Why did Paulson hit the PanicButton™?

He did so on Thursday, September 18. And he was woefully unprepared for it, as Krugman documented on his blog at the time.

So, why the rush?

Because on September 17 Morgan Stanley lost 25% of its stock value, and Goldman Sachs 15%, and both of them started to lose clients from their prime brokerage business. And Paulson is a Goldman Sachs man, first and foremost.

What happened to MS and GS took Paulson by surprise. On Monday the 15th, he had presided over the takeover of Merrill Lynch by Bank of America and the bankruptcy of Lehman Brothers. Which was all fine and dandy since ML was the #3 and LB the #4 pure investment bank, leaving only MS and GS as the top two.

So... For sure the Paulson plan was a scam. But that's neither here nor there regarding whether the credit crunch is real or not. It is real enough.

And, yes, I am convinced the banks are actually insolvent regardless of what their balance sheets and the Fed's statistics say.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith