Timothy F. Geithner

Taxpayers to Put Up Billions More for Bailouts of Greece and Corrupt Mortgage Giant

by Hans Bader on May 6, 2010 · 1 comment

in Bailout Watch, Economy, International, Labor, Legal, Politics as Usual, Regulation, Sanctimony, Zeitgeist

Government-sponsored mortgage giant Freddie Mac is demanding another $10.6 billion in bailouts, which the Obama administration is expected to give it. Obama’s so-called financial “reform” proposal does absolutely nothing to reform Freddie Mac, admits Obama’s Treasury secretary, tax cheat Timothy Geithner, even though he admits that Freddie Mac was “a core part of what went wrong in our system.” (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternative “aims to wind down, and break up” Freddie Mac and “limit taxpayer exposure” to its losses.

“American taxpayers are paying for $6.8 billion of the Greek bailout” through contributions to an international bailout fund backed by the Obama administration.   Greece is being bailed out by Europe and the international community because it is running up huge budget deficits due to a bloated bureaucracy and government pensions that let many retire in their 50s. “The Obama administration wants to use U.S. tax dollars to bail out a nation that is in a financial death spiral brought on by years of amazingly irresponsible deficit spending and similar behaviors often found in socialist states.”

Rioters in Greece killed three bank employees yesterday in their rage over possible budget cuts.  “The protesting civil servant workers trapped the bank employees in a burning building.”

Government spending is out of control in America, too.  Earlier, the Obama administration lifted the $400 billion limit on bailouts for the government-sponsored mortgage giants Freddie Mac and Fannie Mae, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.  The Obama Administration is now expanding the bailouts of these mortgage giants so that they can lavish pay on their CEOs and reduce the payments of deadbeat mortgage borrowers.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically-connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.

Obama claims that it will not lead to more bailouts, but even congressional Democrats admit that it will.  As Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Bogus Financial “Reform” Bill Regulates Internet, Does Nothing About Corrupt Government-Sponsored Mortgage Giants Fannie Mae and Freddie Mac

by Hans Bader on May 3, 2010 · 1 comment

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

The so-called financial “reform” bill backed by President Obama gives federal bureaucrats new powers over the Internet, while doing nothing about the corrupt government-backed mortgage giants that spawned the financial crisis.

For example, “the bill contains provisions that would put the Federal Trade Commission in position to start issuing rules on Internet transactions that would not only slow down business growth but also have no relevance at all to the financial collapse that prompted the bill.”

Meanwhile, the bill does nothing to reform the government-sponsored mortgage giants Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.“ Worse, the Obama administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.  The Obama Administration is now expanding the bailouts of these mortgage giants so that they can reduce the payments of deadbeat mortgage borrowers.  (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)

The bill will also enrich the Wall Street firm of Goldman Sachs, recently accused of fraud, which bankrolls liberal lawmakers.

Government pressure on banks to make risky loans was a key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

So, too, were the government-sponsored mortgage giants, Fannie Mae and Freddie Mac.  They helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud–$6.3 billion at Fannie Mae alone–to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically-connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.  His colleague Alex Pollock notes that Obama has not lived up his administration’s claims that it would back reform of Fannie Mae and Freddie Mac.

Obama claims that it will not lead to more bailouts, but even congressional Democrats admit that it will.  As Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority…The bill contains permanent, unlimited bailout authority.”

Obama Uses Phony Rhetoric About Financial ‘Reform’ to Push Bill That Enriches Special Interests and Perpetuates Bailouts

by Hans Bader on April 23, 2010

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

President Obama has collected millions from Wall Street special interests, his administration is chock full of Wall Street lobbyists, and he supported the unnecessary $700 billion bank bailout.  But now, he’s pushing a deceptive financial regulation bill with phony rhetoric about “reform,” claiming it is “not legitimate” to point out that the bill could lead to yet more bailouts and government takeovers (as economists and banking experts like Peter Wallison have demonstrated).

Obama’s legislation would do nothing to curb the abuses of the worst offenders behind the mortgage crisis, the government-subsidized mortgage giants Fannie Mae and Freddie Mac, even as it would enrich the politically connected liberal Wall Street firm Goldman Sachs (recently accused of fraud), enrich left-wing lobbying groups and community organizers, and give the government the permanent ability to bail out and take over Wall Street firms.

Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” Worse, the Obama administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.  The Obama administration is now expanding the bailouts of these mortgage giants so that they can lavish pay on their CEOs and reduce the payments of deadbeat mortgage borrowers.  (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.  His colleague Alex Pollock notes that Obama has not lived up his administration’s claims that it would back reform of Fannie Mae and Freddie Mac.

Obama claims that it will not lead to more bailouts, but even congressional Democrats admit that it will.  As Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Obama’s proposed financial regulations would also harm retail banking operations used by middle-class people and small businesses.

General Motors Repays Tiny Portion of Taxpayers’ $50 Billion Bailout; Obama Backers Bash Critics of Bailout

by Hans Bader on April 22, 2010 · 1 comment

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Energy, Labor, Legal, Mobility, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

President Obama’s tax-cheat treasury secretary, Tim Geithner, is trumpeting the fact that General Motors has paid back a small fraction of what taxpayers gave the company, noting that “GM had repaid in full the $4.7 billion balance it owed under the government’s Trouble Asset Relief Program.” But this so-called “repayment” was just an accounting trick.  GM used government bailout money to make the “repayment,” as the New York Times has noted.

More importantly, this “repayment” is a drop in the bucket compared to what GM has received from taxpayers.  The federal government has yet to recover the lion’s share of the more than $50 billion it loaned the company.  Why?  Because that $50 billion was mostly “converted into stock held by the Treasury Department.”  That’s billions of dollars for stock in a company that, for all intents and purposes, was bankrupt. (GM just lost another $4.3 billion.)

The only reason GM had enough money left to pay back any of what it owes taxpayers is because of Toyota’s recent safety issues and recalls, which drove car buyers away from Toyota to GM and Ford.  Only that kept GM from burning through most of the taxpayers’ money.

Even though GM still hasn’t paid back the $50 billion, and received billions in additional handouts through programs like the incredibly wasteful Cash for Clunkers (which cost taxpayers and used-car and car-parts businesses billions), Obama backers now claim that critics of the bailout owe Obama, GM, and the UAW “an apology.”

Ironically, GM would never have needed a bailout if it had just received relief from costly regulations such as CAFE rules (which wiped out at least 50,000 jobs) and dealer-franchise laws.  That’s so despite GM’s massive burdens from excessive union wages and benefits (worth up to $70 an hour), and rigid union work rules.

The Obama Administration left those wasteful work rules and excessive benefits largely intact, and gave the United Auto Workers Union (UAW) a big chunk of General Motors‘ stock, even though the UAW helped bankrupt the company, and the company has value today only because the federal government pumped billions of taxpayer dollars into the company (and engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company).

Veteran political commentator Michael Barone called the Obama administration’s treatment of Chrysler and GM bondholders “gangster government.” Law professor and bankruptcy expert Todd Zywicki called it an attack on “the rule of law.”

Back in 2008, Zywicki prophetically warned that a bailout would prove worse for the auto industry than for automakers to just quickly file for bankruptcy.   Zywicki noted that by enabling automakers to get rid of expensive union contracts and red tape, a “Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.”   It would provide  “a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules.”  It would also help automakers get rid of redundant auto dealerships that should be terminated but aren’t because of state dealer franchise laws.  Nobel Prize winning economist Gary Becker also argued that bankruptcy would have been better than a bailout in achieving “needed reforms.”

But the federal government ignored their wise advice, and chose to embark an incredibly costly bailout instead.   The bailout of GM and Chrysler is similar in many ways to the British government’s unsuccessful auto bailout in the 1970s, which ultimately failed despite a cost in the billions.

The federal government used money from the $700 billion bank bailout for the auto industry bailout. Legal scholars at the Heritage Foundation, Clinton administration Labor Secretary Robert Reich and many other commentators have argued that using the bank-bailout money for auto bailouts was illegal.

Stop Thief! NYT steals Examiner’s AIG scoop with no attribution

by John Berlau on April 17, 2009 · 1 comment

in Bailout Watch, Culture, Politics as Usual, Sanctimony

One week after Washington Examiner ace investigative reporter Timothy P. Carney broke the blockbuster story reporting that American International Group’s post-bailout CEO Edward Liddy owned a large stake in Goldman Sachs. a top recipient of the AIG bailout, the New York Times has decided that this is news “fit to print.” But for some reason, the so-called paper of record didn’t think it was “fit” to give any credit to the original source of this story.

Almost all of the significant details in the Times story  by Mary Williams Walsh, posted last night on its web site, were reported in Carney’s column in the Examiner a week ago (and elaborated on in my post in Open Market): The fact that Liddy — who was installed in his position by former Treasury Secretary Hank Paulson (and with the approval of  then-Federal Reserve Bank of New York President Tim Geithner, a detail not in the Times story!) — still owns more than 27,000 shares of Goldman Sachs that its valued at more than $3 million; and that this represented a potential conflict of interest because Goldman was a counterparty of AIG that got $13 billion from the taxpyer-funded bailout.

The Times even talks to the same AIG spokeswoman, Christina Pretto, who originally confirmed these details for Carney. But the story doesn’t once reveal to Times readers that all this information had already been broken by the Examiner.

It is highly doubtful the Times hadn’t known of the Examiner piece. Earlier, at the prominent financial blog site Ritholtz.com, prominet risk analyst Chris Whalen wrote a commentary on the issue citing both Carney’s piece and my analysis in Open Market.

The Times’ appropriation in its covering of what I had described to Carney as a “looting” of taxpayers and AIG shareholders can, in a sense, be called thievery on top of thievery.

Markets Rally on Hopes of Regulatory Relief

by Hans Bader on April 2, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Energy, Environment, Global Warming, Precaution & Risk, Regulation, Stimulus to Nowhere

The stock market has gone up by 280 points so far today, fueled by FASB’s vote to relax rigid mark-to-market accounting rules, which require financial institutions to value assets at their current fire-sale prices, and magnify boom-bust economic cycles.

The market may also be getting a boost from the Senate’s earlier vote undercutting the Obama Administration’s proposed $2 trillion cap-and-trade carbon tax, which would impose burdens on the economy akin to Herbert Hoover‘s disastrous 1932 Revenue Act at the beginning of the Great Depression.

The market’s rise contrasts with its fall in the weeks after passage of Obama’s $800 billion stimulus package, which Obama falsely claimed was needed to avert “disaster” and “irreversible decline.” Obama made that claim even though the Congressional Budget Office, controlled by his own Congressional allies, admitted that the stimulus package would shrink the economy over “the long run.”

Many commentators have called for relaxation or repeal of mark-to-market accounting rules to stem the financial crisis, including former FDIC Chairman William Isaac, Congressmen Ed Perlmutter (D-CO) and Paul Kanjorski (D-PA), the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, Newt Gingrich, and the Republican Study Committee.

While pushing through $8 trillion in bailouts, and trillions more in debt from massive budget increases, the Obama administration has until recently ignored inexpensive possible ways of mitigating the financial crisis like reform of “mark-to-market” accounting rules.

The Obama administration’s footdragging on accounting-regulation reform is inconsistent with the rationale for its trillion-dollar toxic-asset buy-up program, which defies mark-to-market concepts in a much more extreme way than a mere relaxation of mark-to-market accounting rules. The Treasury Secretary claims taxpayers won’t lose a full trillion under Obama’s toxic-asset program, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why did he continue to insist on federal accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules were right — in which case taxpayers will end up losing a trillion dollars — or they were wrong, amplifying financial panics — in which case the rules should be repealed, so that banks, not taxpayers, will be able to take the risk of holding the assets. (If these accounting rules, known as “mark-to-market” accounting, had been in place in the late 1980s, “every major commercial bank would have collapsed,” wiping out the economy).

It’s not even clear that all these bailouts are needed. As William Seidman, the banking official who helped clean up the S&L Crisis as head of the RTC, notes, the government’s $170 billion AIG bailout was absurdly expensive and wasteful. “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do.”

That includes a huge unneeded windfall for the investment bank formerly headed by Treasury Secretary Paulson, Goldman Sachs, a major donor to liberal politicians, which received billions of dollars from taxpayers that it did not even need, through the AIG bailout.

Obama’s record-breaking tax and spending increases violate his campaign promises to enact a “net spending cut” and not to raise taxes “in any form” on anyone making less than $250,000 a year.

Ironically, Obama’s “cap-and-trade” carbon tax might have the perverse effect of increasing, rather than reducing, greenhouse gas emissions. Cap-and-trade is a pernicious “form of tax farming.”

Billions More for Failed Bailouts

by Hans Bader on March 30, 2009 · 3 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Stimulus to Nowhere

Ironically, by getting rid of General Motors CEO Rick Wagoner, the Obama Administration has made it even harder for it to demand the painful changes needed to make the company competitive — meaning that the billions of additional dollars the Administration plans to dump on GM will likely be wasted (the way that England’s attempt to bail out its automakers failed, wasting billions). As Mickey Kaus notes,

“After visibly defenestrating GM CEO Rick Wagoner, and moving to replace the board of directors, won’t Obama now ‘own’ the GM problem? If the company shuts down in the near future, costing tens of thousands of blue collar jobs, it will be under executives implicitly or explicitly chosen by Obama. It will be Obama’s failure, not simply GM’s failure, no? . . . Doesn’t that make it harder, not easier, for the administration to walk away and force the company into bankruptcy? And doesn’t that, in turn, make extracting the necessary concessions (by threatening bankruptcy) more difficult as well?”

Moreover, only bankruptcy — not a bailout — can save the automakers from having to pay billions of dollars in payoffs to redundant, politically-connected, car dealers. Those payoffs are mandated by exploitative state laws that ought to have been preempted long ago.

While getting rid of Wagoner, the Obama Administration has stuck by incompetent Treasury Secretary Tim Geithner, even though Geithner played a key role in the disastrous $170 billion AIG bailout, and previously shaped economic policies that helped destroy the economy of Indonesia, an important oil-producing nation of 200 million people, in the 1990s.

Meanwhile, the Obama Administration has been using AIG to artificially juice up banks’ profits, and indirectly the stock market, in order to give Obama the political capital needed to pass his deficit-exploding budget, which will increase projected deficits by $4.8 trillion to $9.3 trillion, breaking his campaign promise of a “net spending cut” in a big way. (The AIG bailout has also been used to shower money on Goldman Sachs, which does not need the money, and which has given millions to liberal politicians like Obama).

The automakers were bailed out using money from the bank bailout, which was written so broadly that its supporters say it can be used for almost anything. George Will argues that such a standardless law violates the Constitution‘s non-delegation doctrine. We earlier argued the same thing.

AIG employees gave hundreds of thousands of dollars to ethically-challenged Connecticut Senator Chris Dodd, who helped draft the stimulus and bank-bailout bills (and inserted the language that protected their bonuses). That includes $160,000 from employees in the division that later drove AIG into insolvency.

In the Wall Street Journal, scholars debate the principal causes of the mortgage bubble and subsequent financial crisis. Economics professor David Henderson says “the main fed culprits are the beefed up Community Reinvestment Act and the run-amok Fannie Mae and Freddie Mac.” An investment banker cites “mortgage fraud, the Bush administration’s weak-dollar policy and Lehman bankruptcy decisions, and Congress’s reckless housing policies through Fannie Mae and Freddie Mac and the Community Reinvestment Act.” Economists Judy Shelton and Gerald O’Driscoll and law professor Todd Zywicki say that the Fed’s monetary policy was the single biggest factor. Historian Clayton Cramer previously argued that regulations adopted under the Community Reinvestment Act spawned the mortgage crisis.

Congressional leaders blocked Senator Judd Gregg’s modest measure to limit the explosion of the national debt. Meanwhile, House Speaker Nancy Pelosi (D-Cal.) has been busy quarantining harmless library books in the name of child safety.

In other news, PETA, which claims to care about animals, has been busy killing pets.

Feds Make Freddie Mac Even Worse, Ripping Off Taxpayers

by Hans Bader on March 27, 2009 · 3 comments

in Bailout Watch, Economy, Politics as Usual, Precaution & Risk, Regulation

After federal regulators took over failing mortgage giant Freddie Mac, they didn’t stop its risky lending practices. Instead, they ramped up its risk-taking, making it run up even bigger debts at taxpayer expense to try to artificially pump up the economy. They made Freddie buy countless risky mortgage loans. Recently, the Obama Administration forced it to incur $30 billion in losses as part of the administration’s bailout for irresponsible mortgage borrowers, which caps mortgage payments for even high-income borrowers at a ridiculously low level. The Obama Administration tried to prevent Freddie Mac from even disclosing these losses in the financial disclosures it must make to investors under the securities laws.

Given the government’s ability to take even a badly-managed company and run it even worse, why should anyone support Treasury Secretary Geithner’s demand yesterday for vast new powers to take over companies that he thinks pose risks to the economy, or risks of failing? Especially given Geithner’s history of bungling responses to past economic crises, such as his role in the destruction of Indonesia’s economy in the Asian Financial Crisis of the 1990s.

I was a huge critic of GSEs like Fannie Mae and Freddie Mac and their practices. CEI President Fred Smith has been publicly criticizing their ability to gamble at the taxpayers’ expense for years. Congress ignored his prophetic warnings about the risk they posed to taxpayers.

But federal regulators have been so reckless that they have managed to make matters even worse.

Geithner Seeks More Power to Ruin Our Economy

by Hans Bader on March 26, 2009 · 6 comments

in Bailout Watch, Economy, Politics as Usual, Stimulus to Nowhere

Treasury Secretary Tim Geithner wants a “vast expansion” of his power over the financial system. This is the same guy whose bungled $170 billion AIG bailout gave billions of dollars to wealthy AIG clients like Goldman Sachs, which admits it neither needed nor expected the money it got from taxpayers.

Back in the 1990′s, Geithner, working with the IMF, destroyed Indonesia’s economy, by prescribing disastrous economic policies. The result was massive increases in child malnutrition, riots, and mushrooming poverty, in a major country that once boasted annual economic growth rates of 7 percent. Australia’s long-time Prime Minister Paul Keating has chronicled Geithner’s central role in this disaster repeatedly, but to no avail (Keating was the leader of his country’s Labor Party, so he’s not exactly a doctrinaire conservative. And his rule was marked by economic growth.).

Now, Geithner wants more regulatory power in his own hands, even though unregulated financial institutions (like hedge funds) are doing better than regulated ones, so much so that unregulated financial institutions are being relied upon to bail out regulated financial institutions in Geithner’s toxic-asset buy-up program!

Geithner sent the dollar tumbling yesterday by foolishly suggesting that the dollar might be losing its role as the world’s reserve currency. The head of the European Union yesterday called the Obama Administration’s policy of unprecedentedly massive deficit spending the “road to hell.” The prominent liberal economist Jeffrey Sachs says that the Administration’s toxic-asset buy-up program will “rob the taxpayer” by “buying up toxic assets from the banks at far above their market value.”

Historian and engineer Clayton Cramer has a fascinating analysis of how the mortgage crisis was spawned by regulations adopted under the Community Reinvestment Act, and special interest groups that learned how to game those regulations, like ACORN (a group Obama long worked with). ACORN, a beneficiary of the stimulus package, helped spawn the mortgage crisis by promoting “liar loans.” It has also engaged in extensive financial fraud and vote fraud. The Obama Administration has chosen ACORN to help conduct the 2010 census, which will be used to reallocate seats in Congress.

Obama Chief of Staff Rahm Emanuel received $320,000 while asleep at the switch as a director of the mortgage giant Freddie Mac, a fraud-ridden GSE that helped spawn the mortgage crisis and ended up being bailed out by taxpayers at a cost of over $100 billion.

James Piereson has insightful comments about Geithner’s demand for new regulatory powers (and unnecessary bailouts) here. He also notes that Fed Chairman Ben Bernanke has been essentially refighting the last war, applying remedies that might have been helpful in the Great Depression but are positively harmful now.

Perhaps Bernanke’s most controversial policy has been to print vast sums of money to buy up government bonds, under the rubric of “quantitative easing.” Congressman Ron Paul says this policy, and the massive bailouts, are an inflationary disaster, and that it would have been better for the government to do what it did in response to the sharp 1921 recession — nothing. “He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. ‘No one remembers that one. They’ll remember this one, because it will last’” much longer, because the “government just won’t allow the correction the economy needs.”

The 1921 recession speedily ended, without any bailouts or government intervention, although it started out as a very nasty recession, with suffering much worse than in the early days of the Great Depression. The 1921 recession was followed by an economic boom, including 6 percent annual growth rates in the 1920s.

The Obama administration has never explained why such vast powers should be bestowed on Geithner, who cheated on his taxes, lacks expertise in economics, and receives a failing grade from economists. Yet it has relied on him to sell its economic policies, such as its proposed budget (which will add $4.8 trillion in additional debt), $8 trillion in bailouts, a trillion dollar toxic-asset buy-up program, and an $800 billion, economy-shrinking “stimulus” package, all of which contradict Obama’s campaign pledge of a “net spending cut.”

Geithner’s “bad bank” is a big bad idea: fix bad mark-to-market accounting instead

by John Berlau on February 10, 2009 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Politics as Usual, Precaution & Risk, Stimulus to Nowhere

The Obama’s administration $1 trillion plus bank bailout plan — on top of the $800 billion stimulus that just passed the Senate — will explode the national debt and rob from future generations while doing little about the tightening of credit and valuation of toxic assets. Like the Bush administration, the Obama team balked at doing anything substantial to provide relief from the mark-to-market accounting mandates that prominent liberals and conservatives agree are spreading the credit contagion.

Despite my hopes that Treasury Secretary Geithner ‘s plan would offer a change to mark-to-market rules we can believe in, as rumored in the financial press last week, the plan turns out to be “more of the same” Bush-Paulson big spending and big government bailout. As knowledgeable observers from conservative Steve Forbes to Democrat stimulus proponent Mark Zandi agree, mark-to-market relief is essential to unclogging the arteries of the credit system. As I wrote in the Wall Street Journal last fall, it is one of the major reasons for the credit contagion despite the fact that mortgage delinquency rate are still only 6 percent.

After soaring late last week on rumors of mark-to market relief late last week (and TheStreet.com directly attributed this rise to hopes of action on mark-to-market), the Dow fell down nearly 500 points, or 5 percent today. The markets anticipate that any government money will be weighted with the strings of overregulation and de facto nationalization.

By contrast, mark-to-market suspension or relief, which would cost taxpayers virtually nothing, would let the market value these assets with private money at what the government is now planning to pay for them. Financial institutions could buy these discounted securites at a true “market” price without worrying about a future mark-to-market paper loss eating away at their regulatory capital.

Without mark-to-market reform from the SEC and the bank regulatory agencies, the buying initiatives Secretary Geithner outlines today could actually make the problem worse. As I wrote last fall in Open Market of Paulson’s original plan to buy mortgage asset (which he abandoned in favor of buying bank stock, an equally bad idea), if the government sets the price of asset securities too low, it could spread the contagion mark-to-market losses even further. If it sets the price too high, taxpayers will lose out.

It’s not too late for the Obama adminstration to use its political capital push to reform mark-to-market rules such as Financial Accounting Standard 157 that are acting as a stranglehold on the financial system. Changing accounting rules to allow banks to price assets more rationally during a liquidity crisis would indeed be a change we could believe in.

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