Tim Geithner — obstructionist?

Surely Treasury Secretary Geithner is a Republican. He must be since he is publicly willing to hinder the implementation of even a modest reform such as this:

…[T]he G20 will press ahead with the creation of two separate systemic bank lists, the first with an estimated 20 global banks whose failure would pose a risk to the international financial system. The second would be a country-by-country list of banks that are systemically important within their home economies, but pose little danger to the world.

To achieve these goals, the Dodd-Frank Act (H.R. 4173) authorized The Financial Stability Oversight Council to identify those banks the failure of which would threaten the financial system. Geithner chairs the Council. However, the Financial Times
reports that "Tim Geithner has questioned the feasibility of identifying financial institutions as 'systemically important' in advance of a crisis, just as the regulatory council the Treasury secretary chairs is supposed to start doing precisely that." Geithner made this argument in defense of his reticence: "What size and mix of business do you classify as systemic? … It depends too much on the state of the world at the time. You won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock." This appears to be an argument from ignorance or, more precisely, a confusion of evidence of absence (we do not know with certainty what a future state of the world will be) with absence of evidence (we cannot probabilistically predict what a future state of the world will be). I strongly suspect that of all possible future states of the world, those which we believe to be feasible possibilities are also those which resemble the world as we know it. Using this point we can infer a practical rule: Some future states of the world are offensive but can be avoided if actions are taken in the present that are meant to avoid these futures.

Geithner seems unwilling to tolerate that ambiguity entailed by the presence of any regulatory mechanism. To be sure, his willingness to avoid regulation which is uncertain to work as intended — that is, regulation which will not prevent a systemic crisis — likely depends upon his knowing that present and future American taxpayers can be made to bear the risks and pay the debts of a crisis prone financial system.

Another concern about the Dodd-Frank regulatory mechanism believed it would provide large banks with another set of rules to game. Perverse effects would supposedly follow from this rule-gaming behavior. Should the possibility of perverse outcomes deter efforts to implement regulations? No. I make this claim because one could concede the point that regulations can be gamed in every instance without also concluding that any given regulatory regime is equal to every other regulatory regime. Some regimes are preferable to others. Thus, the mere possibility that new regulations can be gamed implies that regulations ought to be designed to achieve desired results along with the knowledge that these regulations may need to be updated in the future.

Should these be problems to worry about that one would want to scuttle a part of the Dodd-Frank reforms? I doubt this. After all, the Great Recession proved that an under-regulated financial system can and will generate bubbles and instability, crises and bailouts. It is unsurprising, then, that Open Congress harshly and rightly evaluates Geithner's reserve:

This sounds to me like an excuse to not do your job. If you're serious about keeping a handle on systemic risk, you'd err on the side of caution and make as inclusive a list as possible so you don't accidentally let firms through to take advantage of their lower capital and leverage requirement and get too interconnected. Instead it sounds like Geithner is inclined to keep a short list and wait until things get messy before making judgements, because, you know, that's when the best decisions are made. Right.

This kind of waffling when it comes to actually taking decisive regulatory action is exactly why proponents of limiting bank size think hard-and-fast rules are the way to go.

This article was cross-posted to OpenSalon and FireDogLake

Obamanomics: Wrongheaded?

According to Mike Whitney, Obama's economic recovery program is very much wrong since it mostly looks set to apply additional monetary WD-40 to the credit market. Even the program's job creation component, the hoped-for byproduct of its stimulus package, means to provide coverage for the demand constraints now afflicting the economy. These constraints take the form of rising unemployment and underemployment, long-term real wage declines, massive personal debt, etc. Yet the stimulus wishes to undo these constraints mostly by incurring additional collective and personal debt. Whitney rightly emphasizes this point along with some of the consequences it entails:

The Obama economic recovery plan is a misreading of the real problem, which is not the availability of credit, but debt. Bernanke, Summers and Geithner are approaching the issue from the wrong end; they want to stimulate the economy through credit expansion and more red ink. This is just more of Greenspan's bubblenomics: the endless boom and bust cycle triggered by low interest crack sold to credulous speculators. The only ones who benefit are the Wall Street insiders….

It should come as no surprise that common Americans now rightly fear the consequences produced by their debt-driven consumption when their consuming will occur during an economic crisis, especially one which promises to be long and difficult. They rightly see the problem as a matter of providing for their personal security, which is, after all, their responsibility. It is because they are afraid and because their fears are rational that they

…will not lead the way out of this economic downturn. It's physically impossible. The country is undergoing a generational shift from profligate consumerism to thriftiness. Stimulus alone won't get people spending. Salaries will have to go up to make up for losses in retirement funds and housing prices; and the face-value of mortgages and credit card debt will have to be written down. Otherwise, spending will continue to falter and the economy will tank. No economic recovery plan has a chance of succeeding if it doesn't address these two key issues: higher wages and debt relief.

Naturally, the Federal Reserve does not want to deal with the underlying causes of the crisis. After all, they're in the credit-peddling business. The Fed's job is to generate business for the financial community, which means creating a favorable environment for credit expansion.

Indeed…. What the crisis demands is a national commitment to debt forgiveness and economic risk reduction for society as a whole, reindustrialization and even unionization! To be sure, a project with these features can only look Quixotic to most Americans.

In any case, the Fed and the government now in power care about more than just securing America's credit-peddling business. Among other things, they care about their internal and external authority, about social stability and system coherence, about their political legitimacy and America's military effectiveness. It is because they care about these specific ends that they must also master the numerous conflicts and related social costs the crisis promises to generate. Most notably these will include: The social disintegration typical of an economy boasting collapsing labor and consumer markets. From what, one might wonder, would most Americans draw upon to construct a collective identity, a sense of national purpose? What would motivate them to sacrifice their short-term well-being if they lack the imperial majesty of Pax Americana as well as immediate access to an abundance of goods and services? If neither guns nor butter are present, if America is not the City on the Hill, the exceptional and indispensible nation, then what? For, why would Americans submissively comply with the rigors of the American way of life if they lack the real and illusory benefits that were once part of that life? They would give their consent to their governors because they have a right to sleep under a bridge?

Out with the old, in with the old

Hillary Clinton — Secretary of State

The New York Times reports that Hillary Clinton will become Barack Obama's first Secretary of State.

Timothy Geithner — Secretary of the Treasury

Bloomberg reports that Geithner will become the next Secretary of the Treasury. He currently heads the Federal Reserve Bank of New York. Wall Street noticed, and approved.

Announcements will be made after Thanksgiving.