It was jarring last week to see the Treasury Secretary under intense fire before Congress, being asked to resign for the good of the country. It was more like Prime Minister's Questions in the British Parliament than the more deferential mode we are used to. Timothy Geithner fought back vigorously, but he lost his cool. His team at Treasury was said to be happy to see him showing a little moxie. Unfortunately the episode didn't add to his gravitas, which is in short supply. Now there is rampant speculation about who will replace Geithner. There is, as they say, blood in the water. It seems a bit unfair for Secretary Geithner to be under siege after less than a year in the job. And it was a year in which the economy has gone from teetering on the abyss to showing signs of recovery. One can hardly imagine holding the job of Treasury Secretary at a more challenging time, and Geithner deserves a lot of credit for managing calmly on many fronts throughout the crisis. At the same time, he has not shown the kind of visionary leadership that we might have hoped for. Perhaps those of us who are great admirers of Alexander Hamilton–the first Treasury Secretary, from 1789 to 1795–will never be satisfied. Hamilton, after all, was a man of ideas, a great visionary, a deep thinker and a skillful politician. It has been quite a while since those qualities have come together in a Treasury secretary. – Forbes, Thomas F. Cooley
Dominant Social Theme: A tragedy in the making?
Free-Market Analysis: We're not so upset about the criticism of Timonthy Geithner as Thomas Cooley is in this recent Forbes article. Cooley is the Paganelli-Bull professor of economics and Richard R. West dean of the NYU Stern School of Business, and he writes a weekly column for Forbes, which must be difficult. But while writing something every week is difficult, since you have to come up with new material 50 times a year, we think Dr. Cooley may have compounded his difficulties with this problematic article. It is certainly well written and presents a thoughtful and clear-headed approach to the issues, but some of the statements and conclusions seemed questionable to us – and to Forbes readers as well. Here is some more from the article – the conclusion actually:
The most recent bump in the road has been the scathing criticism of Geithner by Neil Barofsky, the TARP special inspector, over the funneling of taxpayer funds intended to bailout AIG to its counterparties including Goldman Sachs. As the report put it: "There is no question that the effect of the FRBNY's decisions–indeed, the very design of the federal assistance to AIG–was that tens of billions of Government money was funneled inexorably and directly to AIG's counterparties." And the report was particularly critical of the fact that there was no attempt to extract haircuts from the counterparties–they were all paid 100 cents on the dollar.
As a result, the conspiracy theorists are having a field day. Consider their fuel: As president of the Federal Reserve Bank of New York, Geithner worked very closely with Henry Paulson–his predecessor as Treasury Secretary and before that head of Goldman Sachs–as was warranted by the situation. Geithner's primary deputy at the New York Fed was William Dudley, a former Goldman Sachs economist. The chairman of the Board of the Federal Reserve Bank of New York until May 2009 was Stephen Friedman, former Chairman of Goldman Sachs, and a member of Goldman's board at the time of his New York Fed service. Friedman also chaired the search committee that selected Geithner's replacement–William Dudley. At the time his former Goldman Sachs colleague Dudley was appointed–December 2008–Friedman purchased an additional $3 million of Goldman stock in violation of the rules.
Now ask yourself, surrounded by this crowd of influences, how likely is it that Geithner would have asked Goldman Sachs to take a serious haircut on their AIG positions? You don't have to be a black helicopter fan to recognize that the proximity of the small world that is Wall Street to the very institutions and public servants who are meant to regulate them can seriously compromise their credibility. This proximity and the fact that Wall Street ran amok on Geithner's watch as president of the Federal Reserve Bank of New York–the top regulator–has damaged his credibility in his current role. Let's hope he will shake it off, because now is a time when we need a strong hand to address regulatory reform and our looming fiscal crisis.
Dr. Cooley lucidly seems to sum up the conflicts of interest that Geithner has here. But why then does he conclude that the nation needs the strong hand of Tim Geithner to address the nation's looming fiscal crisis. And why in fact does he call it a fiscal one? We would argue that America has both a fiscal and monetary crisis. Perhaps Dr. Cooley uses "fiscal" because Geithner's bailiwick is to some degree fiscal, not monetary. If so, that's another problem in our humble opinion – because the cordon sanitaire between fiscal and monetary policy seems more and more artificial and arbitrary as the dollar gradually crumbles.
Beyond this, we don't subscribe to the managed money theory of economic growth. We don't think Geithner is irreplaceable and generally we are not believers in the wise man school of economic management. We don't see, over the long term, where it has helped either America or Europe.
It is instructive as well to see some of the feedback that Dr. Cooley receives on his article, which basically boils down to a defense of Tim Geithner and of the management of the American economy as it has existed really for much of the past 100 years. Here are some excerpts:
Posted by maryprice26
Thomas Cooley must be a Goldman Sacks wannabe. Otherwise, this is the most incredibly naive, superficial, inaccurate and misleading article I have ever seen in Forbes. It's a clumsy whitewash attempt and it won't work. With internet resources, no one is this ignorant anymore. Quit insulting my intelligence.
Posted by ccecil
Regrettably for our country, this Administration, which was to be a model of transparency, has betrayed the American people's trust. Too much has been done in the name of expediency and all should have learned by now that the end does not justify the means. At this time it is especially true that it is simply unacceptable that a man with Geithner's conflicts should be allowed to be Treasury Secretary. Charles Cecil, CEO, Opin Partners, LLC
Posted by Ransome
Geithner is not incompetent, he is a committed fresh water banker as is Summers and Rubin. They believe that all the problems of the national economy and society can be cured by the availability of credit. All problems are monetary. Therefore regulation, planning or a national vision are to be avoided at all costs because it interferes with the invisible hand. Visionary central planning leads down the road to serfdom. Fresh water economists believe a wise man has no plan. A business man without a vision and a plan is a ruined business man, something they overlook. Hamilton and other visionaries at the time were political economists working with a vast and rich clean slate, a country with unlimited raw materials, workers and a coming industrial age. Today he would be booed off the stage as a big government socialist dictator, simply for having a plan; after all, the market knows best. Special interests would fly into a rage at the suggestion of a plan. Today self-interest rules, back then national interest ruled.
Posted by salty3333
"It was a year in which the economy has gone from teetering on the abyss to showing signs of recovery." Professor, you lost all credibility with this one line. The only thing near the abyss was Lehman, GS, Chase, and a few of the other high rollers. We should have pushed them over and placed an armed guard on the Treasury. Instead we gave them the keys to the vault. The "recovery" is a myth that only sheltered eggheads can see. The dollar is toast and without a viable currency, we cannot pay off this mammoth debt. If we weren't bankrupt before this all happened, we are now…while the big boys bring down double bonuses.
Notice the reference above, in Maryprice's feedback to the Internet. The problem that those who wish for the continued management of Western economies by a monetary elite (such as Cooley) is that there are a significant number of people now in the middle and upper middle classes in America and Europe who don't believe it anymore. They have read enough on the Internet to have the confidence of their opinions and they have concluded that they have been snookered and don't want to be again.
We don't know if Geithner will stay or go. But the ire directed at Geithner is part of a larger problem that is systemic in nature. Back in the 1930s, the monetary elite was able to channel anger and grief about the economy toward "greedy" bankers and tycoons. This left the central banking mechanism unscathed. And it is from central banking that the monetary elite derives a good deal of its power. But central banking itself is under attack this time around. It's been one economic crisis too far – and it took place under Internet scrutiny so average people (without degrees and inherited wealth) could see how it played out.
This Forbes article and the responses illustrate the dilemma the monetary elite faces better than anything we could write, in our opinion. More and more people seem to understand the systemic nature of the problem now. They may not understand one of the more important solutions yet – a private gold and silver standard – but over time we think that debate, too, will take place. Perhaps it has already started.