Friday, February 27, 2009

Geithner Calls the Kettle Black

There's an old saying about the pot calling the kettle black, which is used to attribute hypocrisy to an individual who alleges another of behavior which he too is guilty of. Treasury Secretary Tim Geithner epitomized this idiom during an interview with Jim Lehrer:
I am deeply offended by the quality of judgments we've seen in the leadership of our nation's financial institutions. They've caused a very damaging loss of confidence. Financial systems require confidence; they're built on confidence. They've created a deep hole of public distrust and anger, which is enormously damaging.
Mr. Geithner, please meet the kettle. There is no doubt that the banks' horrible decisions over the past few years are key to our economic problems. However, Mr. Geithner is in no position to claim moral indignation at the banks' lack of leadership when he has provided zero leadership ever since he crashed and burned before Congress two weeks ago.

In case you missed it, Wall Street thumbed its nose at Mr. Geithner's purported plan to stabilize the financial sector through a 421-point crash of the Dow Jones Industrial Average---about a 5-percent decline. The reason? The administration led us to believe that Mr. Geithner would deliver a comprehensive plan; in fact, President Obama announced the night before that Mr. Geithner would announce "very clear and specific plans for how we are going to start loosening up credit once again."

Instead, Mr. Geithner
only delivered a broad outline which did not sound much different than the Bush/Paulson plan, but for a "stress test" which---left undefined---seemed like a doorway to nationalization. Mr. Geithner highlighted his plan's ambiguity when he stated, "We're not going to put out details until we are confident that we've got the right structure that's going to achieve these objectives to try and bring private capital in, alongside government financing to help these markets get working again."

As market pundit Larry Kudlow quipped, "President Obama, please meet Treasury man Tim Geithner; Mr. Geithner, this is Mr. Obama; we'll all shake hands and have a cup of coffee together."

Alan Greenspan liked to say that the maxim First, do no harm applies just as much to the Federal Reserve chairman (and, by extension, Treasury secretaries) as it does to doctors. Well, Mr. Geithner did tremendous harm to the financial sector. His purported goal is to ensure the survival of our major financial institutions to maintain a viable credit market, but Mr. Geithner has only hastened their demise by scaring private capital away from those institutions---thereby increasing their need of government assistance.

How, then, did Mr. Geithner attempt to make amends? Well, he really didn't. Instead, he seemingly went into hiding and refused to provide any clarification. Mr. Geithner could have said any number of things; in his Lehrer interview, he stated that "these banks now have very substantial amounts of capital relative to what you would have seen in the U.S. economy going into previous recessions," and "I think [nationalization] is the wrong strategy for the country, and I don't think it's a necessary strategy." Mr. Geithner could have dramatically improved the situation by saying that two weeks ago, but he simply chose to say nothing.

The result, therefore, was what Wall Street considers a four-letter word: uncertainty. Private investors were left speculating without clear guidance about whether the White House would nationalize our banking system, and wipe out the shareholders in the process. The speculation increased as Mr. Geithner remained silent.

Mr. Obama did not help matters because, as blogger Paul Kedrosky noted, Mr. Obama talked himself into---and out of---nationalization within the course of the same speech: Mr. Obama first stated that Japan prolonged its decline by initially refusing to nationalize, whereas Sweden quickly nationalized and recovered much more quickly. This sounds like a clear endorsement of nationalization. However, he then reversed himself by pointing out that our banking system is far more complicated than Sweden's, so nationalization may not work here. His so-called conclusion:
And so what we have to do is we have to pull the Band-Aid off so we don't duplicate what happened in Japan. But we've also got to make sure that in pulling the Band-Aid off we don't just start doing so much damage that things end up getting much, much worse.
Someone needs to gently remind Mr. Obama that while deliberating out loud works well for Senators, the President of the United States is in no position to appear so wishy-washy. He is the leader of the free world, and everyone looks to him for leadership. Statements like these imply that the administration has no idea what to do.

Therefore, it is clear that the administration failed to lead the way to financial recovery following Mr. Geithner's failed speech. Who, then, was in charge? Simple: the rumor mill ran Wall Street, and the financial sector led a broad market sell-off. There was little change in fundamentals; the dominant factor was increasing fear that the White House would nationalize our banking system. This affected not only the "bad banks," but the entire sector, as fear of a domino effect caused investors to flee from the more stable banks---thereby diminishing their stability. This fear spread to all other sectors, largely because no one wants to say the government running our banks. The major stock indices have crashed about 15 percent since Mr. Geithner's testimony. Only one investment did well: gold, which is viewed as the ultimate hedge against uncertainty.

This does not mean that Mr. Geithner should have rushed into a poorly deliberated plan just for the sake of acting. The problem is that Mr. Geithner appeared to have ample time to conjure up a more detailed plan. After all, he was the President of the New York Fed and Vice Chairman of the Fed's Open Market Committee prior to his Treasury Secretary nomination; this means that he worked very closely with Ben Bernanke and Hank Paulson in their initial attempts to stabilize the financial markets. Moreover, one would think that he would have taken full advantage of the "Office of the President-Elect" to get off to a running start. Instead, it appears that he did little or no footwork prior to his confirmation. At the very least, if he had so little to say, he should have done more to control our expectations.

We saw a brief stock market respite this week when Mr. Bernanke quelled fears of nationalization, even though Mr. Bernanke is not even part of the administration: frankly, it reached the point where any guidance whatsoever was better than no guidance. Unfortunately, this respite appears to have been short lived as we now creep back to 12-year lows. Mr. Geithner claimed during the Lehrer interview that the initial sell-off following his testimony two weeks ago was really not his fault:
Well, I think it's important to see this happened against the backdrop of a deepening recession here and around the world, and that is the fundamental cause of the uncertainty you're seeing in markets everywhere and the fragile confidence we see generally.
Well, Mr. Geithner, there is no doubt that we're facing a terrible economic climate. However, inherent in the Obama administration's claim that it can make things better is the reality that it can also make things much worse. You, sir, did make things worse. Even if you refuse any responsibility for the current uncertainty, I would implore you to at least show some leadership and remember that every dollar of private capital you scare away from the banks is a dollar that the taxpayers will wind up replacing.

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