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ECONOMIC BAILOUT US financial Calvary or confusion?
Bangkok Post | Feb 14, 2009
By Sin-ming Shaw
Are you as confused as I am by what I read in the papers these days about the financial crisis?
President Obama has called Wall Street compensations and bonuses "shameful." A great start. But he wants to put a cap of $500,000 a year on senior executives of those firms receiving government money.
My question is, why do we need to keep them at all, let alone pay anything? For their "experience"? The firms they manage imploded on their watch.
These "geniuses" borrowed short-term money 25-30 times their capital to expand. In a bubble, their gamble paid off. But any two-bit real estate speculator in Hong Kong knows how to do that. In the end they crashed because they failed to manage the risks of having put on too much debt.
Timothy Geithner, the new US Treasury secretary, finally acknowledged in his February maiden policy speech an elementary truth: "There were systematic failures in the checks and balances in the system, by boards of directors, credit rating agencies, and by government regulators."
Yet we see no mass resignations on those Wall Street boards. Not even a symbolic handful.
Citicorp has among its board members the chair of Alcoa, Xerox and an MIT professor who was a former director of CIA. Goldman Sachs's board has an Ivy League president, a Harvard Business School professor and the world's richest steel magnate from India. Morgan Stanley has deans of famous business schools, a university president plus a group of dazzlingly successful business leaders.
Were they not there to oversee what the senior managements were doing with other people's money? Clearly not. Clearly, they agreed to serve in theory on behalf of the public just to glow and to reflect each other's success. They just loved to be loved.
Has anyone been keeping tabs on how much is needed to pull the world's largest economy out of its free fall?
Henry Paulson, ex-Treasury secretary, said his $700 billion was absolutely necessary lest chaos ensued. We now found out $300 billion is yet to be spent. We also suspected the bailout was done in a cavalier fashion reminiscent of how former Defence secretary Donald Rumsfeld managed the war in Iraq. No one more authoritative than the current Treasury secretary has confirmed our suspicion: "Our work begins with a new framework of oversight and governance of all aspects of our Financial Stability Plan."
So this new plan is to replace the former plan that lacks transparency and competence.
But what is it? Before we even get into the details, I am already befuddled by the actual size of the plan.
President Obama has asked for $825 billion for his rescue package. Is it enough? He keeps hinting the road ahead would be long and hard. So, does that mean he might need a third stimulus package?
Right now Mr Geithner is going to create a Financial Stability Trust Fund plus a Public-Private Investment Fund to "help get private markets working again". What exactly are they going to do and with whom? The same Wall Street folk saved by public money while paying themselves bonuses? The same titans who came out yesterday together to insist that their bonuses came from a "separate" pool of money?
We may not be valedictorians at our high schools, but we do know money is "fungible." You can't separate "new" soup poured into a pot of "old" soup. Soup is soup. New horse manure mixed with old manure is still horse manure.
So, how much is the new rescue going to cost really? I see numbers ranging from $2 trillion all the way up to $10 trillion. So how does Obama's $825 billion fit in?
We still don't even know why exactly the Paulson plan is not working out and why these two ventures would. All we know is that it isn't working.
Yet none of this basic information was forthcoming from the all-important maiden speech from the new Treasury secretary.
The already jittery financial markets hate uncertainty. So, they tanked following Mr Geithner's speech.
How are we to think of all this?
Are we clueless? But what if our confusion reflects the reality of economic thinking at Team Obama?
Timothy Geithner was the former head of the New York Federal Reserve Bank under whose watch Wall Street imploded. Wall Street was his brief.
Congress may have given him a pass. Yet it is clear that he, a protege of Robert Rubin and Larry Summers, failed to prevent toxic assets from becoming a major bread and butter of Wall Street and then failed to prevent an implosion by reigning in the rampant greed on Wall Street. It ran amok with the manufacturing and the distribution of those assets by Wall Street.
Timothy Geithner is arguably part of the problem. We are now to expect him to become the solution?
President Obama promised to clean up Washington. No more politics as usual. No more incompetence.
There is goodwill wishing him success from all corners of the world. Global economic stability is importantly dependent on a US economic recovery. Yet his economic team is filled with veterans of failed battles. All we get so far is a lot of confusion.Not a good omen.
Sin-ming Shaw is a private investor and a former visiting scholar at Princeton University.
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