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.”


“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:

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.