March 23rd 2009
The Critiques Are In: Geithner Bombs
S
orry for the repetitious Geithner flag pictures, but I just can’t get over how flag-crazy the Obama admin has become since he was criticized for not wearing a flag lapel pin. Anyway, flags or no flags, the market might be up, but the prognosticators are down, including me.
It’s obvious the latest offering is more of the same: an offer of federal cover for downside risk in return for letting the federal fox in the financial hen house. There is no free market at work here, since individuals’ downside risk is guaranteed, so it’s just a costly postponement of the inevitable. As for those with more financial pundit prowess than yers truly, a quick scan of headlines at Real Clear Markets reveals that cynicism and anger are overwhelming optimism over the newest rehash of Bush’s, now Obama’s, Wall Street bailout.
I already quoted Paul Krugman; here’s one more cut at his column:
And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.
It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.
Even the Keynesian Klugman is seeing the wisdom of an application of free market Draino to the financial sector.
At the New Republic, John Judis is pretty straightforward, calling his piece The Geithner Disaster:
As my colleague Noam Scheiber has suggested, Geithner’s plan could work if the bad loans and seamy securities that the banks hold are actually worth something–say, 60 percent rather than 30 percent of their original value. If not–and there are plenty of skeptics who question that–then Geithner’s plan will transfer more money from taxpayers to private investors and bankers without reviving the big banks. That will amplify the growing populist outcry against the Geithner and the Obama administration, and make it more difficult to do what is necessary to revive the economy.
Sorry, Sec. Geithner, but re-naming the toxic sludge of Wall Street mega-errors “legacy” funds will not increase their value to anywhere near 60 percent of their original value.
Here’s the obvious solution from RCM columnist Louis Woodhill. Too bad it’s got zero chance of going anywhere:
Unfortunately, the government is now trying to solve a problem created by printing too much money by printing even more money (plus tax increases, plus economic-superstition-based “stimulus” borrowing and spending). This will not work.
What will work is the Constitution of the United States. On February 3, Congressman “Judge” Ted Poe (TX-02) introduced H.R. 835. This bill would require the Federal Reserve to “regulate” the value of our money by making the dollar equal in value to 0.002 ounces of gold. The Fed would do this by using its Open Market operations to establish and maintain a gold price of $500/oz. H.R. 835 would also give a powerful supply-side stimulus to the economy by providing “first year expensing” for all capital investment.
Once the integrity of the dollar (and the Constitution) is restored, the markets can begin to right themselves. Stabilizing the dollar is an essential ingredient in any recipe for economic recovery.
Finally, over to the WSJ’s story on the market’s positive response to Geithner’s announcement, where I found this cynical reader comment:
Now remind me, wasn’t this what we were told they needed the first Trillion in TARP money for? Oh, wait, we used that to pay bonuses and allow banks to make foreign loans. Why does anyone on wall street think they will actually use another Trillion for the purpose the initial Trillion was to be used for?
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March 23rd, 2009 at 11:47 am
Obama’s financial solutions are going to be the death of the economy, unless his political capital runs out first (that’s a change I hope for). But going to the gold standard doesn’t sound like the right idea. I, for one, would be exceptionally happy to buy gold at $500 and ounce and turn right around to sell it at $900 an ounce. I mean, I’m no financial genius, but I think I could turn a profit doing that.
A far simpler solution would simply be to do as Germany did long ago– disassociate the printing of money from the auction of treasury bills. If the government wants to borrow money, they have to find somebody willing to lend it, and have to pay whatever interest rate is demanded. They can’t just print up more money to lend to themselves. Simple, clean, effective.