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Black And Reich

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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.

The High Road To Nowhere

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August 21, 2008

He’s blowing it.  With each passing day, the opinion polls show increasing momentum by the McCain campaign.  For their part, the Democrats have put together a lineup of really uninspiring orators for next week’s Convention.  The schedule for this event will include such former stars as Jimmy Carter, Bill Clinton and John Kerry.  (At least they had the sense to leave Mike Dukakis and Walter Mondale off the program.)  What is Jimmy Carter going to discuss?  … “How to Facilitate Runaway Inflation”?  Is Bill Clinton going to explain “How to Beat a DNA Test”?  (John Edwards will be listening to that one with abated breath.)  We can count on John Kerry to present a coma – inducing diatribe about “How to Snatch Defeat from the Jaws of Victory”.  Meanwhile, Obama appears to be writing his own handbook on that subject.  After folding on the FISA (wiretap) bill and capitulating to the public’s ignorance on the offshore oil drilling controversy, he now appears ready to undermine his campaign theme of Change, by selecting a running mate, who has spent nearly his entire adult life in the Senate:  Joe Biden.

Obama would be better off running with his best choice: Virginia Governor Tim Kane.  Does Barack really believe that some chucklehead, watching “reality TV”, is going to be concerned about whether Kane has the adequate foreign policy acumen to attend the funerals of foreign dignitaries on behalf of the United States?  The people of Virginia will support the team that includes a fellow Virginian.   Southern voters will not vote for a ticket consisting of two individuals who put sugar on their grits.  Catholics will vote for the candidate with a Catholic running mate, despite McCain’s anti-abortion pander.

At this point in the campaign, the often – repeated mantra of the commentators is that “negative campaigning works”.  Obama has expressed his belief that by taking the “high road”, he will somehow be immune to any negative attacks.  If he wants to win this election, he must face up to the need to launch his own negative character attack against McCain.  For starters, he must restrain himself from saying nice things about his opponent.  He should then draw some attention to the following issues:

1.)  McCain’s divorce from his first wife, Carol, and Ross Perot’s feelings about that.  In the June 8 issue of Britain’s Daily Mail, Sharon Churcher discussed Perot’s reaction to how McCain ditched Carol upon his return from Viet Nam, when he first learned of her crippling injuries:

But Ross Perot, who paid her medical bills all those years ago, now believes that both Carol McCain and the American people have been taken in by a man who is unusually slick and cruel – even by the standards of modern politics.

“McCain is the classic opportunist.  He’s always reaching for attention and glory,” he said.

“After he came home, Carol walked with a limp.  So he threw her over for a poster girl with big money from Arizona. And the rest is history.”

2.)  McCain’s involvement in the “Keating Five” scandal.  In 1991, McCain was criticized by the Senate Ethics Committee as having exercised “poor judgment” in connection with the Federal Home Loan Bank Board’s investigation of Lincoln Savings and Loan.

3.)  Obama’s staffers should contact McCain’s fellow inmates from the Hanoi Hilton, to obtain a little more information than “no comment” as to their feelings concerning McCain’s candidacy.

4.)   Get in touch with McCain’s Vietnamese captors to find out whether he provided them with any worthwhile information, justifying  the reason for their offer of early repatriation, which he declined.

There’s a dirt in them there hills.  Obama’s camp has to go dig for it.  If they find it  . . .  they damned – well better use it.

It’s a dirty world out there, with such dirty players as: Vladimir Putin, Hugo Chavez and the Chinese baseball team.  Unless he really can perform a miracle, the guy with the halo over his head won’t be moving into 1600 Pennsylvania Avenue.  Of course, he could always trade in the halo for a nice set of darts.