Yves here. Several readers wrote, appalled by a Time Magazine article defending Timothy Geithner. Marshall Auerback took it upon himself to examine the quality of its reasoning.
It was only a matter of time before someone emerged to defend Tim Geithner and his actions in light of the odious decision to bail out AIG. Michael Grunwald of Time Magazine (the publication which anointed Ben Bernanke “Person of the Year” in 2009), has likened the attacks on Geithner to someone who “booed Lassie for tracking mud on the carpet after saving that kid in the well”.
In Geithner’s defense, Grunwald trots out the usual “sanctity of contract” arguments, although it is interesting that such a sacrosanct principle was deemed to be irrelevant when thousands of UAW workers were forced to rework their supposedly inviolable contracts to save GM and Chrysler: “Nobody has explained how or with what authority anyone could have invalidated AIG’s contracts with all those far-flung institutions on the fly, or why that wouldn’t have worsened the panic.”
Let’s be clear: contracts are modified all the time, provided the stakes are high enough. It seems absurd for institutions to invoke “sanctity of contract” when the large financial firms who insist on invoking this principle conveniently omit the fact that they would be toast other than by virtue of the munificence of the bailouts Grunwald is seeking to defend.
The putrid nature of these contracts aside, the justification for defending Geithner’s actions seems questionable. The bailouts “worked”, we are told. The banking system is supposedly functioning and the cost of inaction allegedly would have been far greater panic, untold bank runs, and vastly greater economic misery. Well, if one defines the practice of banking as proprietary trading, the creation and sale of toxic instruments such as credit default swaps, and generating profits via credit card loan sharking activities, then yes, the banking system is “working” again. But how is that helping the rest of us? And how does it contribute to future financial stability?
Additionally, the “cost” of TARP (to which Grunwald alludes) allegedly represents a mere 1% of GDP (versus the normal 5%-10% cost normally associated with crises of this magnitude, according to the Cleveland Fed). However, such superficial accounting conveniently ignores the additional trillions of dollars of financial guarantees and hidden subsidies which have boosted banks’ profits, the regulatory forbearance embraced in regard to ‘mark to market’, the reduction of interest rates to near zero, guaranteeing billions of dollars of financial institutions’ debts via the FDIC. All of these “off balance sheet” items helped banks produce “profits”, subsequently paid out in the form of large bonuses…plus ca change… And that is before we have begun to quantify the social and economic costs associated with the privations that come with double digit unemployment.
It is far too premature to argue that the bailouts have worked, so the question of costs and “profits” is nonsensical. The $45 billion in “profits” recorded by the Federal Reserve simply constitutes a reshuffling of assets on the government’s consolidated balance sheet. It was money that could have been well spent propping up real demand in the economy, not “returned” to the Treasury (which can always create new net financial assets).
And there were alternatives to the bailouts: the government, via the FDIC, could have just taken over the operating concerns, repaired the capital bases and carried on offering services, which would have obviated the need to pay out sums to other banks via credit default swaps, given that the issue of solvency is no longer an issue when the liabilities are fully backstopped by the government.
It is worthwhile contrasting the behavior of the government today with the actions undertaken by FDR. During the period in which the banking system was being restructured under Jesse Jones, Chair of the Reconstruction Finance Corporation, the RFC required letters of resignation from the top three bankers of any institution receiving aid. These were not always accepted, but their mere existence was a potent deterrent to repeat behavior.
How many managers have been replaced during the current crisis? How many are being charged for fraudulent behavior? In the words of former S&L investigator Bill Black: “Zero indictments and zero convictions of senior insiders at specialty lending companies.” http://www.commondreams.org/view/2010/01/15-8 It is also noteworthy to contrast the minimal resources provided to the Department of Justice and FBI today with the vast institutional and regulatory support for criminal convictions during the Savings & Loan crisis.
Which leads to a broader point: how is it possible to proclaim the actions undertaken to “save’ the system a success, when we still have little understanding of how the crisis occurred? Why do the Treasury and the Federal Reserve persistently frustrate every attempt to gain better understanding via endless court challenges, obfuscation, lies and delaying tactics? Why is Congress being so dilatory in subpoenaing JP Morgan Chase, Goldman Sachs, Bank of America, Lehman Brothers, Bear Sterns or any other financial institution that pushed toxic mortgage-related securities? Do they too have something to hide?
This is one of the reasons why there is so much outrage being directed at the decision makers who, allegedly made the best of a horrible situation. Grunwald fails to understand this. Yes, there should be (and is) legitimate anger directed at the compulsive gamblers who created that situation (especially given the extent to which they are using taxpayers dollars which rescued their institutions to lobby against reforms designed to prevent a recurrence). But it is totally wrong to assert that “the House of Representatives — with strong support from Geithner and the Obama Administration — has passed a financial-reform bill designed to address all those problems”
The legislative and regulatory responses have been pathetic on the part of Congress, Treasury, the SEC, and the President himself, none of whom have the guts to introduce genuinely tough measures to target the break-up of today’s destructive financial behemoths and restrict the range of activities that created the crisis in the first place. Potemkin-like reforms and pinprick tax increases do not solve the problem. Why not regulate the banks like utilities? If we are to continue the practice of securitization (not my first choice, as I would prefer to maintain a ‘hold to maturity’ standard for the banks), why not rescind SEC rule 3a-7 which exempted securitized structures – the main elements of the so-called shadow banking system – from registration and regulation under the Investment Companies Act, as Professor Jan Kregel has suggested?
Yes, Mr. Grunwald, let’s demand some real fireproofing from our government. If they actually provided that, then we could probably even stomach the notion of Tim Geithner staying on in Treasury, although it’s hard to imagine the architects of our current misfortune suddenly metamorphosing from a wrecking crew into the financial/regulatory architectural equivalent of Frank Lloyd Wright, building safe, sound structures, which last for generations and are admired, rather than reviled.