"I don't know anyone in the banking community that believes that you could realistically measure that or force them to do that," he said. "If you have a banker say, 'Here's my capital: I levered it 8 to 1 and here's where this dollar went,' and the banks fill out a report every quarter on their lending, you'll know whether it's going up or down. But of course their lending goes down in a recession! When you say you want them to lend, lend more than what? More than they would have lent if they collapsed? More than they would have lent at the height of the bubble? Of course not, you don't want that, there's not the demand."
Mr. Paulson speaks a sensible yet uncomfortable truth about the bailouts. And for all the Monday-morning quarterbacking, the bailouts worked. The United States banking system is much more highly capitalized than those in most European countries.
And for all the talk of reform on Wall Street, Mr. Paulson said he was still most concerned about rule-making in Washington.
"I believe that the root cause of every financial crisis, the root cause, is flawed government policies," he said. He added that while he is hopeful that the tools in the Dodd-Frank financial overhaul law will help avoid the next crisis, "We're not going to know how these rules work until we have a crisis, until we have someone sitting in the seats to say how are they going to use these authorities. Given how unpopular our actions were, I think it makes it even more difficult for those that come after us."
He said he remained particularly anxious about the number of regulators overseeing the industry, especially in the midst of a crisis. "I'm most concerned about the multiple regulators falling all over each other and the confusion that regulatory competition creates." He said he did not advocate cutting back regulators for the sake of it, but instead favors streamlining the number of agencies with overlapping interests.
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In the new prologue to his book, he addresses the crisis's catchphrase, "too big to fail." " 'Too big to fail' is a misnomer in any case," he said. "Complexity and interconnectedness matter as much as size in assessing risk in banking." But he acknowledges a thorny reality: "No bank should be too big or too complex to fail, but almost any bank is too big to liquidate quickly, particularly in the midst of a crisis."
Asked why he held his tongue until now about his misgivings on the way Wall Street paid bonuses after the crisis, Mr. Paulson, who was formerly the chief executive of Goldman Sachs, said he didn't want to be "piling on."
Banking is "not only a very honorable profession," he said, "it's a very necessary profession."
He said the hardest part of the bailouts for him was in the disconnect between the bailouts' ugly image with the public and his faith that the bailouts would help keep the economy from collapsing.
"I understood that people were angry," Mr. Paulson said. "They wanted to hear that those that made the mistakes were going to be held responsible. Then on the other side was stability. It's hard to punish and save the banks at the same time." He paused for a moment. "I was much more concerned with stability."
—Andrew Ross Sorkin is a CNBC anchor and the editor-at-large of DealBook at The New York Times. Follow him on Twitter