By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute, who writes for New Deal 2.0.
There is a growing consensus that it is time for President Obama to fire Treasury Secretary Timothy Geithner. While he is at it, he needs to clean house by firing Larry Summers, by banning Robert Rubin from Washington, and by appointing a replacement for Chairman Bernanke. It is time for a fresh start.
Geithner is facing renewed scrutiny due to his questionable actions while at the NYFed. As reported on Bloomberg and in the NYT, secret emails show that the NYFed under Geithner’s command prohibited AIG from reporting that it was passing government bail-out funds directly to counterparties, including Goldman Sachs. AIG had been negotiating with the banks, asking them to take as little as 40 cents on the dollar against bad CDOs they held. AIG was the biggest insurer in the country and had provided $62 billion of credit default “insurance” to these banks. The CDOs went bad and AIG could not cover claims. It was forced into insolvency and the government came to the rescue, with $182 billion of bailout funds through last June. By all rights, its counterparties should have lost big on their bad bets. Apparently, Geithner arranged the bailout of AIG with full knowledge that it would pass the bailout funds directly to the banks. Whether or not some protection should have been provided to the banks, it clearly was not good public policy to provide dollar-for-dollar protection to them. If you are a favored Wall Street bank, no bet can go bad!
Geithner’s relations with Wall Street bankers have always been incestuous, raising serious questions about his intentions. Note that Geithner worked with then Treasury Secretary Paulson to broker the AIG deal. Paulson, of course, had been the CEO of Goldman. Geithner is the protégé of Clinton’s Treasury Secretary Rubin, also from Goldman, and he got his job at the NYFed through the efforts of Pete Peterson. In addition to the AIG deal, Geithner had the NYFed provide $29 billion of funding for J.P Morgan Chase’s hostile takeover of Bear Stearns. In the deal, the NYFed got $30 billion of questionable collateral. Geithner hired Blackrock in a no-bid contract to manage these assets. Blackrock is a spin-off of Pete Peterson’s Blackstone Group, and was 49% owned by Merrill Lynch, headed by John Thain (another Goldman alum). As head of the NYFed, Geithner’s closest advisors were Thain, William McDonough (Vice Chairman at Merrill), Gerald Corrigan (Managing Director at Goldman), Jamie Dimon (JP Morgan), and Richard Fuld of Lehman’s. The head of the NYFed’s Board of Directors was Stephen Friedman, former Goldman Sachs Chairman. As Gary Weiss put it back in 2008, “Thus Geithner reports to a board that is composed of people who are not only under his purview but would also benefit from any potential bailouts. The structure of the New York Fed’s board bears more than a passing resemblance to that of the New York Stock Exchange in the bad old days, when member firms, regulated by the N.Y.S.E., were heavily represented on its board”. The AIG deal seems to have been business as usual for Geithner.
According to Representative Darrell Issa, Republican of California, “It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the S.E.C.”. Not only did Geithner want to keep this information from the public, but also from fellow regulators. (Whoops, Geithner admitted he was never a regulator while at the NYFed.) Indeed, at the time, Geithner refused to even tell Congress who the counterparties were-until overwhelming pressure required that he release the names. This smells fishy because it is.
The Fed’s justification for such secrecy was that it was trying to preserve the value of the taxpayer’s investment in AIG. (Vice President Donald Kohn explicitly made this argument before the Senate.) But that is nonsense-there was no value to preserve. This was just a give-away to protect Goldman and other counterparties. Later when AIG’s executives demanded that compensation limits be lifted so that they could get their bonuses, Geithner came to their rescue, arguing that contracts are contracts no matter how putrid they might appear. We now know that the executives were demanding cash rather than stocks in their own firm because they expect the stocks will prove to be worthless-they are managing a firm that will never have any value and they know it. This is something Geithner refuses to tell the public.
Remember, this is the same guy who “forgot” to pay his taxes. Worse, he improperly claimed a tax deduction for a summer camp for his kids. He is ethically challenged. Should he be running the Treasury?
More important than such blunders, however, is that Geithner’s policies are not working. As Republican Congressman Brady of Texas put it, “Conservatives agree that, as point person, you’ve failed. Liberals are growing in that consensus as well. Poll after poll shows the public has lost confidence in this president’s ability to handle the economy. For the sake of our jobs, will you step down from your post?” here Today’s employment figures show that rather than a recovery, our economy is still hemorrhaging jobs at a scary pace. While the payroll number was down “only” 85,000 jobs, the household survey was down 589,000 for December. Over the past three months we have lost an average of 325,000 jobs. And that is in spite of the fiscal stimulus as well as the trillions of bail-out funds provided to the financial sector. We are at least 26 million jobs short. Even if the job losses stopped, real recovery will require job creation on a massive scale. The problem is that Congress, and the public, no longer has sufficient faith in the Administration to provide new funding-and the stimulus will soon run out. Rep. Peter DeFazio of Oregon put it this way: “We may have to sacrifice just two more jobs to get millions back for Americans.”
Of course it is not quite that simple, but it is a first step.
We need an economic team that recognizes the following:
1. Banks do not face a liquidity crisis, rather they are massively insolvent. Reported profits are due entirely to trading activities-which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis. As such, they need to be shut down and resolved. Geithner is not the right person to head such an effort because his past resolutions have always been designed to protect Wall Street, not Mainstreet.
2. Saving financial institutions does not save the economy. The financialization of the economy promoted by Greenspan and Rubin has led to a financial sector that is at least three orders of magnitude too big. If anything, all the efforts directed toward saving Wall Street have only made the economy more fragile. Another financial crash is inevitable because the financial system is still too large to be supported by the economy-even if the economy could recover. We need a Treasury Secretary who recognizes that the best course of action is to downsize the financial system. Geithner is not that guy.
3. As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound. Not because we cannot “afford” them but because they are dangerous. Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Mainstreet. Thus, even if the Wall Street bail-outs were not dangerous, they need to be reversed to generate fiscal policy space for another economic stimulus package. It will not be easy to convince Congress that the solution to our economic crisis is more government spending. And Geithner is not the Treasury Secretary to lead such an effort because he has lost the confidence of Congress and the public.
4. Finally, we need an economic team that understands government finance. The current team is hopelessly confused, led and misguided by Robert Rubin. He thinks government is nothing but a big household, which must balance its budget. He continues to believe that the Clinton boom was due to federal budget surpluses, not recognizing that it was actually due to an unsustainable boom of household borrowing. Indeed, as Clinton’s Treasury Secretary, he oversaw the creation of the conditions that led to this current crisis. The new team must have no connection to Rubin (or Pete Peterson) and his anti-deficit hysteria. The Great Depression of the 1930s only ended with the massive spending of WWII, when the budget deficit reached 25% of GDP. Our current situation is not yet that severe, and it is likely that a sustained recovery can be obtained long before the budget deficit reaches such a level. However, the longer that Geithner, Summers, Bernanke, and Rubin remain in charge, the greater the probability that this could still turn into another Great Depression.
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If all you can expect as a corrupt government official is just to get fired corruption will march on. What it is required is jail time to those who broke the law. And the only way to know who did that is to investigate. The problem of course is that Obama refuses to do so. My guess is that he has something to hide.
BTW the comment should have as first bullet the following:
We need an economic team that recognizes the following:
1) We work for the people and not the bankers
“Jamie Dimon, also of Goldman”
When was he at Goldman? Not during this crisis I don’t believe.
The sticky, tangled web of incestuous trysts in this pirate frat house are hard and loathesome to track.
Jamie Dimon, former chief of Citigroup, is currently CEO of JP Morgan for which “Geithner had the NYFed provide $29 billion of funding for [its] hostile takeover of Bear Stearns.” In addition to the $29 billion, “Dimon oversaw the transfer of $25 billion from the US Treasury…to JPMorgan Chase on October 28, 2008 via ..(TARP)… the fifth largest amount transferred…” [Wikipedia]
This is why it is so odd to hear Jamie proposed by some as a serious replacement for Timmy as Secretary of Deck Chair Rearrangement.
Jamie Dimon only worked briefly at Goldman while in B-school. And he was never head of Citi, he was Sandy Weil’s right-hand man until they had a falling out and he was fired.
And yet, even a political disaster looms, Obama and the Dems dig in on every cadre, no matter how compromised and no matter how expendable by historical standards.
Wingnut welfare has been taken to such extremes by now.
I wonder if the very fact that leaders have deprived themselves of what was historically a standard trick, to fire a hated high-profile subordinate to take some of the heat off yourself and recover some time and political capital, will render it all the more damaging if we can force the likes of Geithner and Bernanke out of office.
I’d hope that if Obama were finally forced to relinquish Geithner, that everyone would see how he had done it only under duress, and that he wouldn’t derive and political benefit from it. Rather, that it would highlight the criminal character of this whole administration.
Well, maybe we’ll get to find out.
In the end nothing short of a Nuremburg-style tribunal, with the same beginning, middle, and end, shall suffice.
And a similar makeup of the juries, we don’t need impartial judges. The French and Soviet representatives wanted to hang everyone. I’d fully support redoing Nuremberg.
Secretary Geithner is faithfully executing President Obama’s vision. This vision is correctly alluded to by a previous commenter, being the “solution” of the insolvency crisis of firms (and individuals) associated with the political power structure of the company by the dedication of very large amounts of taxpayers’ resources. Since the losses that need to be dealt with are real, these actions boil down to the use of government power to transfer the losses from those that ran the risks and would have otherwise reaped the rewards to the public. The decision to do this is being taken at a political level above Sec. Geithner. In the current administration’s defense, it isn’t likely that electing the other candidate would have given much different results as the interested parties have done such a good job in capturing the attention of both parties.
“that electing the other candidate would have given much different results” is of course no defense of this admin, but we get your drift.
It is tempting to think, because it is the lesser evil, that Obama doesn’t quite get it or he is held hostage in some way (the JFK MIC scenario), but this is not Bush or McCain; Obama is a Harvard Law Review sharpie. This is what happens when, in a system liberally marinated in bribery, we vote for the equal of two evils. Increasingly it appears there is no way out but collapse or revolution.
“Those who make peaceful revolution impossible make violent revoution inevitable.” JFK, the year before his murder.
Superb post and excellent comments.
What more need be said?
Indeed. I just maxed out the plastic.
While this type of fraud has always occurred, possibly not on this scale, it is unfolding during the age of the internet.
The impact of the accessibility of this information is unappreciated, IMHO. Many Americans now have a fuller understanding of what this country has become.
Why obey the law, if is not applied fairly and equally?
I agree with many things said but point 4 is useless including the following statement —
The Great Depression of the 1930s only ended with the massive spending of WWII, when the budget deficit reached 25% of GDP.
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Ish here — Any reference to the spending of WW2 is ridiculous. WW2 had a three prong solution to the problem.
1 Yes, there was the government spending to soak up the unused capacity in the US. Note, we probably now do not have that much current unused capacity except in retail space. Our manufacturing capacity needs to be totally rebuilt. For the last 10 years we have had a FIRE economy. The current bail out was focused at this economy which employes few and in riches many.
2. WW2 soaked up the excess bodies which resulted from the credit bubble in good times and put them in uniform. These human assets were then used to destroy human assets around the world resulting in a net decrease of adult males of 60,000,000. Do we want to repeat this?
3. Excess production around the world was put to use building war materials.
4. In the end, the US came out of this large deficit spending in such good shape because it destroyed the manufacturing ability and the human resources of a large part of the world. Not only did we destroy Germany and Japan but we bombed the crap out of France and the low countries. Germany and Japan also did their share to destroy other countries productive assets. Large amounts of stimulus spending now without a war will just add to the already large over capacity of the world.
The writer has some good points but he really fails to understand how WW2 worked. Recently a German official looked at the current situation and said what we had to look forward to — “Ten years of a depression and a world war.”
Is this where we want to go.
Well said Ishmael. I get so aggravated when I hear people say that we just need to spend like there’s no tomorrow because it was huge spending for WWII that brought the end of the GD. NO! It was the huge destruction of industrial capacity, and oh so much else, with the U.S. standing as the relatively untouched survivor that led to our subsequent economic boom and prosperity (and thus ended the GD, finally).
It’s not that hard to understand, but it doesn’t fit the agenda of the deficit spending quasi-Keynesians, and so they spout their nonsense.
You criticize the argument very poorly. Your “three prong solution” has four points, no solution, and only a limited view of WWII that ends with the war and completely forgets the post war period.
For example- “3. Excess production around the world was put to use building war materials. ” (this is a solution?)
The US came out of the war with a deficit, so did everyone else. How did this change? Who was buying all of this capacity after the war? What were they buying it with?
Good reading subject- Marshall plan, especially the financing parts.
From wikipedia-
We GAVE them money to rebuild, and we were running a deficit at the time. It seems his point that countries are not households is well founded.
“The reconstruction plan, developed at a meeting of the participating European states, was established on June 5, 1947. It offered the same aid to the USSR and its allies, but they did not accept it.[2][3] The plan was in operation for four years beginning in April 1948. During that period some US$13 billion in economic and technical assistance were given to help the recovery of the European countries that had joined in the Organization for European Economic Co-operation. This $13 billion was in the context of a U.S. GDP of $258 billion in 1948, and was on top of $12 billion in American aid to Europe between the end of the war and the start of the Plan.[4]”
bob — You are not listening. I am saying why referencing WW2 is not the solution. Yes deficits were incurred, but WW2 also sucked up excess human bodies and excess production in an exercise of destruction.
I did not offer a solution because that is a rather long exercise and America probably does not have the cohunes to do it because we are a nation of whinging poms any more.
I listed three thinks that WW2 did to turn around the depression and one reason why the US did so well after the war. Sorry, I number the last one as 4. If it confused you I apologize.
Yes, we did pay for some of the rebuilding, but as other countries rebuilt guess what happened to the US. We started a downward drift that we never pulled out of.
Thanks for sharing.
You almost have the fox news template down perfectly.
1. Point to the problem.
2. Bring up some completely irrelevant truthy sounding facts
3. Opine about the past, and how much better it was.
4. Blame it all on whiners.
How does it feel to be part of the problem?
2 interesting points about the Nuremberg War Crimes trials.
1) They made an explicit point of linking Nazism to Gangsterism. One documentary I saw stated that the Nazis were a gang, organized crime at a political level. After all, the country had just experienced the likes of Al Capone, the Valentines Day Massacre and a blatant, violent disregard for the laws of the country. The banksters, so appropriately named, are simply another manifestation of the same ethos.
2) No financiers of the devastation of WWII were ever brought to trial. International Telephone & Telegraph, Ford, Rockefeller Chase, National city Bank (Citibank), JP Morgan, American Express all funded the Nazis through their European subsidiaries.
Granted, the heir to the Krupp Industries conglomerate spent a little time in prison
. It was a plush incarceration with all the amenities. Today we would call it a minimum security imprisonment. Ivan Boesky was imprisoned in one in Lompoc California where he had Filet Mignon and any other luxury delivered to his cell. He could wander off the grounds unescorted if he so desired. This is the type of imprisonment the financial gangsters endure, while the rest of us would immediately be subjected to anal rape and beatings by the other prisoners while the guards looked the other way.
Never forget that their are 2 sets of laws, one for the elite, and a much more brutal one for the rest of us.
On another note, Dr. James K. Galbraith, son of renowned economist John K. Galbraith, and an outstanding economist on his own merits, has stated that the depression was over before the US geared up for WWII. The unemployment rate had dropped to 2%, full employment, before we quit building cars and geared up to build tanks and warplanes.
Please note that we begin sending armaments and supplies to other countries a long time before we entered the war ourselves. If Galbraigh says we came out of the depression prior to this, he is one of the few economists who say so.
I think this analysis misses the point by far. Which is not to say that it is not accurate, so far as it goes.
The point, it seems, as Edward Harrison says here http://www.creditwritedowns.com/2010/01/volcker-i-wasnt-persuasive-enough-for-obama-to-heed-my-economic-advice.html
“Clearly, Obama chose to side with Geithner and Summers… It will take economic collapse to eventually persuade us that change must occur. For now, it is business as usual.”
He says somewhere (can’t find it now) that the issue is “business as usual” works for the banks and political establishment which is in their employ. Wouldn’t you like to be party to the agreement that no matter what the bank losses are, 1, banks will be made whole and 2, politicians who make them whole will be rewarded. This seems obvious. Therefore, the assumption that Geithner should go is based on a false assumption: that the objective is to restore a heathy economy, as opposed to profit taking from instability and wealth transfer (bailouts).
Until us Liberals / Progressives are willing to face the reality that the divide between us and “Conservatives” is not a ideological one surrounding the methodology for achieving the same goals (prosperity and freedom for all) and is instead that they are accumulating at everyone else’s expense, we will continue to make the operational mistakes that flow from that… which manifests in articles like this one.
Yes Tiny Tim has to go. But this is not the argument that will carry the day.
Great article, but there’s a rub. The Congressman cited are clueless on #4. The actual passage of Keynesian stimulus coupled w/ necessary financial reform might induce coronary thrombosis in either man or any of their ilk.
The Republicans are attacking the right target for many of the wrong reasons. Possible political train wreck ahead.
Excellent post. I would just add that what complicates our situation is that we need not just an economics team that knows what it’s doing but a President and Congress that do as well. We need to stop talking about these financiers as MOTUs and more as common criminals. This is what we need. What will happen is that our elites will drive the country into the ground trying to shore up their positions and privileges. They can’t let go but also they can’t solve anything. They can’t be reformed or reasoned with. They have insulated themselves from all pressure by giving us a false choice between corporatist Republicans and corporatist Democrats. Their own blindness, incompetence, and greed are sowing the seeds of an explosive, and likely violent, backlash. It is important to realize that before our own Revolution, the French and Russian Revolutions, there were reasonable solutions and compromises that could have precluded them, but the sheer pigheadedness of out of touch elites made them inevitable. We are seeing a replay of the setup to these conditions now. An unsustainable situation. Something has to give. Yet our elites can’t change themselves or the dynamic. Of such things revolutions are made. We have no special dispensation. It can happen here.