The More Things Change, The More They Remain The Same
I’ve been asked by a number of readers for my opinion on the economic team being put together by the incoming Obama administration. I’m not that excited, but then Bush Junior’s economic team was pretty consistently disappointing. What we have is a bunch of Clinton-era retreads in Summers, Orszag, and Geithner. Bob Rubin may not be there, but those that learned from him are there.
And, this is change. I have sixty cents sitting next to me. That’s change also. Moving from Paulson to Rubin’s students is exchanging one part of the intellectual framework of Goldman Sachs for its cousin. As Ron Smith said to me off the air when I was recently on WBAL, the economic advisors of Bush and Obama are members of the same intellectual country club. There is little real change there.
But, look at it on the bright side. The best part of the Clinton administration was the Treasury Department and the affiliated entities. Perhaps that will be true of the Obama administration as well — pragmatism ruling over dogmatism, and a fear of freaking out the bond market. Could be worse. Save us from misguided idealists (perhaps Bernanke — a pity he didn’t pick a different dissertation topic), who think they know how to fight economic depression, but really don’t, and waste a lot of time and money in the process.
As it is we get two new programs this morning that are more of the same: Keep expanding the Fed’s balance sheet; don’t think about the eventual unwind. Create more protected lending programs that encourage lenders to flee unprotected areas of the market for protected areas. Do anything to shift debt from private to public hands; but don’t do anything that truly reconciles bad debt.
I do have a beef with the selection of Geithner, though. This Bloomberg piece gives a sympathetic rendering of his attempts to deal with derivatives. He tried to achieve consensus of all parties. My view is that the areas where he could achieve compromise were areas that were important but not critical. He needed to take a bigger view and question the incredible amounts of leverage, both visible and hidden, that we were building up and focus on what regulatory structures could properly contain the increased leverage, lest the gears of finance grind to a halt, as they have done today.
We can be less sympathetic, though. Chris Whalen’s (Institutional Risk Analytics) opinion of him is quite low, or, as he was quoted in this NYT article:
“We have only two things to say about Tim Geithner, who we do not know: A.I.G. and Lehman Brothers,” said Christopher Whalen of Institutional Risk Analytics. “Throw in the Bear Stearns/Maiden Lane fiasco for good measure,” he said.
“All of these ‘rescues’ are a disaster for the taxpayer, for the financial markets and also for the Federal Reserve System as an organization. Geithner, in our view, deserves retirement, not promotion.”
Ouch.
“He was in the room at every turn of the crisis,” said another executive who participated in several such confidential meetings with Mr. Geithner. “You can look at that both ways.”
This Wall Street Journal editorial is similarly bearish. Geithner was in the room on every bad decision, and a few non-decisions.
Or, just consider some of the questions that should be put to Geithner. They are significant.
My view is that he is a bright guy who is out of his league in trying to deal with the aftermath of the buildup in leverage, that has lead to the collapse in leverage that we all face. Now, I can’t be that critical of him, because he has been cleaning up after the errors of many, a small fraction of which he bears some responsibility for.
No one is equal to solving this crisis. It is bigger than our government, which made an intellectual mistake in thinking that it could promote prosperity through Greenspan-like monetary policies, which almost everyone lionized while they were going on, except a few worrywarts like me, James Grant, etc., who followed the buildup of leverage in the Brave New World. Now we face its collapse; let’s just hope and pray that it doesn’t lead to worse government than what we have now.
PS — If I were offered the opportunity to fix things, I would take it, and:
- Create a new RTC for the small stuff
- Create a new chapter in the bankruptcy code for Too Big To Fail institutions
- Create a means of resolving home foreclosure issues in a manner similar to Chapter 11, which would lead to more compromises.
- Institute true tax reform that eliminates the sheltering of income, and eliminates all tax preferences.
- Wind down the Fed’s current “solutions”
- Begin inflating the currency to force up the value of collateral relative to nominal debt levels
The last one I like the least, but I’m afraid it would have to be done. Phase two would be:
- Move to a currency that is gold-backed.
- Replace the Fed with a currency board.
- Create a new unified regulator of all depositary institutions.
- Slowly raise bank capital requirements, and make them countercyclical.
- Bring all agreements onto the balance sheet with full disclosure.
- Enforce a strict separation between regulated and non-regulated financials. No cross-ownership, no cross-lending, no derivative agreements between them.
- Bar investment banks from being publicly traded, and if regulated, with strict leverage/risk-based capital limits.
- Move back to balanced budgets, and prepare for the pensions/entitlements crisis.
On that last one, there are few good solutions there, but we would have to try anyway. So it goes.
November 25th, 20082:14 pm at
Bob Rubin clearly belongs in jail for what he has done in promulgating deregulation as an aider and abettor of Greenspan as well as trying to turn Citigroup into another brittlely leveraged Goldman Sachs. Now we have his stooges as the newly “changed” economic team.
November 25th, 20086:07 pm at
Quite clearly, Obama can not undertake this program.
I believe Obama is one of the outliner what American Politics can throw up. To assume American Political System to ‘cream up’ leaders who can undertake anything like outlined above is to except miracles from our leaders. Some miracles have happened, but to expect another one who can undertake this bull work is to live in fools paradise. Not going to happen.
November 26th, 20088:47 am at
David,
You list some very sane solution suggestions.
I would move “a currency that is gold-backed” to the top of the first list. Such a move would eliminate the need for so many of these complex derivatives and which help inflate the debt/GDP ratio.
As for Obama’s advisors (economic or other), I fear he and the country are placing too much hope on finding just the right expert, the smartest person, to solve this mess. Markets are far superior than any small group of experts (see Federal Reserve), so what we need are folks who can restore more normal incentives to our system. A gold-back currency would help in this regard as well.
Thanks for sharing your insights.
Russ
November 26th, 200812:58 pm at
Russ Wood: “I would move “a currency that is gold-backed” to the top of the first list. Such a move would eliminate the need for so many of these complex derivatives and which help inflate the debt/GDP ratio.”
I don’t know why so many people incorrectly believe that a gold-backed currency would be any different. Did everyone forget various bubbles and busts in the 1600’s, 1700’s, and 1800’s? In particular, how about the Long Depression (1873)?
I also don’t get the bizarre view held by some that the government can’t go on a spending spree if it chooses to. Did everyone forget that USA was on a quasi-gold-standard in the 40’s?
Perhaps the best example is the 1800’s and in particular the Civil War. Did everyone forget that the government debt to GDP skyrocketed? Look at this chart and the 1860’s and tell me if you still believe that the government cannot borrow like crazy with a gold standard.
Except for the goldbugs, who obviously have a selfish interest, gold-backed currency would do very little other than impoverish everyone during contractions. The money supply can contract very rapidly and, well, as it has always been through history, those owning the gold, which is almost always the wealthy (except in some rare cases when no one cares about gold eg. modern day India), will end up “enslaving” the population. At least with inflation, the typical person without high wealth at least has the option of pursuing consumption (i.e. spend now and enjoy life).
November 26th, 200812:59 pm at
Sorry… forgot the chart (I can’t vouch for its accuracy but I believe it’s correct):
US debt to GDP
November 26th, 20083:42 pm at
Sivaram Velauthapillai:
You seem to have your own set of misconceptions about gold standards.
The various bubbles and busts in the 1600s, 1700s, and 1800s that you mention were either related to 1) fiat money systems or 2) large discoveries of gold in the “new world” rapidly increasing the money supply (which can’t really happen anymore, since none of the known gold reserves amount to more than a small fraction of “above ground” gold). Also, that 1873 “Long Depression” that you mentioned was caused by a period of overexpansion and overcapacity that occurred in the years leading up to 1873. Since the gold standard was introduced in 1873, you can harldy blame events of the preceding years on a gold standard that wasn’t in place.
“I also don’t get the bizarre view held by some that the government can’t go on a spending spree if it chooses to. Did everyone forget that USA was on a quasi-gold-standard in the 40’s?”
Note your use of “quasi-gold-standard” and think about what you just wrote–the US wasn’t really on a gold standard since the holders of dollars were turned away when they tried to redeem their dollars for gold.
Your last paragraph is the most insane thing that you wrote. “Gold-backed currency would do very little other than impoverish everyone during contractions.” As opposed to impoverishing everyone through expansions and contractions? Let’s use the current U.S. fiat monetary system to refute your point. Since the 1970s, we now tend to have two earners per home instead of one and the gap between the rich and poor has expanded rapidly throughout the entire period (both as a proportion of income and ownership of assets). You should also take note of the obvious attenuating properties of a real gold standard.
A gold standard might not be practical or good, but your points are completely wrong (all of them). You clearly don’t have a clue which countries have had a gold standard in which years. I don’t even know where to start with you (lack of) understanding of economics.
yikes
November 26th, 20084:38 pm at
Matt,
it depends on how strictly you define a so-called gold standard but here is what Wikipedia says:
“”"”
The U.S. adopted a silver standard based on the “Spanish milled dollar” in July 1785. This was codified in the 1792 Mint and Coinage Act. This began a long series of attempts for United States to create a bimetallic standard for the US Dollar, which was to continue until the 1930s. Because of the huge debt taken on by the US Federal Government to finance the Revolutionary War, silver coins struck by the government left circulation, and in 1806 President Jefferson suspended the minting of silver coins. The US Treasury was put on a strict “hard money” standard, doing business only in gold or silver coin as part of the Independent Treasury Act of 1846, which legally separated the accounts of the Federal Government from the banking system.
“”"”
For all intensive purposes, the US was on a gold standard long before 1873. I’m not sure why you say it was started in 1873. Maybe it doesn’t fit your definition of ONLY gold being used as currency but if you allow the gold standard as possibly including the use of silver as well as gold, then USA was on a gold standard for most of the 1800’s, and was on a silver standard as far back as the late 1700’s.
The US was also on a quasi-gold-standard for most of the 1900’s, until the early 1970’s. It was quasi because it didn’t apply to Americans. But it did apply to everyone else. My understanding is that anyone was able to swap US$ for gold all throughout the 1900’s (until 1970’s.)
Your argument that we can’t discover new gold supplies so we won’t get large money supply increases (to cause bubbles) is a weak argument. We already have huge quantities of gold that is not counted as gold because it is uneconomic to mine. If the gold price increases you will see huge increases in gold supply.
In any case, my main argument is that a gold standard (or any hard currency standard) doesn’t prevent the buildup of government debts. As I showed in the chart, there was a massive increase in US government debt in the 1870’s. You have no argument against that other than claiming it is not a perfect gold standard…
January 15th, 20093:42 pm at
won’t moving to a gold based currency standard mean that the US economy will shrink to that size. example
If there is enough gold in Fort Knox to back 14 billion dollars. Won’t that mean at best the US economy can be no bigger that that? and if thats the case, then for every 1000 old dollars (current dollar) will be replaced by 1 new dollar (gold backed version). and won’t that mean that the business that sell products that don’t cost less than 1000 old dollars will have to decide if they can stay in business at all? an example of that would be restaurants, grocery stores, electronic stores, and many others. and some manufactures will also have that same decision.
January 16th, 20091:19 am at
We would still have dollars, credit cards, etc., under a gold standard. The difference is that you would have the option to redeem your dollars for gold, or exchange your gold for dollars at a fixed price.
It doesn’t affect ordinary commerce, but it takes monetary policy out of the hands of the government.