Being Timothy Geithner III

William Black, a former federal banking regulator who was active during the Saving and Loans crisis of the 1990's, have scathing words about the current Secretary of Treasury, Timothy Geithner, and the administration's effort or lack thereof to reform banks.

In a recent Newsweek interview Black says,

The administration's officials have all been failures as regulators. [Chairman of the Securities Exchange Commission] Mary Shapiro's big thing was self-regulation. That worked real well: the self-regulation of the investment banks. Ben Bernanke [Chairman of the Federal Reserve] I'm also very critical of, but I do give him credit for being willing to drop a lot of his anti-regulatory ideology in the face of the crisis. He literally wrote the book on the Great Depression, but he was not going to go down in history as the person who caused the second Great Depression. Some of the things Bernanke did were very bad, but he is in sharp contrast to Geithner who has been wrong about everything in his career. When Geithner was once answering a question in response to Ron Paul, he said, 'I've never been a regulator.' He was then the President of the New York Federal Reserve, and he purports that he was never a regulator? That is a demonstration of what is wrong with the Federal Reserve banks if the head of the unit doesn't think he's a regulator. He's a disaster.

Mr. Black points out that during the S&L scandal that there were convictions. During the banking scandal there have been none:

During the Saving & Loans crisis, we had over 1,000 convictions that involved insiders and gigantic borrowers. Now we have zero. The FBI did not even begin to investigate the large subprime lenders until March 2007. People would be upset if they had the facts, or if you asked them how many criminal referrals there were for mortgage fraud. (There were 65,000 last year.) Meanwhile, the administration is saying there is no problem and that the financial crisis is over. That's the exact opposite of what you want to say and do if you want dramatic resources to change things.

There has obviously been and apparently continues to be misconduct on Wall Street. Nassim Nicholas Taleb has been shouting this for some time now. So, why haven't there been any convictions and why do we expect that the same people who got us in the mess will now get us out?

Being Timothy Geithner II

Before the Congressional Oversight Panel, Secretary of Treasury, Timothy Geithner, assured the panel that the financial system is being restored because counterparites, foreign and domestic, are gaining confidence in our system again. Even though jobs are important, it's a lagging indicator, so what is most important now is confidence.

As I listened to Secretary Geithner I couldn't help but to wonder, as I have written here before, why is this so? If you were a counterparty wouldn't you invest in an economy where it is known and proven that taxpayers will bailout failed banks and insurance companies like AIG who paid $105 BILLION to its counterparties at 100% on the dollar when the auto industry was required to take a haircut?

Confidence? The confidence of counterparties do not lie in our economy proper, our industries, products, sales, etc. Their confidence lies in our government through the taxpayers to be bailed out. They have confidence that the Treasury Department and The Fed will bolster their investments in spite of the competancy of AIG and Wall Street banks. But from where does this confidence spring?

The current system seems like a house of indebted cards based on a system that seems to have just as much confidence as casinos. (I would highly recommend Nicholas Darvas' book, Wall Street: The Other Las Vegas.) If we didn't bailout AIG and these big Wall Street banks, would these counterparties, foreign and domestic, who seem to have gammed the American financial system on the backs of the American taxpayer, be so inclined to invest?

Through AIG, Goldman Sachs received $12.9 BILLION on top of its $10 BILLION received from TARP directly, Societe Generale Corporate & Investment Banking, one of Europe's main financial services companies received $11.9 BILLION and Barclays of Britian recieved $7.9 BILLION. Two-thirds of AIG's funds flowed to European banks. So, with these facts is Secretary Geithner correct when he points to other investing in our system again as a sign of recovery?

Okay, even if the confidence of counterparties is a sign of recovery in that the reason for investing is to insure some sort of security and others fell secure again, what is the taxpayers' insurance based on--more debt, hiked interest rates and fees? These counterparties can count on the American taxpayer. They can repay loans not through legitimate products but through the spread created by low interest government loans via programs like TARP and hiking the interest rates on taxpayers' credit cards and collecting late fee charges on those who bailed them out.

Wall Street Banks such as Goldman Sachs seems to have done nothing really that would enable it to raise the $10 million dollars given through TARP with minimum interest thanks to the government besides benefiting from the means above. Yet, these guys are complaining of losing talent if million dollar bonuses aren't paid. But I'm less concerned about the bonuses and more about the system itself. But it's doesn't seem to be about losing talent. It seems more about gaming the system. He who does this best on Wall Street seems to win. Doesn't Timothy Geithner know this?

Being the Federal Reserve II

President Obama proposed a plan that would give the Federal Reserve more regulatory power. My only question is why didn't the Fed use the power it already had to avert a near collapse of the global economy? It seems that Alan Greenspan, former Federal Reserve Chairman, allowed some things to occur for so many years and Timothy Geithner, the current Treasury Secretary, was over the Federal Reserve of New York during the time that Wall Street nearly brought the global economy to its knees. What was Geithner doing then? It seems that he was not able to handle the power he had in New York. Why give Geithner and the Federal Reserve greater power now? And make no mistake about it, we are talking about power here and lots of it! Maybe someone can break all this complicated stuff down to me like I'm a two-year old. Sometimes I wonder if the complications are purposeful.

Being the Federal Reserve

According to Wikipedia, the Federal Reserve has the responsibility of "ensuring the the stability of the financial system." Its current responsibilities include:

To address the problem of banking panics
To serve as the central bank for the United States
To strike a balance between private interests of banks and the centralized responsibility of government
To supervise and regulate banking institutions
To protect the credit rights of consumers
To manage the nation's money supply through monetary policy to achieve the sometimes conflicting goals of maximum employment stable prices, including prevention of either inflation or deflation moderate long-term interest rates
To maintain the stability of the financial system and contain systemic risk in financial markets
To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
To facilitate the exchange of payments among regions
To respond to local liquidity needs
To strengthen U.S. standing in the world economy

Considering that we have had major financial crises, including the Saving and Loans Crises of the 1980s and 1990s with the then revered Alan Greenspan as the chairman for nearly 30 years from 1987 to 2006 under 4 presidents, can the Federal Reserve accomplish these goals?

Should the Federal Reserve be disbanded? If so, for what if anything?

Being Alan Greenspan

While watching Alan Greenspan speak before the Economic Club of New York yesterday, I must admit to being a little more than miffed as he spoke about the financial crisis. I wondered if he should be in Florida relaxing and not speaking as he was the Fed chairman for nearly 30 years from 1987 to 2006.

As I listened to Mr. Greenspan explain away the crisis as something that happens once in "99 years," I was extremely annoyed. Is this a way to excuse his apparent incompetence and that of other economists? As he spoke I could not help but say aloud, "words words words."

Last week President Obama joked in a press conference that "we are all economists now." As I write these words, I am fully aware that I am not an economist. But that does not mean that I lack common sense, neither does it stop me from being livid at those trained experts that are now addressing the crisis.

During the New York conference I heard the term "financially literate" to refer to economists. Can we really refer to those who brought us to this moment of international financial collapse as "financially literate?"

In an article, "Greenspan the Worst Fed Chief Ever," Bill Flickenstein has doubts about the ability and honesty of some economists. He says of Mr. Greenspan:

Even if any of his protestations were true (which I don't believe) and the Fed was afraid of damaging the economy, it has been granted specific tools to deal with periods of speculation. Among them: Regulation T, whereby margin requirements can be raised to reduce risk and change market psychology. (While raising margin requirements to even 100% may or may not have been sufficient to break the stock bubble, the Fed could have at least tried. If that failed, the Fed could then have tightened.) However, for Greenspan to pretend that all he could have done was to raise rates shows that either he doesn't know what the Fed's tools are (i.e., he's clueless) -- or he's not being truthful...

The Fed could also ask Congress to resuscitate the old Regulation X. Part of the Defense Production Act of 1950, this regulation let the Fed set minimum downpayments and maximum mortgage-repayment periods for residential properties. The Fed gave up the authority a few years later.

Of course, when Greenspan wails about not wanting to hurt the economy with rate hikes, none of his lapdogs in the press ever seem to question why the Fed hasn't used the tools at its disposal.

In any case, part of my reason for re-titling Greenspan's speech is due to the following comment: "After the bursting of the stock market bubble in 2000, unlike previous periods following large financial shocks, no major financial institution defaulted, and the economy held up far better than many had anticipated." And we all lived happily ever after.

What I'd like to know is: If this was all so benign, why did he and helicopter copilot Ben Bernanke panic -- to the tune of 13 rate cuts, all the way down to 1% -- about the possibility of deflation in 2001 as the stock bubble unwound? Were it not for the even bigger, more dangerous housing bubble that Greenspan has in turn precipitated, which has only postponed the inevitable, the fallout would have been commensurate with the size of the boom...

Now, do you see why I, an avowed non-economist, would say "words words words?"