Streetwise Professor

February 13, 2009

What’s Really Going On?

Filed under: Derivatives,Economics,Politics — The Professor @ 12:16 am

The passage of a couple days since Treasury Secretary Timothy “Eraserhead” Geithner’s speech on the planless plan to heal the banking system has led me to the conviction that it was not just stupid and damaging (to Geithner, the administration, but most importantly the country), but it was just plain strange.  Passing strange.  Certainly Geithner and Obama, who didn’t want to “steal [Geithner’s] thunder” (no need to worry about that!), should have known that the release of the Treasury Term Paper would be an economic and political disaster given  the buildup for the speech, and the market’s near frantic desire for some indication that some resolution was in sight.  So why did it happen?

The speech was delayed one day as it was.  But the anticipation was so great that Geithner could not wait any longer.  So, even though he had nothing concrete to deliver, he was compelled to say something.  

Which raises the question: Why didn’t he have anything after Treasury had been working on things for months, and presumably the transition team had made the banking situation a priority?  (Remember Obama announced Geithner’s nomination days after the election.)  They had to have something much more detailed than what Geithner presented.  

This all leads me to believe that there is a vicious political battle over the banking plan going on at the very highest levels of the administration.  Note there were myriad leaks in the days running up to Geithner’s speech (most likely emanating from Geithner or his minions) to the effect that the Treasury Secretary had beaten back attempts by White House political types (Axlerod was named specifically) to impose much more draconian restrictions on the banking system.  But the fact that Geithner did not announce a credible, detailed plan means that even if Axlerod and his allies did not prevail, neither did Geithner.  In other words, there is a stalemate.  I don’t see any other way to explain why Geithner would essentially appear naked before a watching world.  

One of the President’s jobs is to break stalemates between his subordinates.  It is clear that Obama has not done so in this instance.  Given the gravity of the situation, that is a serious failure.  

And here is my most troubling concern.  Banking has long been considered one of the “commanding heights” of the economy.  (That’s Lenin’s term, which he used when defending a retreat from hardline Bolshevism in the New Economic Policy; he rationalized the tactical withdrawal by saying that the party still controlled the commanding heights, including the banks.)  Government power over the banking system gives it incredible power over the broader economy.  Hardcore political types (e.g., Axelrod, many people in Congress) no doubt understand the tremendous political and economic advantages to be gained by retaining pervasive government control over the banks.  (To paraphrase Rahm Emanuel, a banking crisis is a terrible thing to waste.) Just think how popular Fannie and Freddie were in Congress.  They were beholden to Congress and did its bidding accordingly.  Think of a quasi-nationalized banking system as Fannie and Freddie on ‘roids.  That would be a leftist/statist politician’s dream.  

So, one explanation of what is going on is that elements in the White House and the Congress want to exploit the crisis to strengthen their control over the banking system.  Treasury and the banks themselves are pushing back.  There is now a stalemate, and Obama has not intervened to break it.  This is very dangerous.

It is a matter of particular concern that politicization of the banking system and the capital markets is self-reinforcing.  Politicization can occur because the dire straits in which the banking system finds itself make it dependent on government support.  But this government support comes at a price, in terms of investment and lending decisions driven by political considerations, rather than economic ones.  Such decisions do further damage to the financial condition of the banks, perpetuating their dependence on the government.  

Maybe this is unduly alarmist, but I find it hard to explain otherwise why the administration was unable to unveil a more complete and credible response to the banking crisis.  It also comports with the leaks about the behind-the-scenes struggles between the more Bolshi elements of the administration and the finance/technocrat types.  

Whatever the cause, this limbo is unacceptable.  And if we are in limbo because of an internecine struggle, it is incumbent on Obama to intervene forcefully to put and end to it, and decide.  

He won, after all.  He told us so.  Well, with winning goes the duty to make the hard choices and live with the consequences.

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  1. […] Streetwise Professor: What’s Really Going On? The passage of a couple days since Treasury Secretary Timothy “Eraserhead” Geithner’s speech on […]

    Pingback by US politics - Hamsterwheel - Page 29 - PPRuNe Forums — February 13, 2009 @ 12:45 pm

  2. For once, I will post on something that does not have to do with Russia. I am curious, could the Canadian example be a model for the USA when it comes to banking? Fareed Zakaria has an interesting piece entitle “Worthwhile Canadian Initiative” and writes: “Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn’t grown in size; the others have all shrunk.

    So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada’s more risk-averse business culture, but it is also a product of old-fashioned rules on banking.” [END OF CITATION]

    Canadian banks are highly capitalistic (they certainly love gouging clients when it comes to fees in order to make profits ;)) but the regulations that banks saw as too “stifling” a few years ago, now is seen as having kept Canada’s banks relatively sound. Could the USA learn something from Canada?

    There, I have posted something not dealing with Russia 😉

    Comment by Michel — February 14, 2009 @ 11:34 pm

  3. Interesting to note, Michel, that Canadian banks also did quite well during the Great Depression. Whereas US banks failed in the thousands, no major Canadian bank did. The US was very “overbanked” due to branching restrictions. Canada had no such restrictions on banks, and hence a small number of large banks operated throughout the country, and they were better situated to deal with the crisis.

    I don’t know what accounts for the Canadian banks’ current outperformance. Could be regulatory differences. Don’t know. I’ll try to look into it. But it is a very good question and one that deserves some investigation.

    Expanding horizons is good!

    The ProfessorComment by The Professor — February 15, 2009 @ 9:57 am

  4. You are right, all of Canada’s big banks have been around for a century and did survive the Depression. Interestingly, before the crisis, a lot of our more conservative commentators were whining that Canadian banks were being shackled by regulation and if they were to succeed in a globalized world then we would have to adopt the American model…. Interestingly, those same reasons that made Canadian banks “uncompetitive” may leave them without competition as their main rivals (large American banks) go bankrupt or are nationalized. Go figure.

    Comment by Michel — February 15, 2009 @ 1:04 pm

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