The Big Mistake of the First 100 Days

Here's your assignment: You've just been elected President of the United States. Your most urgent Cabinet appointment is Treasury Secretary, the person who will lead us out of the worst financial abyss since the Depression.

Obviously, this person must have not only the leadership skills and charisma to inspire and mobilize the country's efforts, but must understand what got us into this mess in the first place and what will get us out. The Secretary has to have demonstrated in the last two years a record of comprehending the financial system's (1) high risk, (2) deteriorating capital base, (3) innovation dangers, (4) soaring leverage and (5) increasing instability.

Unfortunately, you failed the assignment. You selected a person who, judging by his own words, comprehended none of these. But before getting to his words, consider the crescendo of disparaging commentaries from others. Timothy Geithner hasn't had a lot of good press since taking over as Treasury Secretary. Now, if possible, it's getting worse.

In my last blog post, I lamented the appointments of both the Treasury Secretary and the head of the National Economic Council, Larry Summers. Portfolio magazine just chimed in with a less-than-flattering cover story on Geithner. And now, the New York Times weighs in with a 5,330-word front-page piece that can only be described as a public servant's worst nightmare -- but a must read. It takes him to task for his past actions (erratic), associations (Wall Street) and record (unimpressive).

For me, the most valuable part of the article was pointing me to the speeches that Geithner delivered during 2007 when he was president of the Federal Reserve Bank of New York, by far the most important and influential of the 12 Federal Reserve regional banks. He was delivering about a speech a month. They varied little in their optimism. In essence, this was the message:

Despite some serious shocks to the financial system so far, don't worry. The system has handled it before, and can handle it again. You're in good hands.

Let's look at one of these speeches, delivered just before all hell broke loose. He spoke on May 15, 2007, at the Financial Markets Conference of the Federal Reserve Bank of Atlanta. Remember, the subprime mortgage mess was getting into full swing and it was just a little over a year before the bankruptcy of Lehman Brothers, the forced merger of Merrill Lynch into Bank of America, and the beginning of the world economic system's falling off a cliff. Read these remarks, and then ask yourself these questions: What in the world was Obama thinking when he nominated Geithner to be Treasury Secretary, and what was the Senate thinking when it ratified him?

...There has been a marked improvement in global economic performance, with strong growth, relatively low inflation, and less volatility in both growth and inflation. This seems to have reduced concern about future fundamental risk, in terms of the potential damage of future shocks and in the ability of governments and central banks to both avoid the policy errors of the past and to competently manage some daunting longer-term policy challenges...

Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk. Risk is spread more broadly across countries and institutions...

These changes in economic conditions reinforce each other. The long period of relative economic and financial stability has reinforced expectations of future stability, reducing implied volatility and risk premia, increasing comfort with higher leverage, and encouraging flows of capital into riskier assets...

The dramatic changes we've seen in the structure of financial markets over the past decade and more seem likely to have reduced this vulnerability. The larger global financial institutions are generally stronger in terms of capital relative to risk...

Timothy Geithner, May 15, 2007
[emphasis added]

How could one person in such a responsible position be so wrong? He was wrong not on a few things, not on a lot of things, but on everything. He had no clue as to the banking system's increasing risks, vanishing capital, innovation consequences, dangerously high leverage, and impending collapse.

Given his record for perspicacity, how can we now put credence into anything Geithner says? Is there any reason to believe he understands the unintended consequences of subsidizing and supporting too-big-to-fail banks, insurance companies and automobile manufacturers; of throwing trillions dollars of taxpayer money at the economic problem; and of buying banks' toxic assets with highly leveraged public-private purchases.

The answer is we can't put any credence into them. But fortunately for us, throwing trillions of taxpayer dollars pell-mell at the problems will help solve them; maybe not efficiently, maybe not fairly, and maybe not rapidly; but eventually.

Meanwhile, most of the other Cabinet appointments, in my opinion, range from pretty good to superb (e.g., Steve Chu at Energy). And almost all the bold new initiatives in infrastructure, science, energy, health, defense, international relations, et al., are laudatory and long overdue. Kudos, indeed.

But in dealing with the economy, by far our most critical problem, why, oh why, couldn't we have done better?

 

 

Comments

[olephart]

The person for the job was Elliot Spitzer. This is not just a financial problem, it's a criminal problem. No one has come forward to address the 800 pound gorilla lurking in the room. The meltdown has been treated as an oops, we're insolvent, can you give us 8 trillion dollars with no questions asked?

Let me be crystal clear on this, the problem stems from a massive fraud perpetuated by many on Wall Street and elsewhere. This reaches from your neighborhood real estate office to Wall Street. When the term "liar loan" was commonly used by everyone then it is obvious that those dealing in these securities had full knowledge of what they were doing. Add to that an appraisal, sales, mortgage merry go round that knowingly artificially increased prices and you've got a trail of fraud a mile wide. These loans were bundled together as securities and were rated by agencies based not on their merits but on the volume of business that was offered. These junk securities were rate AAA and sold as such. This is conspiracy, fraud and misrepresentation.

The financial meltdown desperately needed investigations invoking the RICO statutes and we got a cover up and bailout. Far from arguing over bonuses the CEOs and others should be negotiating for cigarettes and protection while they're in the joint without bail waiting for sentencing.

[jake1492]

Banking and health care have something in common. In each case the best way to ensure they operate in the best interest of the public is partly 1) to regulating (in some cases preventing, as in the case of many of these toxic derivative financial instruments) significant parts of their business, and partly 2) to compete with them.

There are many NGO's and non-profits that are very well run. What makes it possible to run such organizations with a management team that is well paid, but not wildly grotesquely over paid for the value they produce is a sense of mission. As we make our way through our lives we are variously motivated by money, power, altruistic intentions, a sense of empathy, a sense of fairness, and potentially a number of other things. We see this mix probably most transparently in our politicians.

Keep the banks honest. Make them provide value. Make their boards and shareholders sensitive to the compensation of their executives, employees, contractors, and whatever other creative mechanisms they devise to milk the enterprise....... by operating competitive not for profit corporations with the capital provided by the government.

You want to hear bleating, whining, crying...... just directly challenge the right wing "principle" that private companies always are more efficient than public ones...... by making them prove it. You'd be amazed at how well many excellent community values managers would take the million a month club types to the cleaners.

[ntmessage]

Geithner wrong on everything? Hardly. Perhaps in charisma, only. But then it seems an empty suit is what some irresponsible leaders want. It is perfect that Geithner is a little geeky and completely empirical. Exactly what we need. Also, he was one of the few regulators, in the past several years to fight against Bush and the SEC and was vocal that this was going to end poorly. At the same time, the Dumbos in congress never did support him and let Bush and his SEC extend the charade. Remember this was a nation wide and global issue and a local regulator, even the NY Fed, did not have the powers to go up against Bush and company. He is singularly the best person for a truly screwed up situation. We only hear complaints when he acts like an adult with our Treasury and holds people to account like the financial system and the auto companies.

[jake1492]

Exactly what we need if we don't want the responsible person to have a vision of what is in the best interest of the taxpayer and the country as a whole. The man is captive to a world view that makes him "geekily" work out the answers to the wrong questions.

[ntmessage]

Numbers do not lie and he is holding them all to account in the taxpayer’s best interest and works under the vision of the President. The real reason people are peeved at him is that he is holding special interests to account.

[nitpicker33]

While it is agreed that Geithner has made many, many dumb moves and for dubious reasons, how can a reader be persuaded by your argument when its basic premise - that not only was Geithner wrong, but he was wrong at the latest hour - is wrong? The bankruptcy of Lehman Brothers occurred on September 15, 2008, not 2007 as cited - not months after his speech, but over a year after it. The crisis didn't get into full swing until late 2008, not 2007. Please, HP copy editors and Mr. Rosen, please don't waste our time until you've done your basic homework. It does a disservice to the journalistic efforts of others and leaves the entire profession­/community open to the valid criticism of being a bunch of amateurs.

[mosh]

Huh?? Perhaps you should reread Mr. Rosen's post in which Mr. Rosen references a speech Geithner gave in May 2007 about a year BEFORE Lehman went belly up in Sept. 2008. Here is what Mr. Rosen said:

'Let's look at one of these speeches, delivered just before all hell broke loose. (Geithner) spoke on May 15, 2007, at the Financial Markets Conference of the Federal Reserve Bank of Atlanta. Remember, the subprime mortgage mess was getting into full swing and it was just a little over a year before the bankruptcy of Lehman Brothers, the forced merger of Merrill Lynch into Bank of America, and the beginning of the world economic system's falling off a cliff.'

Perhaps you need a new pair of reading glasses. Either way, I think you owe Mr. Rosen and the HP editors an apology.

[Danigirl65]

Any suggestions for somebody better?? I'm absolutely fed up with people ridiculing without coming up with solutions. It's always easy to throw stones - not so easy to find solutions.

[Rebecca Borchers]

Krugman

[sonofsamphm1c]

Even Krugman recognizes he is not cut out for the job. He would put forth a plan, and then run over to the NYT and rip himself and his plan to shreds - 'cause that is all he's got.

[jake1492]

It would have to be someone who wasn't a wimp about the fickle godless market swinging around once in a while. In fact, ideally it would be someone who would be quite happy to impose the kinds of friction on these markets that would make it highly desireable to make investments from the perspective of..... lemmee see...... making and investments........ rather than....... gee what is business as usual called...... speculating. People like Timothy Geithner have the ethic of quick easy money from "smart investing" (otherwise known as speculating) so deeply embedded in their DNA that it is virtually impossible for them to see the bigger question.

The bigger question is: "What is good for the country?" One corrolllary of that question is "Is it in the best interest of our country to have our stock markets arranged such that it appears to be easier to make millions of dollars in a short time by making successful bets than investing in R&D, plant and people, and producing something of value?". The answer of course is no.

The right person for the job is someone who has the necessary training and experience, the necessary smarts vision and toughness, and understands this.

[mosh]

William Black

[Goddatunda]

I don't know.

I was disappointed as well.

Would Krugman have taken the job?

[sonofsamphm1c]

The preposterous nonsense just keeps coming.

Geither's plan is quite sound, and it is working. The progress has actually been quite fast. You folks are so far behind the curve it's ridiculous.

The NYT article is an abysmal pile of rubbish - little different than their clearly misguided war cheerleading FOR George Bush.

It is reported that more than 100 companies have applied to participate in PPIP. That is a robust response.

[Rebecca Borchers]

Numerous economists have come out rejecting this plan as overly risky. Rosen's comments are sound: Geithner and Summers are in bed with Wall Street, just like Paulson. Geihtner's plan is barely better than giving them blank checks.

[CellarDoor]

Tell that to the Japanese and their missing decade and a half (so far)...

[jake1492]

That 100 companies are interested doesn't necessarily mean the program is in the best interest of the taxpayer. If these 100 companies "know" or "believe" that they can purchase these securities for a price that will allow for them to make a profit later, what is it that makes the assets less attractive to their current owners?

It's a scam, intended to part a trillion dollars from the government and put it in the hands of the current owners.

[sonofsamphm1c]

Now is frozen, so they have distressed values. Later? They call that the thaw, which will surely come. The taxpayer will be in on the profits, and the taxpayer will be paid interest.

It's not a scam. It is an exceptionally well crafted repair of a broken Paulson plan.

[mosh]

In Geithner's PPIF the government (read taxpayer) assumes all the ris while the investors reap all the profit.

What's new and innovative about that?

Crooks, like the ex-CEO or Countrywide, know a good deal when they see one. They are using their ill gotten gains (the massive fees from their fraudulent credit default swaps) to invest in the government's newest gamble. Except this time the odds are even more stacked in their favor.

[caphillprof]

This is a very good question. What was it about Geithner that attracted Obama? Was it because he was Wall Street's boy?