The Inside Job with Geithner

Simon Johnson writing on The Baseline Scenario blog says the following:

Over the past 30 years Wall Street captured the thinking of official Washington, persuading policymakers on both sides of the aisle not to regulate (derivatives), to deregulate (Gramm-Leach-Bliley), not enforce existing safety and soundness regulations (VaR), and to stand idly by while millions of consumers were misled into life-ruining financial decisions (Alan Greenspan).

This was pervasive cultural capture or, to be blunter, mind control. But when the crisis broke it was not enough. Having powerful people generally on your side is not what you need when all hell breaks loose in financial markets. Official decisions will be made fast, under great pressure, and by a small group of people standing up in the Oval Office.

If you run a big troubled bank, you need a man on the inside – someone who will take your calls late at night and rely on you for on the ground knowledge. Preferably, this person should have little first-hand experience of the markets (it was hard to deceive JP Morgan and Benjamin Strong when they were deciding whom to save in 1907) and only a limited range of other contacts who could dispute your account of what is really needed.

Goldman Sachs, JPMorgan, and Citigroup, we learn today, have such a person: Tim Geithner, Secretary of the Treasury.

We already knew, from the NYT, that most of Geithner’s contacts during 2007 and 2008 were with a limited subset of the financial sector – primarily the big Wall Street players who were close to the New York Fed (including on its board). And the announcement of his appointment was widely regarded as very good news for those specific firms.

...

But today’s AP report, based on looking at Geithner’s phone records, from the inauguration through July, suggest something else. How can anyone build an accurate picture of conditions in the entire crisis-ridden financial sector primarily from talking to a few top bankers?

The list of phone calls is not the largest banks, because some of the biggest are hardly represented (e.g., Wells Fargo), it’s not the most troubled banks (e.g., Bank of America had little contact), and it’s not even investment banker-types who were central to the most stressed markets (Morgan Stanley was not in the inner loop). And small and medium-sized banks (and others) always bristle at the suggestion that their interests are in alignment with those of, say, Goldman Sachs.

Go read the whole blog entry to get all the facts and follow up the many links in the text.

I thought the appointment of Geithner as Secretary of Treasury was a disaster. So far he has confirmed my opinion. Furthermore, the fact that Obama put him forward and stands behind him has disillusioned me with Obama. The US needs leadership that will pull the people out of the mess they are in. That requires some straight talk. It requires brutal honesty. People have to be told "cutting taxes" is not the way to fix the mess. People will have to pay to rebuild the country. But Obama keeps promising "no new taxes" (as if he was George Bush 41) while quietly giving trillions to the big corporations with the big lobbyist effort. George Bush 43 was an utter disaster. I suspect Obama will be viewed by history as simply a "too little, too late" ditherer who let the problems fester under his 4 year administration.