Breaking news: Tim Geithner goes to lots of meetings

I posted a defense of Geithner on the NY Times today:

"Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation's most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that's kind of out there,' ” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward. Mr. Geithner says, “I don't remember a serious discussion on that proposal then.”

This is not my interpretation of what Geithner was proposing. He was proposing a full guarantee on the system in order to keep a panic and debt-deflationary spiral from occurring. The whole point of the guarantee would be to stop investors from panicking and allow a more orderly unwinding of positions. It is an attempt to save money, by not allowing the economy, unemployment, investment, etc., to explode. It is best done at the beginning of a financial crisis in order to alleviate its severity, since, everyone should know this, the government will intervene if the crisis is bad enough.

Too bad no one understood or accepted the proposal.

Don the libertarian Democrat

— Don, Tacoma, WA
Recommend Recommended by 7 Readers

People got huge numbers of recommendations for poisoning the well and slogans. Maybe I'm not Godel, but neither were other people commenting.

Anyway, let's go through this: If you feel that letting Lehman go was a good idea, and that AIG, etc., should have just crashed, whatever that would have meant, more power to you. I don't agree, but I understand.

But if you think that Lehman should have been saved, then you must believe that either the govt should have given them a loan or helped the B of A merge with them. Those were the actual choices. Hey, isn't that Geithner's view?

What about Fannie/Freddie? You might believe with me that explicitly guaranteeing them might have stopped the flight from agencies occurring. Hey, isn't that Geithner's view?

If you are a follower of Fisher, and fear a Calling Run, and believe that only a full govt guarantee can stop it, then, hey, that's Geithner's view, isn't it?

In fact, if you were, like me, calling for a Swedish type solution in September, you were assuming that the govt was going to guarantee everything a la Sweden, weren't you? Hey, isn't that Geithner's view?

If you believe that AIG needed to be saved after Lehman, and Merrill as well, and we now know that the only real plan was to merge a large failing financial institution with another, like Bear, WaMu,Merrill, the attempt at Lehman, wouldn't you have expected the govt that week to try like hell and get a merger? Hey, isn't that Geithner's view?

What exactly are the people opposing what I just said arguing? I'm for:
1) Narrow Banking
2) A self-insured investment sector that's well-supervised
3) Quantitative Easing
4) Stamping
5) A large stimulus
6) A very robust social safety net
The only way to have stopped the Calling Run, onset of Debt-Deflation, was a total govt guarantee. No one else has the resources to stop one. Period. Also, Debt-Deflation has no natural stopping point. It has no natural stopping point for unemployment or wealth loss, and is not predictable. It is inherently unpredictable.

If you're not afraid of that, well then, fine. But I am. It has nothing to do with what I want. The main economists I'm relying on are Milton Friedman and Irving Fisher. This situation is too complex and messy to pick easy positions.

It's been trial and error because that's how a govt with different interests, etc., works.

The president of the New York Fed should spent much of his/her time meeting with bankers.
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why? I mean, seriously, why?
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the banks aren't clients who have to be schmoozed, but entities that have to be regulated to prevent another great depression.
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Geithner should have been spending his time with average taxpaying citizens, so that he made decisions that protected their interests first and foremost. Instead, he hung out with people who are so wealthy that they are insulated from any real personal economic problems -- to them, its all just a game about status. Their real currency consists of how many times the financial press associates their names with the word "genius".

I rarely agree with our friend Pluk, but I have to give him the edge in this debate.

Justin,
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I think I split the difference between you and pluk here. I mean yeah, Geithner met with a bunch of bankers. So what? He needs to have a relationship of some sort with the people whose industry he's in charge of.
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On the other hand, and this is what I think is being missed here, HE DOESN'T WORK FOR THE BANKERS. I don't think there's a lot that would be gained if you grabbed 10 people off the street and made Geithner have lunch with them, but I really, really don't like how cross pollinated the bankers and regulators are.
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I mean, he was recommended for a senior banking management position? (Head of CitiGroup) Bankers and regulators should be completely separate career tracks, not co-mingled ones that you jump back and forth between as you feel like. There are some severe, massive, and dangerous conflicts of interest going on here that just aren't being addressed or are being trivialized to no gain.

@Sean: Do you really think that Sandy Weill ever thought that Geithner was in charge of him and his contemporaries?

Sean...
While I can't say for sure if there would have been a major positive impact on policy if Geithner was talking to "regular" people on a regular basis, I seriously doubt that Geithner would have given Goldman-Sachs (and other big banksters) 100 cents on the dollar of AIG debt if he wasn't socializing with these people.

@Justin: I had no clue. I thought all of the Fed regional presidents were appointed by the President. Am I completely wrong, or is New York different? Thanks.

Justin,
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Wikipedia is awesome. I was going for a textbook definition of the Fed's job, but in addition to that (below, bolding mine) I also found some other useful tidbits on the role of the Federal Reserve. Geithner might be chosen by or "hired" by the bankers, but he still doesn't work for them.
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In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is the part of government that regulates the private banks. The balance between privatization and government involvement is also seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the President of the United States and confirmed by the Senate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.
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Additionally, we have this illuminating tidbit concerning asset bubbles: (again, bolding mine)
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Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.
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On the punishments for failure to comply by member banks we get this:
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Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way...shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
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I realize intent is hard to prove in court, but they manage to do it all the time in murder and theft and assault cases. So when exactly do the prosecutions start?
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Curmudgeon, no, and thats a big part of the problem.
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pluk,
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I agree, the revolving doors all have to close. regulators and the industries they regulate are separate career paths. The system we've got now is literally the same thing as allowing prosecutors to go back and forth between working for the DA and the mob. And much as I wish it was, that's not an exaggeration.