Hank Paulson: How He Made the Recession Worse

The American economy is suffering a crisis of confidence, and Treasury Secretary Hank Paulson hasn't helped, says Stanford University economist John Taylor.  Blame the TARP rollout for a worsening of the financial crisis, nto the failure to save Lehman:

While [the spread between three-month Libor and the three month Overnight Index Swap] did rise during the week following the Lehman Brothers decision, it was not far out of line with the events of the previous year.

On Friday of that week,  the Treasury announced that it was going to propose a large rescue package, though the size and details weren't there yet. Over the weekend the package was put  together and on Tuesday September 23, Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified at the Senate Banking Committee about the TARP, saying that it would be $700 billion in size. They provided a 2-1/2 page draft of legislation with no mention of oversight and few restrictions on the use. They were questioned intensely in this testimony and the reaction was quite negative, judging by the large volume of critical mail received by many members of the United States Congress. ... 

It was following this testimony that one really begins to see the crises deepening, as measured by the relentless upward movement in Libor-OIS spread for the next three weeks. Things steadily deteriorated and the spread went through the roof to 3.5 per cent. 3.2 The Lack of a Predictable Framework for Intervention

Moreover, it is plausible that events around September 23 actually drove the market, including the realization by the public that the intervention plan had not been fully thought through and that conditions were much worse than many had been led to believe. At a minimum a great deal of uncertainty about what the government would do to aid financial institutions, and under what circumstances, was revealed and thereby added to business and investment decisions at that time. Such uncertainty would have driven up risk spreads in the interbank market and elsewhere.