With Tim Geithner, who it must be said, I like and respect, having some "issues" of his own at the moment, it might be appropriate for him to pull "a Richardson" and excuse himself to avoid further taint and embarrassment to the incoming administration so that someone, anyone, can take the fiscal helm. This may very well send the Obama team back to the so-called drawing board to find someone who can pass my Ethics Exam with a "Spitzer-score: or better, and inspire a more positive leadership image in the eyes of the public.
Fortunately, I believe that I have solved the conundrum, or rather it may, indeed have solved itself as only miraculuous events can. For the quite obvious answer, has, quite literally descended upon us from the heavens, to America's financial center in New York. Mr Obama, meet Mr "Sully" who would make a great Treasury Secretary, if he could do for the national 747 Jumbo what perhaps only a skilled pilot such as he can to safely crash-land our vessel...
I'm a great admirer of Mr "Sully", but I think his actions say rather more about the fact that he is a bloody good pilot, than his ethical qualities (which I'm sure he has in spades...)
ReplyDeleteYes, but where is the flotilla that gets us off the wings?
ReplyDeleteThis reminds me of the time I was late to a taping of a troubled sitcom I was working on. "How's it going?" I asked one of the other writers. His reply: "This thing's f***ing tanking like...something that f***ing tanks."
Inspired choice!
ReplyDeleteAfter Robert Rubin vacated Citi, and now Geithner's omission, I'm beginning to believe there is justice for all that the two did during the Currency crisis in '97. Now, could Summers please say something about women?
Baltimoron,
ReplyDeleteI do not know why there is such vitriol related to Rubin/Geithner role the LTCM unwind. Putting on my earnest hat (for real) what precisely did you think they did that was wrong or unsavoury? I see what they did as the way a fire department would help when there is a fire.
Herstatt risk is real. Fractional reserve banking makes this an important consideration. The more highly leveraged the fractional system becomes the more calamitous the fallout in a crisis. This is what we are seeing now. Preventing that in 1998 was IMHO correct. The crime was not saving the system in 1998. The crime was - after using the levers of the State to save their asses - was the BUsh admin and their regs and the Fed allowing - and worse positively encouraging the IBs and MCBs to lever and assume principal risk like the world has never seen. Go back and look at all the charts of credit and leverage and the 1990s was a walk in the park. It happened on Bush' watch and Greenspan's watch in allowing and encouraging the system to run headlong, unchecked without so much as bridle towards an inevitable abyss. And the reasons they did it (or rather didn't stop it) were entirely philosophiocal and ideological. Oh the shame. But don;t blame Rubn and Geithner's actions at LTCM. These were correct and right.
I was doing my 2-year hitch in Pyongtaek in ROk wen the storm broke in late '97. Years later I read Stiglitz. But in 12-97, girls were selling their bodies to me and others - we kept tallies taking bets on the next new girl who just came into the ville. I saw Koreans running around the ville because landlords evicted anyone w/o greenbacks, as the won nosedived. It was clear Seoul needed to pump the economy and get people back to work. Instead, the IMF let Seoul torture South Koreans with a gold/jewelry drive, and didn't complain when the South Koreans beat themselves up to repay the loan early
ReplyDeleteAll the time these people were cursing anything western for the sacrifice they had to make. The IMF, backed by Treasury, promised heaven for the hell, but then it only gave the chaebol a way to use popular hatred to stymie privatization, a gift that keeps on giving. As Stiglitz argues, instead of reforming the banks first, the IMF went straight at the chaebol and lost. After the people had repaid the loan, no South Korean could understand the reason for reforms
So now, Seoul sucks ever more cash from South Koreans to beef up its accounts, and still there's no reform of the health care system or even a social security net. And all people say is westerners are vultures and destroyers.
So, for all those who leaped out of buildings in the ville, I say f*#k you, Rubin, Geithner, and Summers!
"Putting on my earnest hat (for real) what precisely did you think they did that was wrong or unsavoury? I see what they did as the way a fire department would help when there is a fire."
ReplyDeleteHanging a bank/fund from time to time encourages the others; forcing banks/funds to blow up or get money from vultures from time to time discourages the industry from making imprudent investments. Obviously, the lax regulatory style of Summers, Rubin, Greenspan, Cox, Bernanke, OFHEO, and the Senators and Congress folks who encouraged lax regulation (by threatening to cut regulators budgets) also encouraged a debt bubble.
Oh I am going to sound soooo conventional but here goes...
ReplyDeleteThe Korean's people's efforts were most noble and I hold them up to contrast the American people's lack of sacrifice. Austerity has real costs - (suicide, human slavery etc.) that all -especially Austrians - would do well to consider carefully (particularly in the context of assessing externalities of growth & the debate over moderate inflation vs. moderate deflation). But for contrast purposes, they are polar opposites.
There also is a contextual element to history. And there is intention to consider. In 1998, the world was a more balanced place and I would in their defence(and I am trying to be objective - I have no axe either way in this) suggest the supranationals were doing what according to prevailing convention was thought best. I believe (though I could be wrong) that their intention was good (and I think Brad Setser who is highly honorable and worked for Geithner would concur). Macroeconomics is aggregates, and in aggregates there are always winners and losers. I understand and sympathize with the human arguments, but believe Rubin Geithner Summers, IMF & World Bank were all drive by well-intentioned aggregates, and as such, should not be vilified, for while in hindsight they may have made mistakes, they were, at least, trying to do something, and it was well-intentioned.
21213 -LTCM was hung-out. Completely and totally. Equity holders got ZILCH. And the IBs and MCBs suggested should have "got some religion" as a result of staring at the abyss of what a large forced unwind of identical positions to their own large prop books would have upon the mark-to-market of their inventory. The intervention should have acted as a Jimmy Stewart Ghosts of Xmas Past - moment. Instead the cynical a-holes who ran these shops ignored the lesson and levered way MORE for no good reason, AND the Chairman of Fed didn't make the lesson clear enough to both management , shareholders and debtholders by saying NEXT TIME YOU ARE ON YOUR OWN. It was cynical because the higher prices went the MORE they lent and lower the collateral required. Issing was right. It was stupid. The consequences are dire. And the assholes like Greenspan, Mishkin and the other "Who am I to say its a bubble" apologists are more major culprits. Yea there's plenty of blame, but I think it is not the state-assisted orderly unwinding of LTCM that bear the blame, but the blind eyes by everyone to the the lessons
"LTCM was hung-out. Completely and totally. Equity holders got ZILCH."
ReplyDeleteLTCM wasn't hung out completely because the govvies didn't shaft LTCM's creditors. A forced liquidation with asset sales to vultures would have burned creditors like Goldman and Merrill enough to teach them a lesson, maybe even a permanent one by blowing them up. Greenspan/Rubin didn't want to really teach a lesson.
There is the often-used saying about cutting off one's nose to spite one's face. Lesson-giving was so much the second priority to keeping the wheels on he proverbial wagon. Despite the street (Goldman, Bear and probably every trend-following technical prop trader) having gunned LTCM, I do not think the Fed and even Rubin was privy to that at the time. I could be wrong about that, but who at GS would owned up to having - in part - caused the crisis? But the risk of cascade was if not real, then played up sufficiently by the street to frighten bankers ultimately responsible for funding the street. I think the street was happy to make a turn gunning them down, suffering a bit oif temporary mark-to-market loss, but didn't wan't to take down LTCM positions because they already had them in spades, but definitely didn't want them sold in distress, which in any event would have been pointless, probably even reckless at the time, you know, shake the tree - and you never know what falls out, like banks cutting off credit like they did in umm 2007
ReplyDeleteCall it my fantasy, but I think the authorities acted in good faith, and may have been duped, but one must be careful not to be revisionist. I can say for certainty that there was massive hits taken from around, thrown in and attributed to LTCM that was merely a convenient place to offload them. From this point, the systemic distress, and pulling back by the funding banks was real.
I mean, what was the 14-handle move in the Yen in a day? If THAT wasn't fricking weird.....it was certainly sufficient to scare the wits out of the authorities. I still shudder at the thought of that day. I mean, what if you had $10 billion of open USD/JPY?!?? There quite of number of folk with just something like that.
-C-
So, who should we put in there as Treas sec? Roubini? Brad Setser?
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ReplyDeleteC: "There is the often-used saying about cutting off one's nose to spite one's face. Lesson-giving was so much the second priority to keeping the wheels on he proverbial wagon."
ReplyDeleteOne of the traditional roles of central banks is to periodically tighten until they cause a recession and blow up some major players; this combined with prudent regulation is the only way to keep a lid on speculative behavior. The alternative Greenspan/Rubin's serial bubble blowing, which works until the economy's debt load is unsustainable at which point there is a massive disaster.
Mara: "So, who should we put in there as Treas sec? Roubini? Brad Setser?"
I'd like to see someone with a background in commercial banking whose bank operated on the prudent side during the last boom, such as Richard Kovacevich, Herb Allison, Richard Davis, or William Osborn.
Your points are valid. But Geithner was hitorically amongst the [few] dissenters to the serial bubble blowing. He was the one talking about danger and systemic risk and moral hazard contra to bubble-apologists like Greenspan, Kohn, Mishkin,who were derisive of Issing & sounder Central Banking. To this day, despite howls from the market, the ECB maintains "fear & Surprise" as a policy tool, as they should.
ReplyDeleteRE: Tsy Sec - I would trade toughness and grit for honesty since there will be many things the Tsy Sec will need to do that will deeply unpopular, and he must have the backbone and communication ability to explain the tough love to congress and the people.
-C-
To tag on to what the other poster said about Korea during 1998, a common placard that was carried by protestors in Indonesia, Thailand et al was - I (a)M F(ucked).
ReplyDeleteWith the IMF under the aegis of the US treasury, I think it would be fair to say that the severe 'austerity' packages imposed on the various countries reflected the prevailing ideology and conventional beliefs of the Treasury folks, incl Mr Geithner. Couple years after the fact, the IMF did finally admit that it went overboard in terms of what was required from a country before an IMF loan disbursement. You have to remember too, that it was the IMF/Treasury pressure which 'encouraged' a lot of countries to open up their capital markets before the local institutions were really ready to handly the hot money inflows. But to heck with practicality, free market ideology rules! Or in plainer words, Wall Street just wanted to expand its transaction flows with less local oversight and to heck with the consequences. So Rubin/Geithner from those Treasury days had already lost all credibility in my eyes, though it took longer for the rest of the market to figure that out. In Citi's case, what's the latest tally of the acknowledged writeoffs? And Geithner, pls Cassandra, I really really like your blog and would agree with your views most of the time, but not only is this guy a lousy tax cheat (you can't possibly forget to pay social security taxes owed, as you have to file extra paperwork with the IMF to reimburse the money that has to be paid to Uncle Sam), he's been running the New York Fed while the haphazard and ever changing while ineffective implementation of TARP all happened on his watch. The buck may not have stopped with him, but he sure was responsible for it's passing, no?
Never mind a speech a women, why not get Larry Summers to make a pronouncement on dumping toxic waste where poor people live...
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