Making it up as they go along

The $700 billion bailout was rushed through Congress as a way of pumping liquidity into the financial system by letting the Treasury buy up so-called toxic assets, the most troubled loans on lenders’ books.

Well, that’s not what the Troubled Asset Relief Program is any more. Not too long after it passed, Treasury decided that it could put money into the system more effectively by purchasing bank stock directly.

This week, Treasury secretary Henry Paulson made it official. Most — $250 billion — of the first installment of $350 billion will continue to be invested in banks a although it may be expanded into the consumer credit — credit cards, car loans — industry. Indeed, credit giant American Express is morphing into a bank holding company to be eligible for $3.5 billion from the government.

As a result of this largesse, The New York Times reports, “The Treasury department is under siege by an army of hired guns for banks, savings and loan associations and insurers — as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists.”

Among the more probable candidates are the Big Three automakers. Congress is coming back to town next week to consider opening up the bailout fund, over the reservations the Bush administration, to Detroit. The administration and many analysts ask: If you begin open up the bailout to those three manufacturing companies, where do you stop?

The Treasury has already made one necessary exception by pumping $40 billion into troubled insurer American International Group. That leaves Treasury with $60 billion still to invest from the first installment. It will have to go back to Congress for the second $350 billion.

There is evidence the government is still getting the hang of how to deal with this crisis. A $300 billion program Congress created to help 400,000 homeowners convert risky mortgages into more affordable conventional ones attracted only 42 applications in its first two weeks.

All of this points to how much the response to the crisis, of necessity, is being made up on the fly. It does make you hope that the crisis blows over before the government burns through enough time and money to get really good at dealing with it.