A new economic team
As Calculated Risk notes, before moving to New York I worked for Mr. Geithner at both the Treasury and the IMF. Mr. Geithner was, by the end of the 1990s, in charge of Treasury’s International Affairs division, so almost everyone who worked there — Tim Duy and Nouriel Roubini to name two — also worked for Mr. Geithner. At the IMF, Mr. Geithner encouraged the IMF to pay more attention to balance sheet vulnerabilities — and helped to push a paper I worked on with a group of talented young IMF economists through the IMF’s internal review process.
It consequently is no surprise that I am thrilled that Mr. Geithner looks to be Obama’s choice for Treasury Secretary. I am also pleased that President-Elect Obama also found a way to pull Dr. Summers — a voracious consumer of economic and financial analysis, including economic and financial blogs — into the administration. The current, severe crisis will provide plenty of work for both. Like Noam Scheiber, I hope that the combination of Dr. Summers’ intellectual creativity and Mr. Geithner’s disciplined analysis and political acumen proves fruitful.
I also suspect that Felix is right. The immediate challenge facing Mr. Geithner and Dr. Summers is finding a way to contain the current financial and economic crisis. Citi is a case in point. But once we emerge from the current crisis, the Treasury and Fed will need to build global consensus on how to regulate too-big-to-fail international banks — one that balances the world’s need for a banking system that lends with the need for banking system that doesn’t take on too much risk in good times, leaving taxpayers with the bill in bad times.
I know from experience that Mr. Geithner puts a great deal of effort into his (relatively infrequent) speeches. Those looking for insight into Mr. Geithner’s world view could do far worse than to start by picking out a few of his major policy addresses over the past few years and tracing the evolution of his thinking.
Back when I worked for Nouriel I often posted detailed commentary on Mr. Geithner’s speeches.
On financial regulation try: Things that keep the President of the New York Fed up at night as well as Felix’s comments on Geithner’s post-Bear testimony.
On external adjustment try: What Geithner said, and then some; Geithner states the obvious and “Substantial accumulation of dollar reserves masks the impact of deficits.”
My guess is that we will soon be bearing more about the need to build better shock absorbers into the structure of our financial system.
NOTE: EDITED. I initially jumped the gun and referred to President-Elect Obama as President Obama.
One personal question: do you expect to be called?
Brad,
Your analysis of recent developments in global economics has provided fluoroscent insights into macro economic volatilities, imbalances and market reactions to them through your blog page.
In stark comparison to the sensational scaremongering of former bosses like Nouriel Hitchcock-is-my-middle-name Roubini and others your analysis pinpoints to relevant information from reliable official sources describing the intercontinental dance of the securitized whirligigs.
It would be my request to continue your contributions on your blog page even if you’re called to serve higher interests of the US economy. Rather than motivate you to stop public blogging, I think you should make it a precondition that you will need to be allowed to podcast your own multimedia electric fireside chats to work at Treasury.
Best regards
Brad,
I am pleased that you are positive about him. I found this paragraph about him in a Bloomberg.com commentary by Rich Miller to be quite discouraging:
This seems to say that he opposed any U.S. intervention in currency markets to counteract Japanese Central Bank interventions that helped Japanese producers steal market share from American producers.
Howard Richman
http://www.tradeandtaxes.blogspot.com
I think that Howard Richman, ReformerRay, and DJC are going to be extremely disappointed with Obama’s new economic team since they are mostly proteges of Robert Rubin.
The “Rubin-ites” have reconsidered some of the beliefs on financial regulation in light of the current mess, but there hasn’t been any reconsideration of a trade policy that generally favors free trade.
Rubin himself is very thoughtful and willing to listen, but being thoughtful is something that doesn’t look good sometimes.
Personally, I think whoever was figuring out positions did a wonderful job with Lawrence Summers. Dr. Summers is brilliant and dynamic, but he has this habit of saying what he thinks which is deadly for a politician (or a University president), and he does have this habit of making enemies. As Treasury Secretary, Obama would probably end up wasting lots of time doing damage control. Someone on an advisory council, it’s perfect.
Also I do think that something that will be interest is to see how the Obama administration uses the web to get public comment. It’s impractical to have public officials have blogs, but I think this might increase the power of advisory agencies and think tanks, where people can have blogs.
“On the other hand regulatory interventions that affect the fundamental factors driving the circularity vectors of the spiral development are akin to smashing the ostrich egg with a golden spoon… Apart from the peacock feathers on the elephant’s brow, the real politic question of the sovereign credit of the United States prevented an immediate solution to the dichotomy of the gold standard, and incarcerated the democratic platform to the compulsions of achieving economic self sufficiency…”
Not to put to fine a point on it, this is gibberish.
“To be continued…”
Not on this blog, I hope. Am I the only one who is tired of Chidambaram cluttering up the comments with this nonsense?
too fine a point, sorry
Also something that is really important is that now there is an economic team. Obama was trying to be very careful to not look like he was usurping Bush’s authority, but that was leading to an extremely dangerous power vacuum. Without an Obama team in place, it would have been impossible to negotiate any sort of major restructuring like the one that was just negotiated for Citigroup.
One of the things that made the Citigroup interesting and why it required some contact with Obama’s team was that the deal that the Federal government made with Citigroup is going to be the template for any such deals that the Federal government makes for the other mega-banks.
It’s interesting to watch how power shifts. During the Bear-Stearns situation, the main representatives for the Democrats were Barney Frank and Christopher Dodd since it wasn’t clear at the time who was the Democratic nominee for President. One reason that Geithner is a particularly good choice is that as head of the FRBNY, he was at the center of all of the IB bailouts this year.
One of the things that happened in response to the Great Depression was that the 20th Amendment was passed to move up the date the President and Congress took office from March to January, but we are finding that even that is not enough for today’s world.
It’s also interesting to watch the human element in all of this. I do suspect that Paulson and Bush are both extremely anxious to leave Washington and turn the keys over to someone else.
Why do all of Geithner’s supporters ignore Geithner’s 3 years at Kissinger and Associates? Add the names Rubin and Greenspan, and Geithner’s resume reads like a white collar crime rap sheet.
As for Geithner’s speeches, Obama has taught us that speeches are not predictive of action, especially now that Obama is reconsidering repeal of the Bush tax cut.
Geithner’s brilliant, but I don’t support his choice, because I think he’s likely to perpetuate a policy playbook that is all wrong for our current situation. Our actions are increasing uncertainty and real interest rates. We can’t continue to decorate the Fed’s balance sheet with garbage(another $250B tonight) as we descend further into deflation. The government borrowing massively for fiscal stimulus is another negative. These actions don’t necessarily cause inflation, as commonly believed. They certainly do drive real interest rates up further, which is the last thing we need.
The Fed is almost certainly insolvent, especially because our new interest-on-excess-reserves program has cut seigniorage so drastically. That matters, and that’s really scary to me. Buiter did some great work on it earlier, and Sims outlines potential outcomes from current policy choices very lucidly.
I know he’s got the knowledge, but I truly hope Geithner has the courage to question Keynesian policy prescriptions before implementing them. I want to see more cohesive planning, clear statement of vision, and rationale, not slavish devotion to ideas we “know” are right.
How Germany emerged from the Great Depression:
Pettis mistakenly argues that Germany’s faster emergence from the Great Depression was a result of the fact that Germany was a deficit country, whereas the US was a surplus country. This argument seems to support the view, frequently put forth on this forum as well, that if somehow the current cycle of deficit accumulation in the US and surplus accumulation in emerging markets were to vanish, the US will find it easy to stimulate demand, rapidly accumulate a current account surplus and emerge unscathed from this crisis. I’ve already shown the example of the combination of a high import tariff with rapid monetary expansion in 1890, and its disastrous impact due to the impossibility of rapid progress in import substitution under conditions of low demand.
To understand Germany’s emergence from the Great Depression, we have to account for the military and diplomatic successes of Germany in getting her war debts forgiven, rather than argue that a trade deficit somehow supports easier emergence from a crisis.
Secondly we have to note that before the war debts were renegotiated, Germany attempted to deal with the crisis by printing more currency; in a gold standard world, printing more currency drastically reduced public confidence in the currency, to the extent that prices were doubling every two days, and the few workers with jobs had to be paid at least twice every day to enable them to afford their dinner with the higher wages of the evening.
Following is an interesting extract from “The Rise and Fall of the Third Reich” by
William L. Shirer.
(January 30, 1933 …)
“That evening from dusk until far past midnight the delirious Nazi storm troopers marched in a massive torchlight parade to celebrate the victory. By the tens of thousands, they emerged in disciplined columns from the depths of the Tiergarten, passed under the triumphal arch of the Brandenburg Gate and down the Wilhelmstrasse, their bands blaring the old martial airs to the thunderous beating of the drums, their voices bawling the new Horst Wessel song and other tunes that were as old as Germany, their jack boots beating a mighty rhythm on the pavement, their torches held high and forming a ribbon of flame that illuminated the night and kindled hurrahs of the onlookers massed on the sidewalks. From a window in the palace Hindenburg looked down upon the marching throng, beating time to the military marches with his cane, apparently pleased that at last he had picked a Chancellor who could arouse the people in a traditionally German way.
Whether the old man, in his dotage, had any inkling of what he had unleashed that day is doubtful.”
@Lyle
This book might bore you to death; I think you will find my typically simple style more interesting. The ponderous essays on the history of economic value are for the pundits who make the policies.
re chidambaram’s 1890 argument: i don’t think import substitution is a big problem for the usa. pretty much every type of manufacture that the usa imports is also produced within the usa’s own borders (or easily capable of being produced). nor is there any shortage of us productive capacity right now. cars being the obvious example.
i second lyle’s motion, with the caveat that i welcome chidambaram’s comments if he can make them more concise. use of links might help.
I’m more happy that Paulson is out than Geithner is in. Paulson obviously works hard and seems to know what’s going on, but he can’t seem to shake his Wall Street background. He always seems like he’s hiding something that he fears, if widely known, will drive down the stock market. IMO, he never transitioned from being a CEO to being a government employee.
Brad,
If you think Geithner is a good choice, then that’s a good endorsement. While I don’t always agree 100% with what you say, I think you’re very honest with your opinions. If the treasury or fed brought you on board, it would be a bad day for blogs, but a good day for the US.
Brad:
To what extent could one trace the origins of the credit debacle to the implementation of the Basle Accords and the opportunities they afford for miscategorising risk?
Mr Geithner deserves a good cheer before he gets down to dealing with the problems that have emerged and that he considered possible outcomes of weaknesses in the “balance between efficiency and stability”. The speeches Brad links to are testimony with traditional FRBNY president’s concerns: inadequate regulation, lots of financial services that should be included in Fed supervision but are not, perhaps even a certain impatience with all those idiots shifting megabanks towards activities that are inherently much more difficult to manage than traditional banks, and apparently oblivious of the absurd inadequacy of many mechanisms that the market has developed to shift risk outside the scope of specific, fragmented regulations. No car maker of pharmaceuticals firm would be allowed to expose the public, let alone the taxpayer to the kinds of hazards and costs that the financial system has.
But, where is mr Geithner’s macro-economic expertise? I love reading his speeches, but what did they achieve. Risk management (and that is one of the key jobs of a FRBNY president is 10% intellect and 90% enforcement. The parishioners are very, very prone to sinning, even unwittingly.
Nevertheless, he looks like a good kid. Let’s hope that he gets lucky for a while.
Summers not?
Berkeley’s Romer to Head Obama’s Economic Council, ABC News Says
By Joe Sabo
Nov. 24 (Bloomberg) — President-elect Barack Obama will name Christina Romer, a University of California-Berkeley economics professor, to lead the Council of Economic Advisers, ABC News reported, without providing a source for the information.
Last Updated: November 24, 2008 07:49 EST
Chidambaram,
Thank you for discussing Michael Pettis’ insightful commentary. I happen to agree with it totally. It implies the exact U.S. policy that I advocate: Warren Buffett’s Import Certificates to get the United States out of the recession by balancing trade. You wrote:
I don’t think that you are correct in calling President McKinley’s economic policies in the 1890s an economic failure. He got the United States completely out of the deflation that was made famous by William Jennings Bryant’s Cross of Gold speech.
And with Detroit going bankrupt and American manufacturing experiencing lay-offs, I don’t think you are correct that the U.S. economy can’t substitute domestic made goods for imports.
The crux of your argument is your assumption that there would be low demand for U.S. products if we balanced trade. But, you are ignoring basic economics such as the fact that Aggregate Demand = C+I+G+(X-M). Thus, if you balance trade, X-M changes from a negative to zero. As Keynes pointed out, income contracts when savings exceed investment, causing inventories to go up. Although, the world economy has an excess of savings right now, the American economy would have no excess if trade were balanced. What Pettis is arguing makes perfect economic sense. When there is a worldwide recession, the countries with the highest savings and investment rates are hit the hardest.
Howard Richman
http://www.tradeandtaxes.blogspot.com
Obama for Change? Neo-liberalism rehashed.
I have been surprised about the quick rehabilitation of Summers in Obama Land — particularly given Obama’s promises to the labor community and his strident position during the campaign against the kind of capitalism that Summers and Rubin promoted.
If he is appointed over Geithner, Tyson, and others — we need to quickly get a sense of whether or not the economic views of Summers have changed. Can he embrace a smarter version of globalization than he helped create? Can he help promote an alternative to the winner takes all capitalism that Summers helped to reify and which made people like Robert Rubin mega-wealthy? Can he embrace a genuine re-write of the American social contract that pushes forward the rights and position of labor? Can he abandon the fiscally conservative ideology of the Brookings Institution’s Hamilton Project that he and Rubin helped hatch?
Obama I will turn out to be GW Bush III & Clinton III.
http://www.huffingtonpost.com/steve-clemons/will-obamas-first-term-re_b_141741.html
Manic neoliberalism of “Rubinomics”
Larry Summers will probably continue his work as one of Bob Rubin’s chief acolytes — and Rubinism is one of the chief reasons that this economy has been trampling the Middle Class and labor in favor of the super-wealthy financial elite.
http://www.huffingtonpost.com/steve-clemons/will-obamas-first-term-re_b_141741.html
Romer would be at the CEA, Summers would be at the NEC. similar sounding institutions, but different jobs. CEA is an economics shop. NEC is a policy coordination shop (//s the NSC).
Geithner’s macroeconomics comes from his experience at both the Treasury and the Fed. But his real strength is at “macrofinancial” thinking — i.e. understanding how financial markets/ institutions impact the economy. Geithner isn’t adverse to a well-designed macro stimulus (which Summers is pushing) done in “scale” — or if he is, I don’t see why he would take the job. But I suspect his biggest job will be structuring and managing the financial bailout. Geithner does worry about the long-term consequences of fiscal deficits — as indicated by his speeches on imbalances. but I suspect he (like me) would argue that the immediate priority has changed right now.
This Is Not A Normal Recession: Moving on to Plan B
http://www.globalresearch.ca/index.php?context=va&aid=11072
“The Winter of 2008-2009 will prove to be the winter of global economic discontent that marks the rejection of the flawed ideology that unregulated global financial markets promote financial innovation, market efficiency, unhampered growth and endless prosperity while mitigating risk by spreading it system wide.” Economists Paul Davidson and Henry C.K. Liu “Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy”
So far, the Federal Reserve has provided nearly $2 trillion through its lending facilities just to keep the financial system upright. The Treasury is currently distributing $700 billion to key banks and other financial institutions that are perceived to be “too big to fail”. In truth, the “too big to fail” mantra is a just public relations hoax to conceal the web of counterparty deals that make it impossible for one institution to fail without dominoing through the rest of the system and wreaking havoc. That’s why AIG is still on life-support with regular injections of taxpayer money; because it had roughly $4 trillion of credit default swaps on subprime securities.
There is a generalized contraction of credit in the non-bank financial system where structured finance has blown up and taken half of Wall Street with it. It’s the end of an era. Here’s how economist Henry C. K. Liu sums it up in his “Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy”:
“Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the ‘Roaring Twenties’. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with ‘innovative’ debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale.”
Rome is burning. It’s time to stop tinkering with a failed system and move on to “Plan B” before it’s too late.
Why do you refer to Obama as president? He is nothing but a crooked ex-senator from Illinois and not even a citizen. We only have one president at a time and it is George W. Bush….please respect that.!!!! Obama ought to be in jail for his crooked real estate dealings.
Brad – Despite whatever good sense Summers and Geither possess, like Bernanke, they are caught up in the panic created by the suddenness of the collapse of the stock market.
All of Obama’s advisors need to stop working on his stimulus plan and go back to the drawing board. Begin with the recognition that “too large to fail” is a way of saying that the counter parties that the firm owes should not be allowed to lose money.
Why not? These counterparties vary tremendously. The important thing is that they are dispersed. Most of them can take a big hit and survive. The spreading out of risk is given in the number of counterparties harmed by the bankruptcy of a major player like AIG.
I say cease giving money to sustain AIG and Citibank. Take the hit now. Then refuse to give money to GM because they are in the most trouble. If money is provided, give it only to Ford because they need it least.
Twofish is right. I am unhappy with the choice Obama has made in advisors. But I don’t know that he has much choice. He needed someone to reassure all the panicked people in the financial system.
My only hope is that he will get disenchanted at what he is hearing from them and turn to Warren Buffett for advice. Warren may be as spooked as everybody else, but in 2003 his article in Fortune magazine was right on target in identifing too much consumption in excess of production and the subsequent reliance upon debt to sustain the economy.
The only good reality, today, is that the confusion about what to do about all the securitized debt between fiancial entities is taking a while to trickle down to the rest of us. Some of us are still afloat.
Why do you people assume the Treasury is really paying for the bailout of Citi?
The treasury will get 8% interest from Citi… it’s akin to what Warren Buffet got from Goldman.
I think that perhaps we got the $300B(or bulk of it) from the GCC and used it in this bailout. Of course, the sheikhs, being men of honor, can’t promulgate their slavishness towards the US, and so use the Treasury as a more discrete tribute conduit.
I don’t think the Treasury is an investor: I believe it’s more of an asset manager.
2/20, sir?
Why should anyone want to bailout Citi?
Perhaps in Citi’s case, it’s too big to save. It has $2 trillion in assets, a $37 trillion (notional value) derivatives portfolio (including $3.6 trillion in credit default swaps), $202 billion in troubled residential mortgages, huge numbers of shaky auto loans, and unknown amounts of other dead weight that may in the end sink the company.
One analyst calls Citi insolvent and says its problems are double those of AIG. It plans 52,000 job cuts (14% of its workforce) on top of 25,000 previously announced and more to come as the company furiously restructures to survive.
For now at least, a stopgap plan was announced on Sunday (November 23) for Washington to provide Citi with another $20 billion infusion and will guarantee as much as $306 billion of its troubled assets. The bank must absorb its first $29 billion in losses and 10% of others beyond that. The Treasury will assume the next $5 billion, the FDIC the next $10 billion, and the Fed will take the rest up to the agreed on amount. This may provide some temporary relief, but given the extent of Citi’s problems, it may in the end be short-lived.
http://www.globalresearch.ca/index.php?context=va&aid=11118
DJC responds:
Perhaps in Citi’s case, it’s too big to save. It has $2 trillion in assets, a $37 trillion (notional value) derivatives portfolio (including $3.6 trillion in credit default swaps), $202 billion in troubled residential mortgages, huge numbers of shaky auto loans, and unknown amounts of other dead weight that may in the end sink the company.
Impressive.
However, Citi bank should not receive any more money, regardless of its chance to survive. All that debt must be absorbed by the financial institutions that participated in the system rather than U.S. taxpayers.
Uh Oh. Hear comes another of those long posts that most of us hate. Sorry.
Obama’s much praised coolness under fire has disappeared. Obama has accepted the advice of pundits and economists that the sky is falling and he must prevent panic by panicking himself. Restore confidence, they say, by showing that somebody is in charge.
The sky is not falling. The U.S. economy is is much better shape than in the mid-1930’s. And Obama is not in charge.
Franklin Roosevelt refused to be drawn into the controversies about what to do about the U.S. economy before he became President. He waited until he had the authority before he showed the country what he would do. When he became President he took an action which surprised the country, but was decisive and showed that he would be in charge of what would happen from then on. His action did not involve spending governmental funds.
I have news for Obama. Confidence will not be restored by continuing to do what Paulson has done. Obama’s stimulus proposal, which will increase the national debt by massive amounts, without offsetting tax increases to pay for at least some of the new debt, are the kind of actions that, up to how, have been substitutes for thought and analysis. Throwing money at a problem is usually unproductive.
Withdraw the stimulus plans. Spend the next two months talking with people like Warren Buffett. And ask your hot-shot economic advisors to explain to you why the Paulson infusion of money did not work. What has happened to the money already spent? And why they think this stimulus they proposed (and you apparently have accepted) will be more useful in January of 2008 rather than in July or October, when the foreclosure problem will have been reduces in size.
Obama’s first action as President should be Presidential orders which will reduce the number of foreclosures in the U.S. And keep quiet about the plans.
Tackle foreclosures first.
The Paulson proposal was created during an emergency – as a Band-Aid or a tourniquet. Paulson says it did what it was intended to do. The financial system has not collapsed.
Let’s assume that Paulson has a reasonable point – there was an emergency. Now that the emergency has been handled, we can recognize that the infusion of around $300 billion into the banking system did not start banks lending again. The infusion was a success in one sense – calming an emergency – but a failure in another sense – correcting the problem of a clogged credit system.
Banks are hesitant to lend to other banks because they do not know the size of toxic assets on the books of any other banks. Banks are hesitant to lend to businesses and consumers because they fear continued shrinkage of the U.S. economy, with more bankruptcy among businesses and consumers yet to come.
Obama’s problem is the realistic expectation that the economic decline has further to go. The turnaround we all seek will happen AFTER the housing market stabilizes – that is, house prices are reasonable relative to consumer income and foreclosures are declining steadily.
The Obama stimulus plan should be delayed until AFTER the housing market stabilizes. The infusion of dollars into the economy will be much more productive – creating new jobs and new wealth – if the money does not go down the rat hole of preventing housing prices from declining further. Housing prices must decline until foreclosures cease growing.
A program to reduce foreclosures logically precedes the stimulus package.
Work on the foreclosure problem first. I am pleased to see more and more people are recognizing that reducing foreclosures is our most immediate problem. Possibly the next 2 months will be spent trying new ways of reducing the number of foreclosures.
My proposal for reducing foreclosures rests on the assumption that foreclosures reduce the total return to the investor by more than 30% of the value of the mortgage. If that is the case, the Congress can make some investors better off by passing a law which requires a reset of monthly mortgage payments to 70% of current payments, for those mortgage payers who have fallen behind on their mortgage and who have the income and financial prospects of being able to meet the reduce mortgage payments for the next 3 years.
In this scheme, investors have no right to contest the decision of the local court. The local court has no right to reset the mortgage to any level other than 70% of current payments. The advantage of this scheme is that each house occupier will be offered the same option throughout the nation. It will reduce the number of foreclosures while retaining the foreclosure option for those people who cannot pay 70% of their current payments. Best of all for the investor, this law will include a provision that this reset is limited in time. Three years after the request for foreclosure is filed with the local court, this reset will be cancelled and the house occupier will be required to resume payment as specified in the mortgage. If the house occupier can resume payment at the terms of the mortgage, the investor will recover much more than 70% of the value of the mortgage.
In my mind, the fact that this scheme benefits only a limited tier of house occupiers is a good thing. Some house occupiers need to move out and others move in. On the other hand, it is stupid to continue with the current system when some investors and some house occupiers would both be better off if monthly house payments were reduced to 70% of current payments for less than 3 years.
This will require a procedure to determine the financial prospects of each home occupier. Other details will be needed to be in the law to prevent people who are able to continue to meet the current monthly payments from taking advantage of this option to reduce their monthly payments.
I’d be interested to know what the Obama people think about the Citi bailout. I don’t imagine they had much say in the matter though.
I gather the the idea behind the guarantee is so they can take the toxic waste (now guaranteed with the full faith and credit of Uncle Sam) and repo it, thus turning sludge into cash. But it looks like a lousy deal to me; the gov’t takes on enormous risk with very little upside potential.
This would strongly suggest that they where not well capitalized, and thus Pandit et. al. may not have been telling the truth when they claimed they where.
Thoughts?
Please. This guy is just another NWO, interventionist, and DEBT worshipping fool!
ReformerRay said: “However, Citi bank should not receive any more money, regardless of its chance to survive. All that debt must be absorbed by the financial institutions that participated in the system rather than U.S. taxpayers.”
BINGO! Let the manufacturers of debt go bankrupt with DEFECTIVE DEBT PRODUCTS!!!
Brad,
I just read Geithner’s January 2007 speech to the Council of Foreign Relations (thanks for the link). I do appreciate the fact that he is for balanced budgets. But the overall speech was quite disturbing. It shows that he didn’t have the faintest idea that the trade imbalances were about to produce a worldwide depression.
Most disturbing of all, he thought that mercantilism would end, all by itself, without the U.S. taking any action. It will end by itself, all right, but not until the mercantilist governments finish stealing what remains to be stolen of our industry. Then they will start withdrawing their money and send us into a currency crash that will leave us in poverty.
Howard Richman
http://www.tradeandtaxes.blogspot.com
credulous_prole said: “I don’t think the Treasury is an investor: I believe it’s more of an asset manager.”
I believe the treasury (and the fed) are there to produce too much debt, to jack up asset prices, and to concentrate wealth/income. It is ALL about benefiting the SPOILED AND THE RICH (including these people themselves)!!!!
Howard Richman, how fast will geithner drop his support for balanced budgets to help save the manufacturers of debt and the SPOILED AND RICH he represents???
Howard Richman,
Please spare us with your nonsense that Asian countries were in any way responsible for the current fiasco on Wall Street. It is the US capitalist system that borders on absolute lawlessness today: Trillions of dollars in capital have been misallocated, stolen, and looted. Billions of taxpayer dollars for politically connected Robert Rubin’s Citicorp, and Hank Greenberg’s AIG, but not a penny has been reinbursed to Asian foreign investors in this massive ripoff.
FACT 1: Thousands of elderly Hong Kong citizens who invested their saving into Lehman bonds are destitute today.
FACT 2: The Chinese-state owned Bank of China was a $10 billion victim of the AAA-subprime MBS fraud perpetrated by Wall Street banks.
FACT 3: Lehman’s major secured creditors, mostly Japan and Taiwan banks, will be lucky to receive back 10 cents on the dollar.
Brad,
Thank you for this blog. I stumbled across it a couple weeks ago, and was impressed by both your clear and thoughtful analysis and the generally high-quality comments – the latter is something of a rarity. Good luck in Washington, should you be called – we would welcome your expertise.
Regarding Citibank – I refer the commentators above to any financial news outlet. The financial services have declined a full 20% more than the S&P 500 since the election, likely due to a combination of short selling, fallout from Paulson’s public about-face on TARP, and a growing concern that mark-to-market is going to lead to growing losses at all banks holding CDOs and MBSs- but especially Citigroup.
The Treasury did not have the funds to purchase outright the toxic debt. At the same time, if Citi had been forced to mark to market, it would have led to increasing losses at JP Morgan, Bank of America, and Wells Fargo, eroding or eliminating the effect of the TARP recapitalization.
One could argue that the somewhat arbitrary cap of $25bn for the Capital Purchase Program placed Citibank at a relative disadvantage. Using the guide of 3% of risk-weighted assets, I believe Citi could have been eligible for about $45 bn at the time CPP was announced. Sunday’s $20bn injection could be, on a relative basis, simply remedying that initial defect. The guarantees of Citi’s debt reduced the mark-to-market impact of other banks, without actually forcing Treasury to open the can of worms that would result if it chose to buy assets from one bank, but not the rest.
This isn’t to excuse Citibank’s board/executives from absolutely atrocious risk management and dereliction of duty. But hopefully it provides a bit of the context and some explanation of why the Citi rescue happened the way it did.
DJC,
Indeed, as you point out, Hong Kong and China were hurt by the foolish decision to force Lehman into default without any compensation for its bondholders. Mr. Geithner was part of that decision.
The first paragraph of Geither’s January 2007 speech to the CFR reads:
Obviously he didn’t at all understand that the current financial crisis was coming.
Howard
Whoops, I meant the fifth paragraph, not the first…
DJC: I have been surprised about the quick rehabilitation of Summers in Obama Land — particularly given Obama’s promises to the labor community and his strident position during the campaign against the kind of capitalism that Summers and Rubin promoted.
Oh really now? Obama’s promises to labor community is that he would provide jobs and incomes. Exactly how he does this labor doesn’t care, and when you have the UAW and GM management in front of Congress asking for the same thing, that says that you don’t have the old labor/capital divide.
Also if you actually read what Obama said, I don’t detect anything against the kind of Rubin/Summers capitalism, and everything that he has said marked him as pro-Rubin which is why Wall Street backed him with huge campaign contributions.
Political tip #242: Whenever some politician uses very vague terms like “change” and “hope” you need to look very carefully at the fine print to see exactly what he means by it.
Political tip #243: Just because two people are both “anti-something” doesn’t mean that they agree on what should replace it.
Astropolitik: The Treasury did not have the funds to purchase outright the toxic debt. At the same time, if Citi had been forced to mark to market, it would have led to increasing losses at JP Morgan, Bank of America, and Wells Fargo, eroding or eliminating the effect of the TARP recapitalization.
Treasury does have the funds to purchase toxic debt, and mark-to-market is not an issue right now, as the losses that Citi had with mortgage securities have already been posted.
What has people worried is not Citi’s current situation, but rather how Citi will do if there is a long and deep recession. If there is a long and deep recession then large number of the assets which are good then turn bad. Right now, the non-paying loans have been largely confined to subprime, but if we have a long and deep recession with lots of people out of work, they won’t be able to pay prime mortgages, credit cards, auto loans, etc.
DJC wrote, “Howard Richman, Please spare us with your nonsense that Asian countries were in any way responsible for the current fiasco on Wall Street.”
The system of imbalanced trade that was kept alive by Asian government reserve accumulations was not sustainable. American consumers could not keep borrowing more and more without the increased income that they would have been receiving if trade were balanced. Eventually there had to be a pull-back. That pull-back came in October with a vengeance.
But that said, Wall Street shares the blame. They lobbied for tax policy that favored borrowing from foreiners over Americans. They lobbied for Clinton’s 1997 change in the capital gains tax rules that set off the house price bubble. They depleted their reserves through stock options and stock buybacks to take advantage of Bush’s 23% capital gains taxrate. I am certainly not excusing Wall Street. As I wrote at the time, TARP was corruption at its worst, straight out of Atlas Shrugged by Ayn Rand.
Howard Richman
http://www.tradeandtaxes.blogspot.com
Patrick: I’d be interested to know what the Obama people think about the Citi bailout. I don’t imagine they had much say in the matter though.
I’m pretty sure that they did. Geithner has been on the front lines of the investment bank cleanups, which is why he is a great choice for Treasury Secretary.
Also everything had to be coordinated very closely since they couldn’t announce the Citi plan before Obama announced his economic team. The important reason is that anything that gets done with Citi is going to be a template for what gets done with the other three mega-banks if they run into problems.
Patrick: I gather the the idea behind the guarantee is so they can take the toxic waste (now guaranteed with the full faith and credit of Uncle Sam) and repo it, thus turning sludge into cash.
No, that’s not the idea. The toxic sludge is not the big problem right now. That makes up at most $40-50 billion and doesn’t account for the $200 billion that has been wiped from Citi’s market capitalization over the last two weeks. Most of the sludge has already been written down, and if that were the only problem, we wouldn’t have to do much.
The big problem right now is the stuff that hasn’t gone bad yet. Right now there are lots of people with good jobs and good credit, who aren’t overextended, and they are going great paying their monthly mortgage bills, credit card bills, student loans, auto loans etc. etc.
If we have a long and deep recession and unemployment starts hitting 10+%, then all those people stop paying their bills, and then we have a really big problem. That’s what everyone is freaked out about.
General Motors may be dead by the end of the year, and thinking about what happens when a million auto workers can’t pay their mortgages and credit cards is what caused Citi stock to tank last week.
whoops. That should read Bush’s 2003 15% capital gains tax rate.
DJC – I would like to know more about the Lehman situation. Where did you get your information about the distribution of bondholds of Lehman’s? What percent of the bonds were held by “elderly Hong Kong residents that are now destitute”?
GM should be treated the same way as IGA and Citibank.
My initial view would be to let both fail. If we do not let both fail, why would we refuse help to prevent any large firm from failure?
ReformerRay: All of Obama’s advisors need to stop working on his stimulus plan and go back to the drawing board.
There is a Twilight Zone episode in which someone ended up with a magic watch which could stop time. This would be useful in this situation, but unfortunately the markets just keep moving, leaving you very little time to think instead of reacting to events.
Besides, no one really knows what works and what won’t. All we have are educated guesses, so it’s not a bad thing to try one thing after another.
ReformerRay: Begin with the recognition that “too large to fail” is a way of saying that the counter parties that the firm owes should not be allowed to lose money.
There the counterparties, the counterparties’s counterparties, the counterparties’s counterparties’s counterparties, etc. Also a lot of them have and will continue to lose money.
ReformerRay: Why not? These counterparties vary tremendously. The important thing is that they are dispersed. Most of them can take a big hit and survive.
No, this isn’t true. Most people will end up in serious trouble if their checking accounts disappear. If your bank account disappears, and your credit cards get canceled, what do you do?
ReformerRay: Obama’s problem is the realistic expectation that the economic decline has further to go. The turnaround we all seek will happen AFTER the housing market stabilizes – that is, house prices are reasonable relative to consumer income and foreclosures are declining steadily.
This isn’t the case. What typically happens after a real estate bust is that housing prices take about 4 to 5 years to settle down.
Subprime mortgages are no longer a major problem right now. All of that has been more or less dealt with at this point, and the reason that Paulson cancelled TARP is that the problem has changed. What people are worried about is not that the subprime is going to kill the mega-banks. That is not going to happen. What people are worried about is that subprime has weakened them to the point that the coming recession is going to kill them.
At what point will investors begin to shun Treasury Certificates?
TWofish says if the big firms fail and they do not pay these folks that have them over the barrel do not get their money, the U.S. banking system will disappear and I will not have a checking account or a credit card.
Come on – there are lots of local banks in my town that did not engage in the sub-prime deals. I want the Federal Government to survive – precisely because I want my money in my local bank to be insured.
Subprime mortgages continue to be THE major problem because so many of them will reset at higher interest rates in the future.
We need to preserve the full faith and credit of the United States of America – not the big firms that are in trouble.
These bailouts create potential problems that we should not ignore.
Twofish – Everything is new in our current situation. What usually happens after a housing bubble has been limited to sections of the U.S. This is the first time in my lifetime (82 years) that house prices have declined nationally. In my town, house prices never went through the roof and they are not going down as much as elsewhere. You cannot rely on what happened some other time elsewhere. You are the one who has been saying look at the details.
Mark-to=market was abandonded a while back and short selling was prohibited on some exchanges.
If both have returned, too bad.
There the counterparties, the counterparties’s counterparties, the counterparties’s counterparties’s counterparties, etc. Also a lot of them have and will continue to lose money.
Ok – but how many of them will fail? You do not know. Nobody knows.
Why not find out? Lehman did not pull down everbody. Maybe more fiancial firms on
Wall Street need to fail and people seek work elsewhere because the system that supported so many people failed.
Twofish responds:
Patrick: I’d be interested to know what the Obama people think about the Citi bailout. I don’t imagine they had much say in the matter though.
I’m pretty sure that they did. Geithner has been on the front lines of the investment bank cleanups, which is why he is a great choice for Treasury Secretary.
Also everything had to be coordinated very closely since they couldn’t announce the Citi plan before Obama announced his economic team. The important reason is that anything that gets done with Citi is going to be a template for what gets done with the other three mega-banks if they run into problems.
Patrick: I gather the the idea behind the guarantee is so they can take the toxic waste (now guaranteed with the full faith and credit of Uncle Sam) and repo it, thus turning sludge into cash.
No, that’s not the idea. The toxic sludge is not the big problem right now. That makes up at most $40-50 billion and doesn’t account for the $200 billion that has been wiped from Citi’s market capitalization over the last two weeks. Most of the sludge has already been written down, and if that were the only problem, we wouldn’t have to do much.
The big problem right now is the stuff that hasn’t gone bad yet. Right now there are lots of people with good jobs and good credit, who aren’t overextended, and they are going great paying their monthly mortgage bills, credit card bills, student loans, auto loans etc. etc.
If we have a long and deep recession and unemployment starts hitting 10+%, then all those people stop paying their bills, and then we have a really big problem. That’s what everyone is freaked out about.
General Motors may be dead by the end of the year, and thinking about what happens when a million auto workers can’t pay their mortgages and credit cards is what caused Citi stock to tank last week.
(I am quoting Twofish just to show that I admire some of what he says).
November 24th, 2008 at 4:00 pm
I apologize for the long quote above. I tried to include only the last three paragraphs. Sorry
Brad, what is your position on the CDS bailout?
M. Geithner’s IMF experience will be most helpful. He’ll know what to do when you take charge in a bankrupt 3rd-world wasteland with a comprador economy and a newly-deposed patrimonial strongman: relief for the poorest, institutional anti-corruption reform, macro structural adjustment. And, budget permitting, some civil society support to keep it from relapsing into barbarism.
Laura Tyson is infuriating me. Would some accountability and honesty be too much to ask for? We just took a 7.8% stake in C for twice the price it would’ve cost to buy the whole thing!
You guys have to be very, very careful to not incite more anger, and Summers is not a deft hand.
i think that obama appointments are being made on the hillary clinton principle – you need to have people who are ready to go ‘from day one.’ he heard that often enough in the last couple of years . . .
look what has happened in the last two months – (and many people see the crisis as accelerating) – there are still two months to go. i think the bush and obama people have to line up and pass the fire buckets together. no option.
try to see the obama appointees as the fire brigade bravely rushing in to the twin towers on 9/11. if this is the systemic collapse – how many careers will survive it ?
the ‘kitchen cabinet’ or white house staff may be the real powers in the first stage of the new administration.
obama will take decisive and historic decisions because history itself will leave him no option.
the titanic has now gone over niagara. anyone shouting ‘reverse engines!’ might as well save their breath.
ReformerRay: Come on – there are lots of local banks in my town that did not engage in the sub-prime deals.
Sure, but sub-prime is no longer the big problem right now. It’s the prime market that people are now worried about. You have a whole much of banks that survived the first wave, and then the second wave is starting to develop.
ReformerRay: Subprime mortgages continue to be THE major problem because so many of them will reset at higher interest rates in the future.
Subprime was the biggest problem two months ago. It’s not the biggest problem now. Most of the loans that will go bad have gone bad, and the subprime market dried up some time ago.
What is causing the uncertainty is that people have a good handle of how big the subprime mess is. How big the prime mess is depends on how deep and long the recession is, and no one has any clue what that will be.
I should have referred to Obama as President Elect; I’ll correct that.
Credulous prole — with oil at $50 and building domestic commitments, the Gulf sheiks would only have $300b if they sold a big chunk of their existing portfolio. The US gov now owns more of Citi than the Gulf.
Chidambaram, A bit of history about Germany between the world wars. You post an interesting but economically irrelevant quote from Shirer. Here is another:
“Big industrialists and landlords goaded the government to deliberately let the mark tumble in order to free the State of its public debts, to escape from paying reparations and to sabotage the French in the Ruhr. The destruction of the currency enabled German heavy industry to wipe out its indebtedness by refunding its obligations in worthless marks. The fall of the mark wiped out war debts and thus left Germany financially unencumbered for a new war.” I may add that many kleinburgers benefited from hyperinflation by having their mortgages wiped out. After the war, practically nobody would admit that they benefited from inflation, any more than they would admit to collaborating with the brutal regime that followed, but the reality is quite different. Germany’s economy could rise largely because all debts were repudiated (at the expense of anyone who had savings, bonds, and insurance policies.)
I have lived in Germany in the seventies and I heard from people who lived through that period some interesting stories regarding hyperinflation and its asymmetric effects.
Inflation and deflation seem to be always politically motivated.
[...] unveiled his economic team to generally positive reviews from people I often agree with (e.g. here and here) considering their mainstream nature. Both Summers and Geithner are near the top of the [...]
Chidambaram: “@Lyle This book might bore you to death”
I object to your incoherent post, therefore Shirer’s book would bore me to death? Non sequitur. As a matter of fact, I read The Rise and Fall of the Third Reich almost 50 years ago, as an extra-credit assignment in my 9th grade World History class. It was certainly boring, but I slogged all the way through it and wrote a report.
Since then I have learned a few things that William Shirer didn’t want me to know. In Web of Debt, page 237, Ellen Brown quotes Sheldon Emry as follows:
On page 235, Ellen Brown says
In Chapter 3, Brown describes the origin of the American system of public finance, also known as the Greenback system. It started in Massachusetts in 1691. In 1764, Benjamin Franklin went to London.
Lyle here. I am not sure what to make of Ellen Brown. As I read over Chapter 3, questions arise; for example: how did the colonists pay taxes before 1764? – with paper money? In any case, she has established that there is an alternative way to organize public finance. It is not just a theory – it has been tried more than once, and it works (up to a point). We don’t learn about it in school. World War 2 brought it to a definitive end, and it is no longer even mentioned in political campaigns.
one important asset mr. geithner possesses that has widely overlooked is his concentration in east asian studies and his knowledge of the chinese & japanese language.
comments like “how about those agencies!” and “i don’t think that issuing treasuries in yen is such a good idea” go down much more smoothly when spoken in the native tongue and with sensitivity to cultural norms imho .
also, fyi, some useful background material of some of the lesser-publicized members of the team:
(incl. my fav: ‘do tax cuts starve the beast?’)
“(The broader lesson is that the allure of pure science — which works beautifully in physics and some other fields — can go astray when the subject involves human beings.) ”
:: sorry 2fish, couldn’t resist ::
Professor Sims writes in an above referenced article “Government and Central Bank Balance Sheets, Inflation and Monetary Policy” that the recent monetary expansion of the Fed’s balance sheet, which he notes has doubled in the last year, will not cause inflationary pressure in the future because.
“it did not take place by the traditional route of expanding
liabilities and assets by printing money and using it to buy bonds” page 8
This doesn’t make complete sense to me because, per Sim’s own observations, the Fed’s balance sheet has doubled in the past year as have other central bank balance sheets of the OECD. Additionally the fed has been an exchanging high quality assets for lower quality assets as Brad’s posts have adroitly pointed out. When you spend money that you don’t have, playing the role of lender of last resort, you are expanding money supply. The follow on argument to this, is that in times of stress, the fed’s expantions, are countered by the private sector’s faster contractions, hence the deflationary argument, and the justification for the Keynesian intervention. But the ability of the fed, to correct their expansions in the future seems to me to be a low probability event. I thus expect much higher inflation in the future as a historical look at the bonds yields of 1926-1933, 1870-1879, 1822-1829, 1769-1776, and 1717-1724 seem to suggest. See the following note on the prudent bear (http://www.prudentbear.com/index.php/component/content/article/37-Guest/10141-real-interest-rates). What does the group of assemble minds say?
one important asset mr. geithner possesses that has widely overlooked is his concentration in east asian studies and his knowledge of the chinese & japanese language.
comments like “how about those agencies!” and “i don’t think that issuing treasuries in yen is such a good idea” go down much more smoothly when spoken in the native tongue and with sensitivity to cultural norms imho .
also, fyi, some useful background material of some of the lesser-publicized members of the team –
christina romer: http://elsa.berkeley.edu/~cromer/index.shtml
(incl. my fav: ‘do tax cuts starve the beast?’)
peter orszag: http://cboblog.cbo.gov/
“(The broader lesson is that the allure of pure science — which works beautifully in physics and some other fields — can go astray when the subject involves human beings.) ”
:: sorry 2fish, couldn’t resist ::
Lyle,
Germany’s economic history between say 1930 and 1950 is extremely interesting, but there is not much that should inspire the Obama team. Most of it wat suppression of markets in both goods, services and money. And the political backdrop was not ll that inspiring either. Or did I mis the point. O, and if you want to read up on the subject, I would recommend Hjalmar Schacht’s work.
dr.b — sorry for the double posting, i tried to get all fancy with html & failed miserably the 1st time.
lyle: “It is not just a theory – it has been tried more than once, and it works (up to a point).”
also interesting that one of the men who used it just happens to be one of the incoming president’s political idols.
question for me tho is whether this ‘thou shall not be named’ alternative can be realistically implemented sans militarism. is war (or its drumbeats) the only possible justification for such a ‘radical’ idea?
(footnote to howard/ray/protectionist junkies, google this: henry carey harmony interests — excellent read, though the u.s. is now in the position of the empire that mr. carey was trying to release his country from — can protectionism be justified from a position of hegemony w/o backfire?)
2fish: “Right now there are lots of people with good jobs and good credit, who aren’t overextended, and they are going great paying their monthly mortgage bills, credit card bills, student loans, auto loans etc. etc.”
unfortunately, citi is not helping these creditworthy consumers all that much by jacking up rates on their credit card balances.
http://www.nytimes.com/2008/11/15/business/15citi.html
“Citigroup said that, on average, it planned to raise its customers’ effective borrowing rates by two to three percentage points — a move that would cause some borrowers to pay more than 20 percent interest instead of 17 percent. Some rate increases could be much higher.”
now that the USG has just saved its glass behind, perhaps citi may see the moral & economic wisdom of not working in cross purposes to the objectives of its new primary investor/backstop…the flipside to moral hazard.
then again…perhaps not…why stop now when you can get it from both ends, right?
twofish: So, do you think citi is currently solvent (well, before the rescue) and the run on the stock was anticipation of future insolvency? If so, then do you expect to see similar panics cascading through other bank stocks?
Given the possibility that Brad will be headed back into government, we need to start planning now for a post-”Follow the Money” world. No-one can take Brad’s place, but we need a fallback forum which has some breadth and depth of analysis. I quite like nakedcapitalism.com, but I’m open to other suggestions.
had a longer post about Obama’s introduction of economic team (blog said I couldn’t add) Was it me or did he look like a rookie (shades of Jimmy Carter), also like his Jack Kennedy style of evasive answering with blah, blah, blah – but – nada, nada, nada!
here’s a video mash-up I did on the Citi Bailout… I was so engrossed in reading Brad’s comments that I screwed up the audio a bit, a few hiccups..
enjoy,
Deddy
ps: unless readers of this site are mind readers, and I’m sure a few are, here’s the Link for the Citibank vid
http://www.youtube.com/watch?v=pPfbXFf4g2k
footnote to howard/ray/protectionist junkies, google this: henry carey harmony interests — excellent read, though the u.s. is now in the position of the empire that mr. carey was trying to release his country from — can protectionism be justified from a position of hegemony w/o backfire?)
Ans. Classical protectionism can never be justified from any position. However, increased tariffs on ALL imports limited to the countries that have a large trade surplu s with the protecting country can certainly be justified – as a way to get to equal trade, which is the only defensible position for all counrtries engaged in international trade.
What is the intellectual justification for any country maintaining a large trade surplus with any other country for a long period of time?
After Decd. 2, I will answer anyone who responds to the above post.
Patrick: So, do you think citi is currently solvent (well, before the rescue) and the run on the stock was anticipation of future insolvency?
Yes. It’s not a coincidence that the stock tanked the week we had hearings on what to do with GM. Also this puts Wall Street in a very interesting position with GM and the UAW. Normally, you think of labor and capital being on opposite sides, but in this situation, the last thing that Wall Street wants is for GM to crumble.
One problem is right now with GM is that no one has come up with a credible plan to save it. If just giving GM a $25 billion loan would fix the problem, then I’d be all for it. The trouble is that no one has explained how that would work.
Patrick: If so, then do you expect to see similar panics cascading through other bank stocks?
You did. Citi got most of the attention but all of the bank stocks tanked last week.
lb: unfortunately, citi is not helping these creditworthy consumers all that much by jacking up rates on their credit card balances.
Yes this is a huge problem which contributes to the spiral downward.
lb: now that the USG has just saved its glass behind, perhaps citi may see the moral & economic wisdom of not working in cross purposes to the objectives of its new primary investor/backstop…the flipside to moral hazard.
It’s very difficult to get someone who is scared to lend money.
lb: then again…perhaps not…why stop now when you can get it from both ends, right?
Citi loans out money to people with credit cards out of the belief that they are going to make money doing it, and if Citi loans out at 20% and everyone else loans out at 12%, then theory says that Citi should make less money. The trouble is that everyone is freaked out, so no one wants to loan money to anyone except for the government.
This doesn’t make complete sense to me because, per Sim’s own observations, the Fed’s balance sheet has doubled in the past year as have other central bank balance sheets of the OECD.
dmg555, this blog post is a very good explanation of the phenomenon that’s scratching your head here.
ndk… your right… thank you very much…excellent
To give some contrarian point of view, from Dean Baker of CEPR:
http://www.guardian.co.uk/commentisfree/cifamerica/2008/nov/24/barack-obama-timothy-geithner-treasury
“”"[...]
The other part of the story was the suspension of regulatory oversight of the financial industry. This allowed for huge over-leverage, predatory mortgages and the other excesses of the financial industry that fuelled the bubbles.
Geithner was in the middle of all this, even if not a lead actor. While this should not be forgiven – this recession and the millions of lives that are being ruined is not funny – it is not clear that Obama had very much choice.
In this respect, Obama faced the same sort of problem as those hoping to de-Ba’athify Iraq following the overthrow of Saddam Hussein. It would have been almost impossible to establish a government without including members of the Ba’ath party, since membership was a virtual requirement for holding a position of responsibility under Saddam.
Similarly, it would have been almost impossible to get to the top echelons of power, or even the middle ranks, during the Clinton-Bush years without giving lip service to the policies of one-sided financial deregulation and bubble-driven growth that were so fashionable at the time. The real question is whether Geithner has learned anything.
The jury is out on this point. After Bear Stearns sank in March, Geithner testified about the collapse before the Senate banking committee and gave the classic “who could have known” answer. Given the economy’s current economic situation, we really do need a Treasury secretary who can give answers, not just excuses.
It may not have been feasible for Obama to go the full de-Ba’athification route. But the real question is whether he wanted to.
“”"
GUERBY: Similarly, it would have been almost impossible to get to the top echelons of power, or even the middle ranks, during the Clinton-Bush years without giving lip service to the policies of one-sided financial deregulation and bubble-driven growth that were so fashionable at the time.
Part of it is that things really didn’t unravel until 2006-2007. If you went back to 2003, things seemed to be working quite well.
The big problem, which is a general problem in government, is that the people with the expertise are often the people that were in the industry. You just aren’t going to get someone with deep expertise in CDO pricing models and what went wrong with them outside of Wall Street, and the people that can tell you why the broke are most likely people that were involved in the mess.
GUERBY: Given the economy’s current economic situation, we really do need a Treasury secretary who can give answers, not just excuses.
No we don’t need people with answers, since it’s not what you don’t know that will kill you, it’s what you think you know that isn’t. Thinking that you know exactly what happened between 2003-2008 and exactly what is happening now is somewhat dangerous since you run the risk of getting it wrong.
GUERBY: The real question is whether Geithner has learned anything.
I’m pretty sure he has. The question is what exactly needs to be learned. People are still arguing over the causes and meaning of the Great Depression and the French Revolution, and I’m sure that fifty years from now people will still be arguing about what happened this summer.
I’d feel more comfortable with someone that is willing to say “I really don’t know what is going on” and to totally throw away the textbook when it doesn’t appear to be working, than to have someone that offers an answer to everything.
“The Treasury did not have the funds to purchase outright the toxic debt. At the same time, if Citi had been forced to mark to market, it would have led to increasing losses at JP Morgan, Bank of America, and Wells Fargo, eroding or eliminating the effect of the TARP recapitalization.”
I wonder. Citi’s treatment of tax losses gives me no faith at all in their accounting honesty. And I would not be surprised at all to learn that their accounting fails to take into account even a modest (and almost certain to come) further fall in real estate.
Twofish, you can replace “GUERBY” by “Dean Baker”
.
“deep expertise in CDO pricing models”
Being an expert in “models” these days means thinking that house prices cannot go down
. So much for experts…
I will ask again:
Brad, what is your position on the CDS bailout?
[...] Full disclosure: I worked for Mr. Geithner and Mr. Truman from 1998 to [...]