paulson Proposal.

Assuming Krugman is correct, the sequence of decision-making was

1. Admit that there was a serious banking problem the private sector could not deal with which was bleeding over into the real economy.

2. Decide to throw money at the problem. Ask Congress for $700 billion. The amount was a guesstimate of what they thought was going to be needed to convince the banks that the government was going to protect them (about $500 trillion), plus a fudge factor.

3. Get the money from Congress and the taxpayer. Avoid questions by slipping Section 8 (the "No one including the courts can demand oversight or accountability provision") into the law Paulson asked for. Get the law passed without Congressional discussion.

4. Oops. Recognize that Congress is not buying the Paulson Proposal as written.

5. Dream up a rationale for how the bail out will be conducted. The cost ($700 billion) has already been published. Just dream up ways to use it.

6. Tell Congress whatever Congress will accept. Change story as needed.

Or in other words, this is more conservative Republican Bush administration "magic-based" thinking.

This isn't an uncommon form of decision-making. The second largest spending decision most people ever make is to buy a car. Most people go to the car lot, briefly talk to a salesman and look at some cars, quickly fall in love with one of them, buy it, and then, only after the real decision was made, spend several weeks researching and justifying the decision they have already made. That's the typical car-buyer's decision model, one the car salesman encourages.

Paulson is a securities salesman. He succeeds by getting someone to buy the product, not from providing a careful analysis and explanation of what he is selling. It is no surprise to find a salesman encouraging Congress to use the typical car-buyer's decision model.