Geithner’s Town Hall Tells Us to Batten Down the Hatches
Posted by Michael A. Kamperman on September 11, 2009
Treasury Secretary Timothy Geithner was on T.V. twice yesterday. First he testified before the TARP Commission headed by Elizabeth Warren. Then last night he held a Town Hall meeting hosted by CNBC. He is a very good politician and should consider running for public office. But he is not the person we need to lead us out of the economic crisis. When asked by Dr. Warren if we could re-run the stress tests on the banks since unemployment is now higher than the worst case assumptions used in the test, he said banks losses were better than the worst case estimates used in the tests. When asked if we could run the stress tests on the 9,000 banks that weren’t tested, he said it was unnecessary since they only represented one third of total bank assets. When asked if we had Zombie banks that don’t go insolvent but are too weak to lend, he said he didn’t believe any of the largest banks are Zombies. I guess he has been too busy appearing on T.V. to notice that consumer credit dropped by a record $21.6 billion in July. I guess his view is the banks have plenty of money to lend; they just don’t have enough credit worthy borrowers to lend it too. In front of the commission he bobbed and weaved and got out of there relatively unscathed.
It was at the Town Hall meeting that we got to see some real insights into Timothy Geithner’s view point. He believes the U.S. economy and the global economies have returned to growth. He believes the banking system needs to take less risk so that another global financial crisis doesn’t emerge. He doesn’t want to end some of the support programs put in place for financial companies too soon. He believes Americans need to save more. He believes once the economic crisis is over the deficit needs to be reduced substantially with higher taxes on relatively wealthier Americans. When asked if Meredith Whitney’s call for housing prices to drop another 25% was a real possibility, he dismissed it by stating the mortgage modification program has already refinanced 350,000 mortgages over the last year. Perhaps he missed that in the month of August alone 355,000 notices of foreclosure were sent to homeowners mirroring the record pace set in July. He basically believes the federal government has done enough to solve the crisis, but will do more if necessary. He thinks we just need more time and patience to slowly crawl our economy back up the hill.
My take is Treasury Secretary Geithner is a deficit hawk at heart and doesn’t want to spend any more resources or political capital than is necessary to solve the economic crisis. But he doesn’t get it. He doesn’t understand that we are in a prolonged debt-induced deflationary depression. He doesn’t understand that we need shock and awe policies to revive the economy. He is part of the economic team advising the President that a slow recovery has started, and while the next few months will be rocky eventually the economy will heal itself. This means he is advising the President to wait and watch rather than to act. The economy has reached the point where the straw has broken the camel’s back. The weight of the debt is too much for the economy to carry. The U-6 unemployment rate is 16.8% and 1 in 8 mortgages are over 30 days past due. By this time next year the U-6 unemployment rate my pass 20% and most of those mortgages that are delinquent will wind up in foreclosure. He is a nice sharp technocrat. But he has no vision on how to lead the economy to the Promised Land. We need a person of economic vision guiding our President. Where is our modern day John Maynard Keynes?
Lawrence Bagshaw said,
Dear Mr Kamperman,
We are all searching for an answer to the financial problem the world is facing. I would very much appreciate your view on the following alternative scenario as it is one which I never hear or see discussed at any length :
I consider that right now we are witnessing a denial of hard reality : governments are refusing to accept the political and social consequences of their past economic mismanagement. We have a monetary policy that promotes more credit and a fiscal policy which is creating more debt. This cannot solve the debt crisis and will only prolong it resulting in the excess economic capacity generated via loose credit being allowed to remain in place for longer.
In the meantime governments are risking an inflationary spiral. Inflation is a particularly unfair process as it lets off the hook both governments and individuals who have borrowed recklessly whilst eroding the value of savings of those who acted responsibly. Quantitative easing is further increasing this risk of injustice beyond fiscal stimulus. Surely deflation is the answer in order to accord economic justice and to provide for a genuinely sustainable recovery ?
Would you not agree that the natural way to solve the debt crisis is to reduce the total levels of debt ? Accordingly, individuals and businesses are quite naturally and correctly reducing their expenditure. Deflation may therefore be seen to be part of the efficient working of the market economy and an integral part of the process of economic recovery whereby labour and capital are reallocated.
If market forces were allowed to prevail, the market would quickly bring about the reduction of debt in all sectors via liquidation – all asset prices and wages would fall. Unemployment would rise to whatever level of employment cleared the market. Prices and wages would both fall and, in due course, this would lead to a vigorous and sustainable recovery albeit from a lower level of economic activity. In the interim, governments would be forced to accept the political and social consequences of their past economic mismanagement.
By allowing market forces to prevail, the losses would fairly be allowed to lie where they fall : less prudent individuals with net debt who were either reckless borrowers or who were simply enticed into borrowing by the expansionary credit environment of the recent past would see their burden increase via the deflationary process. More prudent individuals not burdened by debt would be able to maximize the advantages of their past prudence. A re-allocation of resources would ensue as strong balance sheet companies, managements and individuals absorbed the weak. The prudent would also enjoy the advantage of a relative increase in the value of net personal and corporate savings within the new deflationary environment providing greater purchasing power to this group.
This is surely the natural and fair outcome of the crisis. Why should the financial position of debtors be eased at the expense of savers? Anyone can get into debt but it takes sacrifice and judgment to acquire savings as we all know.
Looking beyond the immediate pressures of the crisis, I also consider that we need a return to sound money, balanced budgets and a more efficient and productive economy. Do you think that there may be an argument for removing fiscal as well as monetary policy from government ? Given their past performance and general lack of candour with the electorate, perhaps we should allow them only the power to legislate for the social good within a balanced budget environment ?.
That way society would get what it currently earns, not what it borrows from the future.
I would be very grateful for your comments in due course.
Yours faithfully,
Lawrence Bagshaw
Michael A. Kamperman said,
Lawrence,
I agree that if the government would pull fiscal and monetary support we would experience significant deflation and find the true bottom in the economy. But in a society where economic activity is insufficient to support all of the nations debts no one knows how low we would ultimately go to find a bottom. Can we afford to take that chance? The pain would be immense for large segments of our society. How do we know the fabric of our society would hold together under such strain? Would the savers be better off if the bank they had their savings in closed and the federal government withdrew FDIC support? Would the savers be better off if crime spun out of control, or anarchy broke out everywhere?
A lot of the economic pain is being felt by young workers in their 20′s and 30′s who thought they were doing the right thing. Many of them saved and made a downpayment on a home. Then, the home dropped by 30% in value and wiped out their equity along with their ability to sell it. As the economy continued plummeting they lost their jobs. After a few months their savings were wiped out and they were eventually foreclosed upon. Yet these were people who worked hard in school to get good grades to get a good job. These were people who went to work on-time every day and were very good employees. Under the liquidation and clear scenario there would be millions more joining their ranks. No, I cannot support that concept. Moral hazard has broken down in America. Too many who lived by the rules they were taught their whole life and now left in financial ruins. In many young families both the wife and the husband have lost their jobs.
I believe we need a massive dose of monetary and fiscal stimulus from the federal government far beyond what they have done so far. The solution to reduce the debt burden is for the Fed to expand the program of quantitative easing, not end it.