Wednesday, February 11, 2009

Tim Geithner - Idiot, Savant?

Now we know why he couldn't figure out how to do his taxes....

He's not the sharpest tool in the shed....

Geithner: Still making the same mistakes.

Alan Reynolds' column in today's NY post clearly explains the reason for Wall Street's reaction to Geithner's new Financial Plan.  It's the financial equivalent of throwing gas on a burning house.

If Obama, and the rest of the Democrats in this season's revival of "The Gang That Can't Shoot Straight", wanted to really destroy the economy for the next generation, they couldn't have devised a better plan.

One has to ask whether the Democrats have savaged the economy out of sheer ineptitude, or are they really attempting to destroy Capitalism.  I personally think that it's both.  

First, they structure Governmental programs to pressure banks to issue dodgy loans to people who can't afford them, then set up Fanny and Freddy to facilitate the scam and push the securitized notes on the financial community, who in an attempt to be innovative in spreading the risk they'd been pressured by the government to take, spread the paper globally.  After the global market has been saturated with these high risk securities, the Democrats then engaged in a lengthy, concerted and relentless negative campaign to taint George Bush's economic record and cause economic jitters in a strategy designed to help them win the mid-term and 2008 Presidential election.  They even went as far as to cause a run on a bank (Chuck Schumer), and a run on an insurance company (Harry Reid) in their quest to rattle the market.  Unfortunately for the world, a devastating aspect of regulations they initiated earlier under Sarbanes- Oxley legislation, requiring banks to "mark to market" their reserve capital assets, wreaked havoc on the banks because of uncertainty of the value of those assets.  They had inadvertently kicked over the lead domino that subsequently caused the cascade of globally linked financial institution failures, and the total market chaos we are living through today.

So, here we are today; the "mark to market" requirement still has not been eliminated; and not only is Geithner proposing that the banks go back to pushing loans to people who are over-leveraged (Isn't that how we got into the whole sub-prime mess to begin with?), but his proposal to further extend governmental "participation" in banks is causing an even greater flight of private capital from the market.  

This is a team that is so blinded by ideology that they can't, or won't, heed the experience of history....we're in for a long, rough, ride.

THE economy is suffering from too much debt and not enough credit, says Treasury Secretary Tim Geithner. While announcing a new "Financial Stability Plan" yesterday, he noted that many firms and households "borrowed beyond their means," due to a "boom in credit."
Yet he also complained that many banks (having finally come to their senses) have tightened lax lending standards. He insisted, "We must get credit flowing again to businesses and families."
Before spending yet another $2 trillion to fix something, it might help to find out what's broken.
Last October, the Minneapolis Fed published "Facts and Myths about the Financial Crisis of 2008" by V.V. Chari, Lawrence Christiano and Patrick J. Kehoe. Bank lending had not declined, they showed, nor had sales of nonfinancial commercial paper. Besides, 80 percent of nonfinancial corporate borrowing is done outside the banking system, they noted, such as selling bonds and commercial paper.
Bank lending was 5.7 percent higher in December than a year earlier, and roughly flat from September to January (surprisingly strong for a falling quarter with rising credit risks). And the areas commonly pointed to for signs of a credit squeeze last fall (such as high interest rates on loans between banks) don't look troublesome today. On the contrary, healthy companies have been raising billions by selling long-term bonds at low interest rates.
So why does Geithner suggest that cuts in bank lending caused the recession (rather than, say, the squeeze on profits from too much debt) and that increased bank lending (rather than bond sales) is the cure?
The new Treasury plan continues to put most of the emphasis on pushing banks to make more loans to over-indebted consumers, homeowners and firms. Unlike last year, however, Geithner now believes, "Our policies must be designed to mobilize and leverage private capital, not to supplant or discourage private capital. When government investment is necessary, it should be replaced with private capital as soon as possible."
That's a laudable goal - but contradictory. In reality, government capital replaces ("crowds out") private capital, leaving taxpayers holding a bigger and bigger bag. Call that nationalization by default.
Under the new and old TARP schemes, the mere threat of incremental nationalization of banks and insurance companies will always "supplant and discourage private capital." You could watch it happening while Geithner spoke - as investors rudely pushed bank stocks down sharply. (An "ultra short" exchange-trade fund that bets heavily against financial stocks (SKF) was up 15 percent by the end of his talk and 18 percent at closing.)
This is nothing new. As I observed on this page last fall ("Why Bailouts Scare Stocks," Sept. 18), Treasury plans to "help" financial institutions alwaysscare away private investors.
In mid-January, for example, Bank of America stock fell from $10.50 to $5.10 in three days on news that "the bank is close to getting billions in additional aid from the government." Then President Obama's inauguration shared The Wall Street Journal's front page with the headline: "Banks Hit by Nationalization Fears: Financials Plunge as US Considers New Rescue Options."
Nationalization fears began last September with the virtual expropriation ofFannie MaeFreddie Mac and AIG. Shareholders were swiftly wiped out, with no vote on the bad deal.
The federal assault on financial stocks escalated in October, when Congress converted TARP by whim into a "Capital Purchase Program" (CPP) - a scheme for incremental nationalization of select banks, via Treasury purchases of preferred stock with warrants. Investors soon realized that CPP is simply a time-release dose of the same poison deliberately used to punish shareholders in Fannie, Freddie and AIG.
Neel Kashkari, Treasury's TARP czar, described this plan as "purchasing equity in healthy banks around the country." But from the perspective of common shareholders, Treasury's purchase of senior preferred shares is no different from the banks taking on more debt.
TARP-afflicted firms will have to pay dividends to the Treasury for its preferred shares before any remaining crumbs fall to common shareholders. Treasury will be first to get any dividends or capital gains if the firm does well, and first to get repaid in the event of bankruptcy.
Once a bank or insurance company gets in bed with the government, the property rights of that company's stockholders become uniquely insecure. When the government jumps into the cockpit, smart stockholders bail out.
And depressed stock prices deflate the banks' capital cushion, regardless of Treasury investments - making them more likely to fail and therefore less likely to lend. In other words, government "help" achieves the opposite of Geithner's declared goal.
"Our work will be guided by the lessons of the last few months," says Geithner. But he never learned those lessons. On the contrary, he continues to emphasize how sternly "conditions placed on banks" will be enforced, while naively expecting private investors to risk money in enterprises under intensely politicized control.
Companies as valuable as Bank of America and AIG need stockholder support, not taxpayer support. If Secretary Geithner really hopes to get stockholders back in, the government will have to get out.
Alan Reynolds, a Cato Institute senior fellow, is the author of "Income and Wealth."


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