On the Treasury’s Curious Denial That Geithner Blocked Deal on Irish Debt

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This is getting interesting. The US Treasury has roused itself to issue a narrow denial of an op-ed in the Irish Times by one of Ireland’s most highly respected economists (by virtue of his having predicted a very severe housing crash), Morgan Kelly. To recap briefly, Kelly said that the IMF was willing last November to haircut €30 billion of unguaranteed bonds by roughly two-thirds on average, but that Geithner’s disapproval on a conference call killed the idea:

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way.

The Irish Independent today reported on the Treasury’s objection:

The US government last night rubbished a claim that one of its most senior officials “torpedoed” a plan to allow Ireland to write-off some of its bank debts….

Last night, a senior US official said this report was “inaccurate”.

The official pointed out the ECB and the European Commission (EC) did not want to impose haircuts on bondholders who loaned money to Irish banks.

“The ECB and EC were both dead opposed and they are decisive. The US is not a decision maker on European issues,” the official said.

Ahem. Notice the statement. It does not say that Geithner was not against the restructuring, merely that his opposition made no difference.

But this finesses what Kelly discussed, which is that Geithner effectively undercut the IMF (notice their complete absence from the Treasury account). As Kelly indicated in his op-ed, the Irish strategy was to hold off on a rescue, since Portugal and Spain would need to be dealt with first, and that would improve its bargaining position. As Richard Smith indicated in a series of posts last year, the Irish debt problem was not a government deficit mess but a banking sector lending binge mess, primairly that of Anglo Irish. The notion was to press for a deal that involved a banking sector rescue only rather than channel the rescue through the government, effectively making the taxpayers responsible. As Kelly recounted:

On November 16th, European finance ministers urged [finance minister Brian] Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown.

At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.

Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.

And no less than IMF chief Dominique Strauss-Kahn had given coded support in public for the Irish position. This Bloomberg report is from November 13:

The International Monetary Fund stands ready to help Ireland if needed, its managing director said, as market concern about the country’s debt crisis continues.

“Everybody knows that the situation with Ireland, it’s a difficult situation,” IMF Managing Director Dominique Strauss- Kahn told reporters today in Yokohama, Japan. “So far I haven’t received any kind of request. I think they can manage well. If at one point in time, tomorrow, in two months or two years, the Irish want support from the IMF, we will be ready.”….

Strauss-Kahn, who is attending this weekend’s Asia-Pacific Economic Cooperation forum, also told reporters today that Ireland’s debt problems are mostly linked with “one big bank” and are different from those of Greece.

“It’s not the same thing as Greece’s problem,” which was caused by a lack of economic competitiveness in addition to fiscal woes, he said.

Notice the strategy of the ECB was to force a rescue on Ireland even though the need was not imminent. So Strauss-Kahn saying that he was ready when the Irish were ready but “I think they cam manage well” was pointedly standing aside from the matter. This is consistent with the Kelly account:

The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.

In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.

The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30 billion of their capital, to a deal that its negotiators privately admit will end in Irish bankruptcy. Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.

Now in fairness, what this depicts is a divided Ireland (the Finance Minister versus the governor of the central bank, who also happens to be aligned with the ECB) while the IMF is trying to fight an uphill battle with the ECB to get a more realistic deal. As we have said repeatedly, Ireland is the poster child of “austerity does not work”. Its nominal GDP has fallen 20% since steep budget cuts were implemented, making its debt to GDP ratio worse.

So why was what Geithner said on the call probably more important than the Treasury spokesperson suggested? First, as anyone who has spent a lot of times in meetings can attest, a person who is seen as influential or knowledgable, even if they do not have a formal decision-making role, can wind influencing a decision. Indeed, the theoretical outsider can has more sway by being perceived to be objective.

And let us not forget: the US has more votes on the IMF board than any other nation, and Geithner is the US’s governor. Do you think his expressing a negative view of a haircut might have some influence on the IMF?

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  1. yoganmahew

    Is the Irish property bubble being airbrushed out of history?

    There’s a fiscal deficit of 15bn euro excluding interest payments on debt. That’s down to increased social security payments and runaway bubble revenue spending (government spending doubled between 2000 and 2008).

    Austerity simply hasn’t happened – GDP fell with the bursting of the bubble – it predated austerity measures. Many of the measures are less than the deflation that has occurred. Some are entirely spurious – deferring payrises that had been agreed and capital spending that was planned.

    GNP has risen for the last three quarters. GDP is vastly inflated (to the tune of 20%) by transfer pricing by multinationals that funnel profits through Ireland to the Netherlands and on to tax havens beyond (the double Irish and the Dutch sandwich).

    With regard to Mr. Honohan – the IMF were in town already. Government ministers were denying a bailout was being sought, that it was in progress, that the IMF were in town. There was an electronic run on the banks that has continued (look at the Central Bank deposit figures and the increasing reliance of Irish banks on ELA from the ICB). The country was near panic.

    No political party in Ireland is willing to cut the deficit at a significant pace. You omit the part of Mr. Kelly’s article where he says that the deficit must be cut to zero in short order to be able to default. You simply cannot expect that a country can default and immediate look for funding to continue spewing money to the best paid politicans and senior civil servants in Europe. How does this sit with your dislike of austerity? How do you propose that a country funds itself without a balanced budget?

    Mr. Lenihan’s negotiating position was not credible within Ireland; I doubt it was outside. Sheriff Bart in Blazing Saddles may escape lynching by threatening to shoot the sheriff, it doesn’t cut much ice with creditors that know that you need the money.

    Ireland is playing the poor mouth in a fur coat…

    1. Yves Smith Post author

      I suggest you consider the view of Ambrose Evans-Pritchard, who is most decidedly not a liberal, from an article at the end of November:

      Let me add that the ECB ran a monetary policy that was too loose even for the eurozone as a whole, holding rates at 2pc until well into the credit boom and allowing the M3 money supply to expand at 11pc (against a 4.5pc target). The ECB breached its own inflation ceiling every month for a decade. It did this to help Germany through its mini-slump, and in doing so poured petrol on the bonfire of the PIGS. So please, NO MORE HYPOCRISY FROM BERLIN.

      The truth is that the EMU venture is one of shared culpability. Yes, the Irish should have regulated their banks properly and restricted mortgages to a loan-to-value ratio of 80pc, 70pc, or 60pc, forcing it down as low as needed – as Hong Kong and Singapore do – to stop idiotic bubbles.

      But almost nobody understood the implications of monetary union: in Dublin, in Berlin, in Brussels, and Frankfurt. They were almost all beguiled, (though I doubt that the ECB’s Axel Weber and Jurgen Stark ever were).

      Given this, why should the Irish people accept the current terms? As Citigroup said in a note today, the EU part of the package will come at around 7pc — higher than the fee paid by Greece. This is penal.

      By 2014, interest payments on Ireland’s public debt (then 120pc of GDP) will be €10bn, while tax revenues will be €36bn. This ratio is well above the average default trigger of 22pc, as calculated in a Moody’s study.

      Nominal Irish GNP has contracted by 26pc since the peak. It is nominal, not real, that matters for debt dynamics.

      Ireland is in a classic debt-deflation trap , as described by Irving Fisher in his 1933 Economica paper.

      Yes, it has a very vibrant export sector, and can perhaps claw its way out of the trap – which Greece and Portugal cannot hope to do in time, in my view. In a way that makes the choice even harder.

      The question is, should the Dail vote against the austerity budget on December 7, Pearl Harbour Day. And should the next government – with Sinn Fein in the coalition? – tell the EU to go to Hell, do an Iceland, wash its hands of the banks, and carry out a unilateral default on senior debt by refusing to extend the guarantee?

      The risks are huge, but then the provocations are also huge. And there is a score to settle. Did the EU not disregard the Irish `No’ to Lisbon, just as it disregarded the first Irish `No’ to Nice? Did it not trample all over Irish democracy?

      It is not for a British newspaper to suggest which course to take. Both outcomes are ghastly, but as one Irish reader wrote to me: if Eamon De Valera could defy world opinion in 1945 by sending condolences to Germany for the death of the Fuhrer, today’s leaders need not worry too much about scandalizing those who made them swallow Lisbon.

      Compliance is traumatic. Default is traumatic. What the Irish have before them is a political choice about what they wish to be as a people, and a nation.
      Let me finish with a few words by Dan O’Brien, the Economics Editor of the Irish Times, that caught my eye.

      “Nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach.”


      1. yoganmahew

        Absolutely I’ve read AE-P. There is little I disagree with in his article.

        As he says “Compliance is traumatic. Default is traumatic.”

        What he doesn’t say and that few seem to want to address is that default requires immediate austerity.

        Politically in Ireland, Mr. Lenihan and now his successor Mr. Noonan have decided that it is better for the Irish economy to not close the deficit quickly. This closes off the possibility of default except on terms that your lenders agree to. As Mr. Kelly highlighted – the only lender willing to countenance this was Mr. Osbourne.

        Don’t forget it was Mr. Lenihan’s government that blew the bubble, that it was he and his officials that introduced the guarantee in the criminally incompetent belief that somehow there would be a property crash and the banks weren’t insolvent. It looked foolhardy in September 2008; it looked like it would bankrupt the state. It did. Despite all of this, there is still no bank resolution legislation in Ireland… Mr. Lenihan’s attempts at revisionism cut no ice with me.

        I’ll leave you with a quote from someone I respect:
        “Given that preventing labor unrest is a major priority in the Chinese officialdom, it seems they have a non-win situation: either see worker real incomes squeezed further by rising prices, or deprive some, perhaps many, of jobs by putting the brakes on growth. As much as the entire world has every reason to hope for a happy outcome, soft landings are notoriously hard to engineer even in a command economy like China’s.”
        ( ;) )

        Ireland reached its Minsky moment in late 2008. Debt-deflation is inevitable. So far, 46 billion has been borrowed to pump into the banks, 35 billion of it, at least, never to be seen again. Meanwhile, 50 bn has been borrowed to fund the fiscal deficit and another 40 bn is planned over the next three years. So while the banks are a very large problem, the unsustainable state debt is mostly as a result of the deficit.

        Despite the parlous state of the sovereign, Irish households are in a worse state. All mortgages are recourse. Bankruptcy is an expensive option that takes a minimum of twelve years to work out. There is no house price register, so there is widespread confusion about what prices have fallen to. S&P recently claimed the falls were over with a decline of 31% from peak. Anecdotally (and this from estate agents among others), the falls have already surpassed 60%. With rental yields still below the cost of investment mortgages, there is more to come.

        So what has been done to address this in the past three years? Er, the banks have been asked not to repossess… that’s about it… despite it being part of the MoU with the IMF, there has still been no new personal insolvency regime.

        Some people really need to move away from the “Irish government good, IMF bad” story. Many of the measures suggested by the IMF have been welcomed in Ireland by those not attached to the official Ireland of insiders and backscratchers.

        1. ed_finnerty

          The real killer is the out migration – there is no chance of the economy recovering enough to pay back the loans if the workforce is leaving.

          1. jedimom

            were I the Irish PTB, I would offer immigration to we Americans of Irish descent, there are millions of us here and we need work and homes thanks to Geithner stopping any real mods or a HOLC plan.

            give us a chance at a house and citizenship and we will flock back ‘home’.

        2. Dr. Pitchfork

          That Ireland cannot borrow if it defaults on its bank guarantee is nonsense. Speaking for myself, if Ireland defaulted, I would put every penny I could in Irish bonds. It’s only BECAUSE of the bank guarantee, which is unserviceable without outside assistance, that Irish yields are so high. Obviously it’s the bank guarantee that’s driving the risk premium.

          But even if you were right, wouldn’t a period of forced austerity (no sovereign debt issuance) be preferable to bailing out bank creditors, plus austerity, plus the possibility of a total sovereign default later on?

          1. yoganmahew

            Oh, I agree entirely. Note that Mr. Kelly is talking about default on bank obligations only.

            Despite that, sovereign debt in GNP terms just for the deficit may be unsustainable. This is where the problem comes – many in Ireland are calling for default on ‘everything’. In which case, borrowing becomes difficult.

            Note also that defaulting on bank bonds assumes that the ECB and bondholders will take ownership of the banks and will continue to fund them. The Irish state is not in a position to make good on deposit guarantees (there is no equivalent of DIF or the FDIC). A disorderly collapse of the banks would be, eh, bad.

            The period between hacking off the rotten limb that is the banks and getting market funding is likely to be at least a year as everyone watches and waits to see if Ireland will just go totally bust and if the ECB will step up to the plate. It is because of this delay in getting funding that the state needs a balanced budget (not being within the 3% deficit limit!).

        3. fresno dan

          “What he doesn’t say and that few seem to want to address is that default requires immediate austerity.”

          I think that is a good insight. If one looks at how Geithner acts, one has to ask ‘why’? I would assume that there is such a fear of debt deflation that the US Fed and Treasury appears to believe that any default ANYWHERE can start the avalanche.
          If that is not the answer, I would be interested in other plausible theories.

      2. Martin

        AEP is wrong, when he writes, the ECB broke the inflation target. I know for sure, that at the celebration of the 10th birthday of the Euro, the average inflation for those first 10 years was less than, but close to 2%.
        Before the oil jump in 2008, there were few months, where the inflation was above 2.5%.

        On average the inflation in the Eurozone was quite a bit lower than in the US. And this with higher unemployment, which should reduce the rate as well.

    2. Tao Jonesing

      Before calling for austerity or deficit reduction that is ultimately designed to help out the banksters, shouldn’t we remind ourselves that Ireland’s government incurred that deficit to help out the banksters?

      Even if we consider the Irish property bubble, let’s remember who blew that bubble: the banksters.

      I guess the moral of the story is that everybody else must suffer so that the banksters can keep earning their bonuses.

      1. yoganmahew

        No, the deficit wasn’t incurred to bail out the banksters. As I say above, 15 bn (or 14% of GDP) will be borrowed this year for current and capital spending excluding interest on existing debt (whether bank or not) and excluding bank bailout costs.

    3. disgruntled observer

      Is the Irish property bubble being airbrushed out of history?


      There’s a fiscal deficit of 15bn euro excluding interest payments on debt. That’s down to increased social security payments and runaway bubble revenue spending (government spending doubled between 2000 and 2008).


      Austerity simply hasn’t happened – GDP fell with the bursting of the bubble – it predated austerity measures. Many of the measures are less than the deflation that has occurred. Some are entirely spurious – deferring payrises that had been agreed and capital spending that was planned.
      Ireland is playing the poor mouth in a fur coat…
      Hogan, you’re kinda playing a bit fast and loose here aren’t you. There’re lots I’d agree with with you about, but this we’re playing the poor mouth is getting really tiring. I’d suggest you revisit Professor Karl Whelans post at:
      “Consider this for a second. In 2009 and 2010, the Irish public experienced the two biggest years of fiscal adjustment anywhere in the advanced economic world over the past thirty years. And this left Ireland with a budget deficit of nearly 12% of GDP. After another budget implementing adjustments similar in size to the previous two years, the public then elected a government consisting of parties who proposed a further €9 billion in cuts over the next three years in the case of Fine Gael or €7 billion in the case of Labour.
      By the time the stabilisation programme is supposed to be finished, the cumulative fiscal adjustment will have been close to 20 percent of GDP. Previous academic studies of large adjustments reported cumalative adjustments of 10 percent of GDP as the outer limits of what had been achieved (see here and page 17 of this paper).
      I’m my opinion, those who wish to characterise the Irish public as feckless teenagers have it exactly wrong. Fiscal adjustments are extremely difficult to implement. Every society in the world has powerful institutions and organisations designed to protect vested interests and various types of status quos. Many of these societies would respond to one year of fiscal adjustment on an Irish scale with mass public protests and strikes.
      In Ireland, however, we have largely accepted three years of these adjustments without serious disruption and then voted in a government charged with implementing further large adjustments….”
      “No doubt many of our commenters will continue with their negative characterisations of the Irish people. However, I think the past few years have showed that we are a strong people who have displayed great courage in coping with immense adversity. Requesting a small amount of assistance from our European partners (particularly in relation to the repayment of loans made to insolvent banks by the ECB and European bondholders) to help Ireland avoid a sovereign default—this shouldn’t be too much to ask for if European solidarity is to be more than just a cheap slogan.”

      For my part: I’m almost completely convinced that we can neither cut/tax our way out of this. (Although I’d definitely like to see a higher tax take in this state, in particular on wealth and high incomes.) But to be honest, short of the ECB engaging in direct monetization, I can’t see a way out other than leaving the euro. And I think that’s implicit, but not said in Morgan Kelly’s piece.

      1. yoganmahew

        Well, let’s look at the cuts that have been ‘counted’:
        (see p.48 onwards)
        Jul 2008 – spoof efficiency measures, reduction in expenditure on consultancy, advertising and PR. Tough times…
        Oct 2008 – income levy – fair enough; more spoof containing spending
        Feb 2009 – PS pension levy – fair enough
        Postpone pay rises?! Total spoof
        Apr 2009 – revenue raising – fair enough
        Adjustments to current and capital expenditure? Not building stuff that they don’t have the money for? More spoof.
        Dec 2009 – PS pay cut, welfare cuts – fair enough
        More unspecified spending cuts and cuts in the capital budget – again more spoof

        Only in Dec 2010 has there been a real budget that could be characterised as austerian – three years and 50 bn euro of current and capital borrowing later…

        The problem is the same as the 1980s. There is an unwillingness to either tax or cut current spending. The axe is falling on the capital budget (total anti-cyclical rubbish). There is hiding behind percentages – the Irish president has taken a 10% paycut, but is still paid more than the US president. The Irish Taoiseach (Prime Minister) has taken pay cuts, but is still paid more than the German Chancellor. The Irish civil service has some of the highest paid bureaucrats in the world.

        In case you think I am some sort of tea-party loon, I’m not. I welcome an increase in the tax base to a sustainable level. There just isn’t that much to be gained by squeezing the top. The really rich chums of FF et al have all left the country, their wealth intact. Higher taxes are going to have to be paid by everyone. Lower benefits are going to be received by everyone.

  2. Maju

    What the US says is normally deciding in IMF issues. Sadly China and other new powers are not allowed by the imperialist Breton Woods agreements to get the voice they deserve in these key monetary global institutions, so as of now the IMF is little more than the monetary office of USA/NATO/Trilateral Commission.

    But, as European, what really worries me is the ECB and EC (European Commission) attitudes here: they are not helping at all to solve the problem, much less in terms that are acceptable for the peoples involved. The ECB is not lending enough to member states, the euro is way too high, and the Brussels institutions in general seem to think that making peripheral peoples pay for the errors or abuses of some private banks (clearly the cases of Ireland and Iceland at least, even if very differently managed), often banks owned by other European oligarchies (not even national bourgeoisies!) will bring the EU anywhere else than a total disaster.

    These policies are not just totally unfair for the peripheral peoples, which are being made to pay the abuses of some oligarchies but they are a time-bomb on EU itself because the principle of solidarity has been radically breached, rendering EU meaningless.

    There is just too much emphasis in German or otherwise NW European (oligarchic) interests and meanwhile the rest of the union is being dumped into colonial status. This has such short run that I can’t believe that the Brussels bureaucrats really believe in all this nonsense.

    I feel like riding in a plane run by suicidal pilots who want to crash it.

  3. Hubert

    If not building even more houses means lower GDP – then a lower GDP might not be all bad …… Irish now have more time in the pub; might bring GDP up again.

    1. jedimom

      actually, pub sales have PLUNGED in Ireland. there was just an economic data point released showing pub layoffs/closures and the drop in Irish spending in pubs.

  4. Cedric Regula

    I think the Irish probably backed down when TG leaked the CIA sat photo images of NATO troops massing in Dunkirk.

    I expect a warrant will be issued to arrest Bono soon, the charges being conspiring with Paul Volker to wreak the global financial system and also having sex without a condom. U2 is obviously a clever name for an Al-Qaeda cell, but the cover has been blown.

  5. bill n

    But -why- is Geithner, per @Glen, ” the Financial equivalent of Rumsfeld and Cheney.” ?

    I’ve seen a lot of stuff deriding the G. I read a few of his papers BT (before Treasury). He does not seem like the devil incarnate. I don’t buy that he is in the pay of the Banks. What’s his worldview? I’ve not seen anything on it…

    1. Yves Smith Post author

      Have you not been paying attention? He was behind paying out 100% on credit default swaps to AIG counterparties, as the new Treasury secretary he recommended against tough measures versus the banks (the stress tests and the ridiculous PPIP), made all kinds of promises re transparency for the TARP and reneged (discussed in ECONNED), has acknowledged banks gamed HAMP yet refused to clay back incentives and more generally not taken foreclosure fraud seriously).

      1. john c. halasz

        Actually, I think it’s clear, from what’s plainly been reported in the MSM, that not just Geithner, but Obama himself believe that Hi-Fi is a crucial area of U.S. comparative advantage. Not least because “developing nations” lack “deep” capital markets and U.S. Hi-Fi is supposed to provide their “services”. It’s the same ol’ Wall St./Cold War imperialism, but, as usual, the principals are blind to how much damage they’ve done and are doing to their “brand”.

        1. alex

          Nah, back in the ol’ days we were only out to kill commies. If you lived in a 1st world country they’d try to keep you from going commie by cutting you in on a piece of the action.

          Nowadays anyone who isn’t a banker or one of their cronies is a target. They’re really very internationalist and non-discriminatory, and will happily steal from anyone.

          The only thing I didn’t like about the Irish Times article is where it said “but Geithner, as always, got his way. An instructive, if painful, lesson in … who our friends really are”

          Sure Turbo Timmy is no friend of the Irish, but he’s no friend of the Americans either. Both you and the author have to get out of this nation-state mentality and understand that this is more akin to the Middle Ages. Ceaseless minor wars notwithstanding, royalty and nobility often worked in “international cooperation” and understood that the real targets were the serfs.

  6. anon2

    bill n says: “But -why- is Geithner, per @Glen, ” the Financial equivalent of Rumsfeld and Cheney.”?…I don’t buy that he is in the pay of the Banks….What’s his worldview.”?

    This has been discussed at length in previous posts. You could try these links, for a start:

    Geithner’s Dubious AIG cover-up:


    NY Fed Told AIG to Hide Details of Swaps Payouts to Banks


    1. bill n

      Thanks for responding. I know this stuff. But -why- is G apparently a financial terrorist? It does not seem to me to make sense.

      1. Yves Smith Post author

        He is a protege of Bob Rubin and Larry Summers. He has no financial services industry experience, he isn’t even an economist. He is instinctively a preserver of the status quo, and that status quo is rotten, plus he is intellectually captured by the banks, which compounds his propensity to coddle them no matter how much damage it does to everyone else. He believes everything they tell him and does not appear to seek out independent views. He gives all the right caveats in his speeches so he looks objective, but he’s not.

        See this take on one of his 2007 speeches. It’s an early warning before his colors were clear:


        And another reader’s reaction to the speech and post:


        1. bill n

          Yikes! I think this is right. He’s not a thief. He’s much worse: a believer!

          YS, you nailed it in 2007! In March! I’m in awe.

          You da man – er…

        2. alex

          “He is instinctively a preserver of the status quo …”

          Give the man the benefit of the doubt. Maybe he’s just unusually patient in waiting for his Wall St. payoff (ala Rubin and Summers). A crook I can understand, but if he’s just a lick-spittle not even trying for a payoff, I’ll loose all respect for him.

      2. Paul

        He’s more like Condi Rice. Fail in a truly spectacular way at your job and get promoted despite/because of it.

  7. Albert

    As we have said repeatedly, Ireland is the poster child of “austerity does not work”. Its nominal GDP has fallen 20% since steep budget cuts were implemented, making its debt to GDP ratio worse.

    I keep seeing similar statements from you, but I don’t think the argument ever was that somehow the GDP would not decrease in the short-term from “austerity measures.” Government spending is one of the parts of GDP, so obviously reduced government spending is going to reduce GDP in the short term. The argument is rather that by reducing the absolute debt figure, the debt:GDP ratio will reduce over the long term because less of our money will be wasted paying interest to creditors and bankers and instead will be spent on productive growth.

    The argument is similar to the argument that banks needed to be wiped out in 2008 for the long-term good of the GDP; obviously, in the short term GDP would have been devastated. But the whole point of illustrating the hope as a “V-shaped” recovery was to say that even though GDP would suffer (and debt:GDP would grow) in the short-term, cleansing the system would allow for real economic growth without the parasites and baggage of zombie banks in the long-term.

    It’s completely immoral to put “austerity measures” (understood as making us spend within our means) on the people, especially the poor/elderly/sick, while deficit subsidizing the banksters and corporations at the same time. But the solution is to stop subsidizing the rich creditors, make them actually eat the costs they’ve helped create by defaulting on debts rather than deficit paying them, and balance the budget–which is precisely what Morgan Kelly recommended.

    1. Hugh

      Where even to begin? The US is not Ireland. Ireland is screwed because it does not control its own currency and because its government took on a bunch of banking debt it should never have gone near.

      There is nothing sacred or even particularly relevant about debt/GDP ratios with regard to the US. The use of Treasuries to finance public debt is a holdover from the gold standard and is a subsidy to financial markets through the interest paid on them. We could still deficit spend in this country and never issue another T-bill. We can do this because the US is sovereign in its currency. The only constraint is inflation and that has not been in evidence. The general pattern remains deflationary. The inflation we see in commodities markets is an outgrowth of Fed policies that sponsor speculation in them. Not really the same thing at all.

      Austerity is a bad policy in a recession because it decreases demand on the public side even as it is decreasing on the private one. The idea that this somehow will stimulate growth is simply and patently false. It is like saying that the best way to gain weight is to cut one’s caloric intake and start exercising.

      1. F. Beard

        There is nothing sacred or even particularly relevant about debt/GDP ratios with regard to the US. Hugh

        True. The US should not even have a National Debt. And we should pay it off as it comes due with new, debt-free fiat.

        The use of Treasuries to finance public debt is a holdover from the gold standard and is a subsidy to financial markets through the interest paid on them. Hugh


        We could still deficit spend in this country and never issue another T-bill. Hugh

        The sooner the better!

        We can do this because the US is sovereign in its currency. The only constraint is inflation and that has not been in evidence. Hugh

        The risk of inflation could be greatly reduced if the US allowed genuine private currencies. That way, the US Government would only hurt itself and its payees if it overspent relative to taxation; the private sector could sail merrily along unaffected.

        [snip] The general pattern remains deflationary. The inflation we see in commodities markets is an outgrowth of Fed policies that sponsor speculation in them. Not really the same thing at all. Hugh

        True. Government spending, including the deficit, would only be to cover government costs, not recapitalized the banks on the sly.

      2. Albert

        Way to completely miss the point, O zealous one. Everyone knows austerity measures will not stimulate the economy in the short term.

        1. F. Beard

          Everyone knows austerity measures will not stimulate the economy in the short term. Albert

          Ah yes. Dem “malinvestments” must be purged first?

          What the Austerians fail to realize it that the bust may be as damaging as the boom since both phases are caused by fractional reserve lending.

  8. Hugh

    Yeah, why are we ganging up on Timothy Geithner. He made his bones back during the Asian banking crisis in the 90s when he was the IMF envoy and pushed the policies that made that crisis so much worse than it needed to be. He was head of the New York Fed from 2003 onward and had the best seat in the house to see the housing bubble and the meltdown coming. Did I mention that the NY Fed is as big as the rest of the Federal Reserve banks combined? What was Geithner’s reaction to all this? He praised and promoted financial innovation and diversity saying that this made markets safer. In other words, he was completely catastrophically wrong and totally in accord with the reigning kleptocrats. And when the housing bubble blew up in 2007 and the meltdown hit in 2008, Geithner again was in the best position to, you know, actually do something constructive. What did he do? He helped put together the sweetheart deal with JPMorgan to take over Bear Stearns. He helped make the decision not to intervene with Lehman with the consequences we all know. He helped put together the AIG deal that helped out Goldman Sachs so much. He continues to defend even the most egregious financial instruments like naked CDS. He has run inteference for the banksters at every turn. The financial industry remains as corrupt, unreformed, out of control, and predatory as ever thanks to his unceasing efforts. With a record like that, how could anyone be critical?

  9. IrishGirl

    It was the Irish Times that published Morgan Kelly’s op-ed, not the Independent (your link goes to the Times).

    This is important because the Indo has a very different slant on political/economic affairs to that of the Times (it’s more to the right).

    1. Yves Smith Post author

      Oh, thanks a LOT, will correct the post. And this makes it more interesting, the Times saw the Treasury denial as noise and appears not to have run it.

  10. make do and mend

    @ yoganmayhew, how can you seriously suggest that the Irish state’s total acquiescence to first Irish bankers and then the ECB to give blanket gaurantees on Irish bank debt and then effectively assume the majority of risk on unperforming debt of the banks as a seperate issue from state funding. It is this type of tripe that bankersters, regulators and the ex-Finance ministers foisted on the Irish nation that has landed us where we are. The contingent liabilities of banks affected our ability to borrow in the international financial markets. You cannot disconnect the budget deficits, where borrowing (and other monies) could have covered tax receipt shortfalls until adjustments were made, while ignoring the huge implied risks taken by the govt in relation to bad banks. The budget deficit didn’t affect interest rates for Irish govt borrowing but the opacity and duplicity of govt policy with regard to the banking situation did. Nobody knew the depth and extent of the risks under which the govt had willingly put nation. This drove up the interest rates for Ireland and made borrowing problematic. Put the horse before the cart.

    Before the crisis we had a debt ratio of about 26% to GNP, a large surplus in the national retirement account and decent standing in the bond markets until the banking system aided and abetted by an ideologically bound govt refused at every point to come clean on how badly the entire Irish banking system had been run – not just Anglo. Had we not had a Fianance Minister whose very words where that he “never countenanced” a govt policy that would affect bond holders in any negative manner as the only primary objective of govt policy during this whole sorry period, we could have handled the situation much more advantageously. This expressed sentiment from the ex-finance minsister was hardly a good position from which to negotiate nor was it keeping with past practices during previous banking crises.

    As the housing bubble burst, we needed to address tax receipt shortfalls over time and with a view to stabalising the economy, including employment. Instead we had a govt whose seemingly sole purpose was to ensure that all bondholders shouldn’t be affected by their own decisions about risk and reward. As the opacity increased and the crisis along with it, the govt found scape goats in the Public Sector mainly, but elsewhere also. Had we followed past US or Swedish solutions to a banking crisis, put some clarity into the markets about our predicament, raised taxes a point to two on the wealthy, and used some retirement money to fund shortfalls in a wise manner while restructuring the our income/debt situation we’d be in a far better place today. We’d be paying some sort of premium on borrowed money but not effectively shut out of the markets. Instead, it seems that many still have an agenda to obfusticate, call for privatisation of viable state enterprises (at the cheapest sales prices available) and ultimately blaming the unemployed for being unemployed in a system so stacked against the individual that many are fleeing (immigration).

    Jesus wept.

    1. yoganmahew

      The numbers still do not add up. The deficit is the result of the bubble, not the result of the banksters. Perhaps the deficit would have been manageable without the banks (I called for the banks to be liquidated in late 2008, where were you?).

      Or perhaps the government would have avoided making any decisions, kept its three month summer holidays, and continued to pay itself too much. And the problem would have been delayed, with the result the same.

      The national debt on entering the crisis, 2007, was 25% of GDP. This nets off the NPRF against the gross debt figure. The GGD was 40% of GDP or 50% of GNP. GDP was inflated, probably to the tune of 20% by the effects of the bubble, so realistically debt was over 60% of GNP. Barring accounting tricks, this was already over the Maastricht limit. For a number of years the money put into the NPRF had been borrowed.

      Believing that the financial markets (lenders) would continue to believe the rating agencies and their spoof ratings is a fool’s errand. Ireland was on an unsustainable path from a good while before the financial crisis and this just from the public debt perspective. From the private debt perspective it was far worse.

      By the way, there is no difference between the “Irish state” and the “bankers”. They went to the same schools, they studied the same courses. They are, in blood, one and the other. There is an aristocracy in Ireland based on who you know. That is what led us to catastrophe and the same actors are still in charge and continuing to feather their own nests at the expense of anyone else they can reach to strangle.

  11. Gary Anderson

    Tim Geithner cares less about the people. He only cares about investors and wants everything under the sun guaranteed. He is a Federal Reserve mole who should not be Treasury Secretary.

  12. VM

    How can any of this be credible without the key potato question of – How much, where from and when? Next time they meet in Jackson hole WY they should hop across to Idaho and nail this.

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