Ben Stein on Tim Geithner: Right for the Wrong Reason
For those who did not see the NYTimes yesterday, below is an excerpt from Ben Stein’s “Everybody’s Business” column:
“I am the world’s most ardent fan of Paul A. Volcker and Lawrence Summers, but I am a bit puzzled by the choice of Timothy F. Geithner to be Treasury secretary. During the presidential campaign, I heard Mr. Obama talk many times about “change you can believe in.” But what does Mr. Geithner have to do with change? He’s the pre-eminent careerist of old-time finance, and a basic part of the team that got us into this mess. He was pro-deregulation for most of his career. He went along with failing to rescue Lehman Brothers, a decision now generally considered a catastrophic mistake. He led the Federal Reserve Bank of New York while money-center banks made lethal mistakes of faulty risk management — and he did zero to stop it, as far as is known.”
My one quibble with Stein and others is Lehman Brothers. In the past, I have agreed with the crowd that letting Lehman fail was a mistake, but for different reasons than most. The screw-up by Geithner et al was inconsistency, not making a bad choice. Lehman going into bankruptcy was the end result of a lot of events beyond anyone’s control — but it was the right decision. But by bailing out Bear and not Lehman, Geithner et al showed that they do not understand the definition of systemic risk — namely, when markets are SURPRISED.
Bear and AIG should have been pushed into bankruptcy as well, but because of the lack of financial skills and values in political economic terms, Geither (and his colleagues at the Board of Governors in Washington) mudded and thereby confused and scared the markets. This lack of a moral compass when it comes to matters of political economy is a major reason why I think Tim Geithner is the wrong man for Treasury. If we want to get this economy back on its feet and avoid hyperinflation, we need more bankruptcy and less bailouts.
Chris
December 1st, 2008 at 9:00 pm
As far as I can see, all we are doing now is removing moral hazard from our financial system. Some people seem to believe that the whole concept of moral hazard is “quaint”, to borrow a word from our recent history, but it is one of the core pillars of capitalism. Indeed, it is the first thing executives exclaim when they try to explain their ridiculous salaries. “This is a risky business! We deserve more money because of all the risk!”
We need more bailouts. If you risk and win, you get rich. If you risk and lose, you go bankrupt. That is how it works. Anything else is socialism … or worse.
December 1st, 2008 at 9:11 pm
my limited understanding of the situation is that letting leh fail was much worse for our uk and euro friends than for us… and definitely not the right thing to do. that seems to be the modus operandi of the US…
December 1st, 2008 at 9:31 pm
Not sure there was any choice with Lehman, Karen. The firm did not have collateral to borrow from the Fed, so it means either nationalization or bankruptcy. If the Fed had put Bear into bankruptcy earlier, then Lehman would not have been such a shock. But this is all academic at this point.
December 1st, 2008 at 10:25 pm
My guess is Geithner is not going to be making the big decisions; they will probably be made by O and Summers with input from, Bernanke, Volcker and Geithner. After O and Summers make the final decisions, Geithner will be the one to “make it so.” But I doubt that will result in fewer bailouts.
December 1st, 2008 at 11:49 pm
OK–what would have happened to JP Morgan if Bear had gone down? And if JPM went down due to CDS written on Bear–was that the reason for Bear’s rescue?–then what?
So much theory and rhetoric, but do you have the numbers and model to back up your points? What do you suppose would have occured next had Bear just gone down? I want to understand if there is actually some evidence behind the bold assertions above. Or is it all doctrine and indignation?
So far, not one big credit card company has gone down for the count, and the fallen banks for the most part have not impaired their depositors.
Is this to the good or to the bad? Time will tell. In the short term, as weak as this shopping season is, I can imagine that it could have been far, far worse if we had serial bankruptcies at the more public-facing banking institutions. And then so many other perfectly decent businesses would have been ruined.
Is it possible that any good could have come by winding up (outlawing) CDS while saving the institutions, and was there a way to accomplish this?
Finally, moral hazard. Please–this concept is indeed quaint because poor results over time don’t necessarily affect corporate leaders, who earn their keep according to the short term results of their stock. Nor do long term results influence money managers, who keep their jobs on quarterly and annual results. We’re a long, long way from Kansas, Dorothy.
December 2nd, 2008 at 7:13 am
IMHO, the reason that Lehman was allowed to fail was political, in that the party most severely damaged was Hugo Chavez and Venezuela. OK, maybe not “most severely damaged”, but it put old Hugo in a worse fix than most anyone else, and probably hastened the (still-to-come) collapse of his regime.
There was some unreservedly good consequences that came out of letting Lehman go; the fear that serves as the motivation behind moral hazard was reinforced — and it only takes a few actual disasters to make people a lot more cautious. I suspect that ALL portfolio managers are a lot more vigilant about getting the junk out of their portfolios now than they would be if Lehman had been bailed out along with everyone else.
Poor results do effect corporate leaders, if the corporation they are leading is vaporized as a consequence.
December 2nd, 2008 at 7:26 am
Ditto on reviving moral hazard. And I had not thought of poor Hugo Chavez, who I have spoken about often. You made my day! The miserable little dictator in Caracas is headed out soon — hopefully. There is a new tyrant in training in the slums of Caracas as we speak. See below:
Speech at the FRB Philadelphia: Venezuela Under Chavez: Socialist Construction and National Chaos
http://www.rcwhalen.com/research/GIC_VE.html
Chris
December 2nd, 2008 at 11:46 am
Chris, who would you have preferred?
And by the way can we all agree that Ben Stein has been so wrong for so long as to now be thoroughly discredited?
December 2nd, 2008 at 1:50 pm
Preferred vs. Tim Geithner? How about 1) anyone with actual experience in banking or finance. The IMF and Treasury do not count; 2) anyone who has every managed a company or bank; and 3) anyone with actual, hands-on knowledge of the areas in 1-2.
I worked for Gerry Corrigan at the FRBNY. On his worst day, even after one of those early breakfast meetings at Brady’s with the folks from bank exams, Gerry Corrigan could run rings around Geithner.
Corrigan began his professional life as an economist, but learned enough about finance and particularly the issues in the back office to be credible.
Trouble is, today the converted economists like a Corrigan or Susan Schmid Bies, for example, are completely outmatched by the issues of the day. Instead of the sublime questions of economic policy, we now need people who understand how to not only run a bank or dealer, but how to take one appart in bankruptcy.
How about Herb Allison? How about Sheila Bair? I’d even take Peter Fisher from Blackrock.
The basic problem with Geithner is that he is a minion of the corrupt group of people who have been running US economic policy for almost two decades. Rubin, Summers, et al. These folks are going to be incinerated in the next year as this crisis goes into outright meltdown. Not only is Geithner unqualified to deal with this situation, but he is going to be the first one thrown under the bus!
To paraphrase a man who we are featuring in The IRA next week, Geithner and/or Ben Bernanke could be the next Danny Wall. Stay tuned.
Chris