Paulson says more capital injections needed

Treasury Secretary Hank Paulson says more bank capital injections are needed:

The second half of the financial industry bailout fund should be used mostly for direct capital injections into troubled banks and financial firms, Treasury Secretary Henry Paulson said Friday.

"At least in my judgment, a good portion of the TARP resources has to be used for capital programs," Paulson told reporters in his final press conference as Treasury Secretary.

Congress is working quickly on releasing the second half of the $700 billion war chest. The Senate voted on Thursday to release the funds.

Paulson said he understood the public's impatience that the massive spending has not solved the financial crisis.

But he said the plan has been essential for financial market stability.

Paulson defended his record in combating the financial market failure and resulting credit crunch.

"I think history will look and say that maybe around the edges we might have done things differently, but the big decisions we've made have been the right ones and I think will stand the test of time," he said.

Although he was as frustrated as anyone that banks are not lending more, lending is naturally lower in a recession, he said. The key is that lending is higher than it would be without the Bush administration's efforts, he said.

President-elect Obama will face the same frustration with his economic stimulus plan, Paulson said.

I agree with Hank Paulson. I originally opposed bank bailouts, but Milton Friedman changed my mind.

Keep in mind that capital injections are not a handout to the financial industry. The banks do have to pay the government (i.e. the taxpayer) dividends in exchange for the capital. The banks need to continue paying dividends to the government taxpayer until the banks repay the principal. If the government borrows at a rate of 3% and the banks pay a dividend to the government of 5-8%, then the government taxpayer is netting 2-5% on the capital injections.