April 16, 2009
I guess it’s because I was using TurboTax to work on my income tax return for the past few days, that I was constantly reminded of Treasury Secretary “Turbo” Tim Geithner. Criticism continues to abound concerning the plan by Turbo Tim and Larry Summers for getting the infamous “toxic assets” off the balance sheets of our nation’s banks. It’s known as the Public-Private Investment Program (a/k/a: PPIP or “pee-pip”). I recently read an article by a couple of Economics professors named Laurence J. Kotlikoff (Boston University) and Jeffrey Sachs (Columbia University) wherein they referred to this plan as the GASP (Geithner And Summers Plan). Their bottom line:
The Geithner-and-Summers Plan should be scrapped. President Obama should ask his advisors to canvas the economics and legal community to hear the much better ideas that are in wide circulation.
One of the harshest critics of the PPIP is William Black, an Economics professor at the University of Missouri. Professor Black gained recognition during the 1980s while he was deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC). During that time, the FSLIC helped block an attempted sale of Charles Keating’s Lincoln Savings and Loan, which was subsequently seized by the Federal Home Loan Bank Board, despite opposition from five United States Senators, who became known as the Keating Five. A recent interview with Professor Black by Jack Willoughby of Barrons revealed that Black’s aversion to the PPIP starts with the fact that it is being implemented by Geithner and Summers:
We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.
I particularly enjoyed Black’s characterization of the PPIP’s use of government (i.e. taxpayer) money to back private purchases of the toxic assets:
It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what’s so appalling — numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.
The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.
For the past month or so, I’ve been hearing many stock market commentators bemoan the fact that there is so much money “on the sidelines”. In other words, people with trading accounts are letting their money sit in brokerage money market accounts, rather than risking it in the stock markets. I believe that many of these people are so discouraged by the sleazy environment on Wall Street, they are waiting for things to get cleaned up before they take any more chances in a casino where so many games are rigged. In the Barrons interview, Black made a point that reinforced my opinion:
His (Geithner’s) use of language like “legacy assets” — and channeling the worst aspects of Milton Friedman — is positively Orwellian. Extreme conservatives wrongly assume that the government can’t do anything right. And they wrongly assume that the market will ultimately lead to correct actions. If cheaters prosper, cheaters will dominate. It is like Gresham’s law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.
By asking Professor Black a few simple, straightforward questions (in layperson’s language) Jack Willoughby got some fantastic and refreshing information in return (also in layperson’s language) making this article a “must read”. As Black and many others have pointed out, these huge financial institutions must be broken down into smaller businesses. Why isn’t this being undertaken? Professor Black looks to where the buck stops:
Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.
These Democrats want to maintain America’s pre-eminence in global financial capitalism at any cost. They remain wedded to the bad idea of bigness, the so-called financial supermarket — one-stop shopping for all customers — that has allowed the American financial system to paper the world with subprime debt. Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.
Another critic of the Geithner-Summers PPIP is former Secretary of Labor, Robert Reich. Reich is now a professor at the University of California at Berkeley. His April 6 blog entry discussed the fact that the top 25 hedge fund managers earned a total of $11.6 billion last year:
But what causes me severe heartburn is that these are exactly the sort of investors Tim Geithner is trying to lure in to buy troubled assets from banks, with an extraordinary offer financed by you and me and other taxpayers: If it turns out the troubled assets are worth more than these guys pay for them, they could make a fortune. If it turns out the assets are worth less, these guys won’t lose a thing because we taxpayers will bail them out. Plus, they get to pick only the highest-rated of the big banks’ bad assets and can review them carefully before buying.
What a deal. Why can’t you and I get in on this bonanza? Because we’re too small. The government will designate only about five big investor funds — run or owned by the richest of the rich — as potential buyers. Hedge funds fit the bill perfectly.
It’s nice to know that more and more prominent individuals in the world of economics and public policy are taking the ethical stand against a program based on the principle of “socialized loss and privatized gain”. I just hope President Obama doesn’t take too long to realize that these people are right and that the Geithner – Summers team is wrong.
Rethinking The Stimulus
February 22, 2010
On the anniversary of the stimulus law (a/k/a the American Recovery and Reinvestment Act of 2009 — Public Law 111-5) there has been quite a bit of debate concerning the number of jobs actually created by the stimulus as opposed to the claims made by Democratic politicians. For their part, the Democrats take pride in the fact that John Makin of the conservative think-tank, the American Enterprise Institute, recently published this statement at the AEI website:
A few months ago, I had a discussion with an old friend and the subject of the stimulus came up. My beefs about the stimulus were that it did not offer the necessary degree of immediate relief and that a good chunk of it should have gone directly into the hands of the taxpayers.
I recently read a blog posting by Keith Hennessey, the former director of the National Economic Council under President George W. Bush, which expressed some opinions similar to my own on what the stimulus should have offered. Although Mr. Hennessey preferred the traditional panacea of tax cuts as the primary means for economic stimulus, he made a number of other important points. With so much fear being expressed about the possibility of a “double-dip” recession, our government could find itself in the uncomfortable position of considering another stimulus bill. If that day comes, we have all the more reason to look back at what was right and what was wrong with the 2009 stimulus.
Keith Hennessy began with this statement:
At the end of his second paragraph, he got to the part that was music to my ears:
A bit later in the piece, Hennessey said some things that probably caused a good number of the CPAC conventioneers reach for the Tums:
Of course, Hennessey complained that “The law was poorly designed and inefficient” — in part because the money was funneled through federal and state bureaucracies — another valid point. Then, he got to the important issue:
In case you’re wondering what “transfer payments” are — you need to think in terms of “wealth transfer”. In this case, it concerns situations where the government gives away money to people who aren’t rich. A good example of this was the stimulus program that took place under President Bush. Individuals with incomes of less than $75,000 received a $300 “stimulus check” and households with joint incomes under $150,000 got $600.
My own stimulus idea would involve a “tax rebate” program, wherein the taxpayers receive a number of $50 vouchers based on the amount of income tax they paid the previous year. The recipients would then be instructed to go out and buy stuff with the vouchers. So what if they spent it on imported merchandise? The American retailers and shipping companies would still make money, finding it necessary to hire people. The vouchers would display the person’s name and address. In order to use the vouchers, identification would be needed, so as to prevent resale. The maximum amount of cash change one could get back from a voucher-funded purchase would be $10.
Hopefully, we won’t need another stimulus program. However, if we do, I suggest that the government simply give us vouchers and send us shopping.