Tornado Alley (PROG)

[StephanieVanbryce]

Geithner and his pseudo liberal critics

Gretchen Morgenstern of the NYTimes joins the list of people writing critical summations [ http://www.nytimes.com/2013/02/03/business/banks-at-least-had-a-friend-in-geithner.html?partner=rss&emc=rss&_r=0 ] of Geithner’s term at Treasury as if the economy consisted only of Wall Street banks and as if the major proposition of neoclassical economics was self-evidently true instead of being clearly false:

For everyday Americans, his major tasks included responding to the home foreclosure mess, unwinding federal bailouts under the Troubled Asset Relief Program and tackling the problem of financial institutions that are too big to manage and too interconnected for America’s good.

For me, the rescue of the auto industry using TARP funds was the most important action of the Treasury during Geithner’s tenure - the action with the biggest impact on “ordinary Americans” - but it’s not important enough for Morgenstern, Simon Johnson or Matt Taibbi to even mention. In the dominant neo-classical school of economics, the kind of direct government investments in manufacturing that the Obama administration has pursued just cannot work - even though they do and did. Belief in this theory is widespread and people like Dean Baker and Christine Romero are in the faith as much as the “freshwater” Chicago scholars, the Hayekians, and the Libertarians. This makes the “liberal” or “left” critics of the administrations economic record unable to even admit the existence of the most important part.

Ignoring the auto-rescue’s unfortunate departure from theory, Ms. Morgenstern is mostly exercised about what she calls “kid-glove treatment of the big banks”, asserting in an oddly worded phrase, “banks recovered quickly and the Dow is around 14,000”. The odd wording sidesteps the fact that Citigroup shares are 83% down even after a good last couple of weeks, Bank of America is 70% or so down, HSBC is 20% down, and even Goldman-Sachs is 20% down. The Dow is back to 1400, but a number of the biggest financial players pre-crisis are gone or deeply wounded. The provisions of the Obama administrations banking law reform that allow the government to fold up big non-bank financial institutions like AIG or CitiGroup (much more than a bank) and claw back benefits from management in the event of failure are also not mentioned. Some more odd wording follows as Ms. Morgenstern and Dean Baker appear to want to redefine what “profit” means:

Unwinding the Troubled Asset Relief Program was another area where the department fell short. Eager to trumpet the success of TARP and other bailout programs, for example, Treasury boasted last spring that taxpayers would likely make money on them.

Such a claim, said Dean Baker, [ http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/timothy-geithner-saved-wall-street-not-the-economy ]co-director of the Center for Economic and Policy Research, should “immediately discredit the teller.”

Treasury’s accounting for TARP and the other programs didn’t factor in the below-market rates the recipients paid on these loans.

Someone is being discredited here, but it’s not anyone at the Treasury department. Henry Paulson’s Treasury gave out $350billion to Wall Street; Geithner’s Treasury recovered more than that; and according to Baker and Morgenstern making that factual statement is lying. Because maybe if they went back in time and changed Paulson’s terms there was potentially more profit to be made? By definition, profit is excess returns over expenses, not some hypothetical returns that Baker and Morgenstern imagine would have been more appropriate. The Treasury turned a profit. Period. But consider that “below-market rates” claim - something that brings us back to industrial policy.

According to Chicago School and Libertarian dogma, “markets” are omniscient forces that never fail or make false judgements. One day Pets.com was worth $1billion and change and the next day it was worth nothing. The market spoke and that’s that. In 2006 the financial market wanted to give high values to bank bonds and investment accounts and in 2007 banks were desperately hocking the silverware for spare change - and both valuations were, according to right wing economists, absolutely correct. In 2007 there was a widespread financial panic in which loans were simply not offered - because anyone with cash wanted to hold onto it and many others were desperately seeking cash to meet obligations. If one agrees with the market-infallibility theory, then it makes sense to complain about loans from the government to banks at “below-market rates” at this time even though loans were not available at any rates.

The opposition to market infallibility is due to economists like Keynes or J. K. Galbraith, not to mention the old (pre-Obama era ) leftist economists. [ http://krebscycle.tumblr.com/post/30872908911/all-thats-left-melts-into-air-how-the-left-became ] For them, capitalism is inherently subject to irrational market panics that require government action to cure. The economist Hiram Minsky noted:

Keynes’ hard insights into the fragility introduced into the capitalist accumulation process by some inescapable properties of capitalist financial structures”

People who lack faith in the infallibility of financial markets have argued that when financial markets seize up, the government should ignore “market-value” and try to both generate economic activity directly and to make the financial markets “liquid”. This is why the Franklin Roosevelt administration stepped in to lend banks cash on collateral for which market-value had broken down. The government got its money back, but it certainly was not lending at market-rates. The Federal Reserve and Treasury did the same thing in the recent panic. And the Obama administration via the ARRA stimulus program, the Auto rescue, the DOE grants and loans for green energy manufacturing, and so on intervened directly in the economy to replace a financial market that could not do the job.

So, Baker and Morgenstern are right: the government lent money to banks and recapitalized the auto companies, and put money into advanced battery manufacturing and so on - all in defiance of market judgement. But that’s because markets are far from infallible and “insecapable properties of capitalist financial structures” cause irrational panics and misallocation of investment to ponzi schemes. That’s when the government has to step in. And even if banks were smaller - as the banks that collapsed in 1929 and in the S&L crisis were- the need for government action outside market values remains.

Very Related

Timothy Geithner Saved Wall Street, not the Economy
[ http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/timothy-geithner-saved-wall-street-not-the-economy ]


http://krebscycle.tumblr.com/post/42161117174/geithner-and-his-pseudo-liberal-critics