Henry Paulson’s speech Wednesday made it pretty clear: The Treasury secretary has seized control of the financial system.

“He is absolutely the most powerful person in the country. Maybe the world,” says Wall Street accounting expert Robert Willens.

The most telling line in his speech came when Paulson was explaining why he did a 180-degree turn with money approved by Congress under the $700 billion bailout bill. Instead of using it to buy troubled mortgage assets from banks, as clearly envisioned, he scrapped that idea and used it to make equity investments in banks.

“In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks,” he said.

Paulson apparently consulted with Federal Reserve Chairman Ben Bernanke before making his executive decision. But neither man is an elected official.

If Paulson bothered consulting with President Bush, he didn’t mention it. In fact, he didn’t even mention the president until the tail end of his speech, when he talked about the global summit Bush is hosting this weekend.

I can understand why Paulson wants to distance himself from an unpopular president, especially one who has little facility for complex financial matters. But Bush is our elected president and even President-elect Barack Obama knows there can be only one president at a time. And his last name is not Paulson.

In September, when Paulson asked for a $700 billion blank check from Congress to fix the financial markets, he got a lot of blowback. By the time Congress was done with his proposal, it had grown from 2 1/2 pages to more than 450. Yet it now appears that Paulson got the blank check he wanted.

nvesting in banks

On Wednesday, he laid down the law: Money approved under the bill, nicknamed TARP for Troubled Asset Relief Program, will be used to make additional equity investments in banks and possibly other financial institutions, such as insurance companies. He said it would not be used to bail out individual homeowners or automakers, as some politicians would like.

Paulson is considering a new use for the TARP money: trying to resuscitate the market for securities backed by auto, credit card and student loans.

“Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt,” Paulson said.

Indeed it has. In the first half of 2008, there were $129.4 billion worth of asset-backed securities sold (excluding mortgage-backed securities). That compares with $652.3 billion in the first half of 2007, according to the Securities Industry and Financial Markets Association.

onsumer lending

Paulson gave few details on how he would revive this market. All he said was, “With the Federal Reserve, we are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers’ investment.”

A liquidity facility is essentially a line of credit. Paulson didn’t say who could access this credit.

Presumably, investors would be more inclined to buy these securities if they knew they could use them as collateral to borrow money from the government if they need cash in a hurry. That might improve the illiquidity that is plaguing the market.

But it wouldn’t solve the underlying problem: Nobody knows what asset-backed securities are worth. They are excruciatingly complex. Investors relied on ratings, which were paid for by those selling the securities and turned out to be overly optimistic.

Even if investors understood the securities, with job losses rising, nobody is eager to lend money to consumers, who can no longer fall back on home equity loans to pay other debt.

Another key question is who would bear the losses if the government loaned money to investors to buy asset-backed securities and the securities defaulted – the taxpayers or the investors.

istorical perspective

I asked Peter Temin, an economic historian at the Massachusetts Institute of Technology, whether any previous Treasury secretary had wielded as much power as Paulson.

“Rumor had it that Andrew Mellon determined a lot of policy” when he served under Herbert Hoover, Temin said.

Mellon’s philosophy, as the Depression was starting, was to leave things alone. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he said. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life.”

Paulson, by contrast “is trying not to do what Mellon did,” Temin said. “Everybody now is trying to do everything.”

Paulson has been criticized for some actions he has taken without congressional approval.

Sens. Chuck Schumer, D-N.Y., and Charles Grassley, R-Iowa, “have complained bitterly about the Internal Revenue Service and the Treasury not having the authority” to change tax rules in a way that encourages profitable banks to take over failing ones.

On the whole, though, Congress seems happy to let someone take charge.

“We’re searching for someone who seems to have a grasp of the problems,” Willens said. Paulson “is certainly impressive in that regard. He expresses himself with a great deal of confidence. We are searching for leadership. He is seizing the moment.”

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at •••@••.•••.