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.
Painting Themselves Into A Corner
April 27, 2009
During the April 21 – 24 timeframe, ABC News and The Washington Post conducted a poll to ascertain President Obama’s approval rating. The poll revealed that 69 percent of Americans favor the job performance of our new President. Fifty percent of those polled believe that the country is on the right track (compared with 19 percent just before Obama’s inauguration). This seemed like a particularly strong showing since, just one week before this poll began, we saw the anti-taxation “tea parties” that had been promoted by Fox News.
A recent article by Ben Smith and Jonathan Martin for Politico revealed that in some states, the “tea parties” have helped energize the Republican base:
As the article by Smith and Martin pointed out, this “rebellion” is taking place at exactly the time when many Republican Party leaders are tacking to the center and looking for someone like Utah Governor Jon Huntsman as a possible Presidential candidate for 2012. Nevertheless, as the article noted, rank-and-file Republicans outside of Washington have no desire to adopt more moderate views:
Many of those comprising the Republican base appear to be motivated by antipathy toward the increasing acceptance of gay marriage, rather than by a reaction to all of the bailouts that have been taking place. In fact, I was surprised to observe, during the extensive “tea party” coverage, that none of the protesters were upset about the bank bailouts or Treasury Secretary “Turbo” Tim Geithner’s use of the Federal Reserve to manage the bank bailouts in furtherance of his attempts to avoid legislative oversight. I guess Fox News had not primed the protesters for that sort of outrage.
The Politico article by Smith and Martin reveals that “cultural issues” remain as the primary concern of the Republican base. Meanwhile, Newt Gingrich is trying to position himself as the next Republican standard bearer. Those touting the “sanctity of marriage” (including the Catholic Church) don’t seem particularly concerned that Newt has been married three times. Newt’s vision for the future is the same vision he was seeing almost twenty years ago: lower taxes. If others within the Republican Party have a broader vision and feel the need to expand their appeal to the voters, they can expect plenty of opposition from the party’s base — and therein lies the problem. Newsweek‘s Howard Fineman has written extensively about how the political primary system works to the benefit of political candidates with the most extreme views. This is because the only people who vote in political primaries are those with strongly held views and most of them come from the extremes. This is why wing-nuts such as Minnesota Congresswoman Michelle Bachmann get nominated. In the absence of any strong moderate or centrist uprising within the Republican ranks, the GOP could be destined to find itself marginalized. It’s beginning to appear as though the only way for promising, new, centrist Republicans to get elected is to run as independents in the general elections. Once elected, they can reclaim the “high ground” within the party. In the mean time, Republican leaders are either unconcerned by or oblivious to the fact that they are painting themselves into a corner by continuing to pander to their base.