October 2, 2022

Geithner Lectures Europe On Fiscal Discipline – This Is Like BP Giving A Seminar On Oil Well Safety

With Europe Facing Meltdown Geithner Offers Advice

After recently “saving” the US from economic Armageddon, Treasury Secretary Geithner must feel uniquely qualified to  advise European governments on their looming sovereign debt crisis.   Geithner’s solution to Europe’s out of control deficits is additional stimulus (via increased deficit spending), bailouts and stress tests on Europe’s tottering banks to rebuild public confidence in the banking system.

Wall Street Journal – LONDON—U.S. Treasury Secretary Timothy Geithner landed in Europe and reasserted a traditional American role of dispenser of financial advice to the world, telling European governments to get their fiscal houses in order.

After two years in which an historic financial crisis seemed to deprive the U.S. of its self-confident global economic leadership, Mr. Geithner signaled a new-found willingness to reassert American authority on the future of the world economy.

Inside No. 11 Downing Street, the home of his British counterpart, Mr. Geithner pushed continental Europe to speed up the rescue of debt-laden economies, and to not stint on fiscal stimulus.

The U.S. is also advising European countries that can afford it—the U.K., Germany, France—to keep pumping stimulus into their economies.

“This crisis is multifaceted, but I believe bank stress tests can be helpful as a critical component of any comprehensive plan to restore confidence in the European financial system,” said Lee Sachs, who was, until a month ago, a top adviser to Treasury Secretary Timothy Geithner.

Mr Geithner’s advice that over indebted nations should borrow more money to solve their debt crisis was met with scorn by European officials.  The recommended stress tests for banks was viewed as a mere public relations exercise.

WSJ – For Geithner critics, the new U.S. assertiveness is misplaced. Desmond Lachman, a former senior IMF European official who is now a researcher at the American Enterprise Institute, said the repeated bailouts engineered by Mr. Geithner have made the overall problem worse, and that the U.S. advice of providing even more financing for heavily indebted countries like Greece is bound to fail.

Mr. Lachman said Greece’s debt needs to be restructured and that weaker euro-zone countries should consider dropping the euro and reverting to their national currencies. “Geithner is part of the problem,” he said. “It’s obvious this can’t work.”

“You don’t need a stress test to tell you what would happen if Spain became bankrupt; it would be horrible,” one German official said.  German officials argue the U.S. tests were little more than public-relations stunts, designed so that banks would pass.

European governments realize that the American solution of borrowing trillions for bailouts and fiscal stimulus has only compounded the original problem of too much debt.   US Government debt now exceeds $13 trillion and the debt to GDP ratio of the US equals or exceeds that of many European nations that are now tottering on the fiscal abyss.  Based on continued unprecedented expansion of the national debt, the IMF is forecasting that total US debt will exceed GDP by 2012.  Debt to GDP ratios over 100% raise serious questions about a country’s ability to service their debt, especially if interest rates rise.

Tragically, Europe has bought into the “Geithner solution”.  Despite their doubts and with no other easy options, Europe will lend up to $1 trillion to bailout hopelessly over indebted sovereign borrowers.  Does anyone really believe that this latest bailout is a solution?

Does Tim Geithner Need A Stress Test?

Geithner Goes Over The Edge

Is the stress of running running the Treasury and trying to figure out how to borrow almost $2 trillion dollars starting to take a toll on the Treasury Secretary?

On Friday, Treasury Secretary Geithner lashed out at top federal regulators in an expletive filled tirade.  Mr Geithner’s rage seemed to be based on his perception that the FDIC, the Federal Reserve, the SEC and other government agencies had not blindly endorsed the Obama administration’s demands regarding financial regulatory reform.

WASHINGTON — Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting.

The proposed regulatory revamp is one of President Barack Obama’s top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.

Mr. Geithner told the regulators Friday that “enough is enough,” said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.

Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Friday’s roughly hourlong meeting was described as unusual, not only because of Mr. Geithner’s repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

In addition to Mr. Bernanke, Ms. Bair and Ms. Schapiro, other attendees at Friday’s meeting were: Fed Governor Daniel Tarullo, Comptroller of the Currency John Dugan, Commodity Futures Trading Commission Chairman Gary Gensler and Office of Thrift Supervision Acting Director John Bowman.

Achtung! Mr. Geithner, exactly what country do you think you are working for?  Does our government no longer believer in the principles of  “checks and balances”, compromises and democratic free debate?   Shocked high level government officials who attended the meeting had no comments for the press on their meeting with Mr. Geithner.

Two days later, Mr Geithner gave another remarkable performance when he broke the holiest rule of politics and told the truth about the need for a broad based tax hike on the middle class.

Treasury Secretary Timothy Geithner said Sunday that signs are emerging that the economy is starting to turn around, but he cited private economists’ predictions that unemployment rates wouldn’t start to fall until the second half of next year. He also suggested that the current budget deficit was unsustainable, and both he and Lawrence Summers, the White House’s top economic adviser, declined to rule out future tax increases.

Asked whether President Barack Obama could keep his campaign pledge to hold down taxes for those earning less than $250,000 a year, Mr. Geithner didn’t respond directly.

“We can’t make those judgments yet about what exactly it’s going to take” to reduce the deficit, he said on ABC News’s “This Week.” “People have to understand that we have to bring those deficits down.”

The Congressional Budget Office has projected that the federal budget deficit would hit $1.8 trillion for the current fiscal year ending Sept. 30.

One can only wonder about how severe a thrashing Mr Geithner must have taken from the President for publicly admitting that the campaign promise to tax only the rich was soon to become just another broken promise.   Or was the Geithner performance done at the behest of his boss to lay the necessary groundwork for the inevitable tax increase coming for the middle class?  Either way, based on the Treasury Secretary’s behavior over the past week, the logical question is “should Geithner be stress tested”?

Geithner’s Pump And Dump Scheme

Pump and Dump

According to the SEC website, a pump and dump scheme is one of the most common investment frauds and works as follows:

First, there’s the glowing press release about a company, usually on its  financial health or some new product or innovation.  Then, newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest “hot” stock.  Messages in chat rooms and bulletin board postings may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst.

Unsuspecting investors then purchase the stock in droves, pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and innocent investors lose their money.

If all of this sounds familiar it should, since we have probably just witnessed one of the biggest pump and dump schemes ever perpetrated at the expense of witless bank share investors.

Consider the scenario: The Pump

Early this year, the financial system is in a panic as banks announce ever greater losses and talk of nationalizing the banking system is rampant.  Public officials fear a full blown banking collapse if worried depositors start a run on the banks.  Public opposition to bank bailouts is intense.

To stop the growing banking panic, the Fed and Treasury announce that the major banks are too large to fail and will not be allowed to collapse.

An easy to pass “stress test” of the biggest banks is announced to prove to the public that the banking industry is sound.

After a cursory examination of the largest banks, they all pass and are told to raise additional capital just to be on the safe side.

Investors start to buy the bank stocks en masse causing many bank stock shares to double and triple in price.

Over $200 billion in new capital is obtained from investors eager to get in at depressed prices.

Treasury Secretary Geithner states that “this transparent, conservatively designed test should result in a more efficient, stronger banking system”.

Witless commentators at CNBC pile on with predictions that the banks will soon be earning billions in profits.

No less a luminary than Warren Buffet adds to the buying panic by stating that he would put his entire net worth into Wells Fargo.

Potentially catastrophic losses on derivatives, commercial real estate, mortgages, off balance sheet assets and credit cards are swept under the rug as frenzied investors pile into a sure thing.

The Dump

Now, however, Geithner’s brilliant scheme seems to be entering the “dump” phase where “prices plummet and innocent investors lose their money”.  Consider the recent price action in major bank stocks:

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Most of the bank stocks peaked during May and have already declined substantially or appear to be in a distribution phase.  Nervous investors are considering the latest horrendous employment numbers and increasing defaults in virtually every major loan category.   There’s no harm in jumping into a pump and dump scheme early on for some quick gains.  It just might now be the time to jump back out.

Disclosures:  None

Geithner – “I am not a crook”

“Chinese assets are very safe”

This remarkable assertion regarding the safety of US debt securities held by China was made by Timothy Geithner, US Treasury Secretary, during his visit to China.   That Mr. Geithner felt compelled to make this statement probably reinforced the unease China has about the finances of the United States.  If the Chinese assets were actually “safe” and everyone knew it, there would have been no need to say that they were safe.

Mr. Geithner’s denial brings to mind another famous denial made by Richard  Nixon during the Watergate affair – “I am not a crook”.  We all know how that turned out.  If it wasn’t obvious that everyone knew Nixon was a crook, he would not have had to deny it.  If US assets are really safe, Geithner would not have to say that they are safe.

Almost a Vaudeville Act

Mr Geithner’s “Chinese assets are very safe” line was  greeted with loud laughter by the student audience he made his remark to.   The laughter speaks for itself regarding the credibility given to Mr. Geithner’s assurances.  Perhaps our Treasury Secretary should have countered the laughter by saying, “I am totally serious about this”.

At the same time, the President and Chairman of the Federal Reserve were very publicly proclaiming that the US deficits would be cut, future spending would be “disciplined” and that fiscal imbalances would be addressed.  These remarks probably confused the Chinese as they watch the United States implement programs that require trillions of dollars a year of new deficit spending.  You can say you will do something but what really counts is what you actually do.   Words are a cheap commodity while confidence is precious.

The recent remarks by Geithner, Obama and Bernanke promising fiscal restraint may have something to do with the following chart.

10 Year Treasury

10 Year Treasury

Courtesy: Yahoo finance

Despite the Fed’s massive purchases of mortgage and treasury securities,  price action in the long term treasury market clearly indicates more sellers than buyers, with rates nearly doubling since late last December.  Rates at 3.75% on the 10 year treasury are certainly not a disaster, but if all the powers of the Fed and Treasury to lower interest rates are failing, then maybe things aren’t so “safe” after all.

Mr Greenspan, “There You Go Again”

Greenspan Insists He Was And Is The Maestro

Alan Greenspan, probably more responsible for the financial bust

Greenspan: "I didn't do it".

Greenspan: "I didn't do it".

than anyone else on planet earth, attempts to influence the history books by again (unsuccessfully) defending his record.

WASHINGTON — Former Federal Reserve Chairman Alan Greenspan Tuesday brushed back critics who contend that easy monetary policy fueled the housing bubble and ensuing bust, saying, “I respectfully disagree; they’re wrong.”

“I think there is a recalibration of financial history that I find very puzzling,” Mr. Greenspan said.

In his speech, Mr. Greenspan said he is starting to see “seeds of bottoming” in the U.S. housing market, though that isn’t reflected yet in home prices.

Alan, give it a rest, your final legacy will be based on what actually happened rather than what you say happened.   The housing bubble that happened under your watch, which you couldn’t recognize, has devastated the economy.

The reckless lending at super low rates that fueled the housing bubble  was viewed by you at the time as normal price appreciation due to a healthy economy.  The sub prime lenders that you praised for providing financing to those who could not afford the mortgage payments are gone and their customers’ homes foreclosed on.  The 50 to 1 leverage you allowed to occur at the investment firms and banks made a few very wealthy but subsequently caused economic misery for millions as they collapsed.  Those who were thrifty and saved were rewarded with 1% rates on savings so that deadbeats  could borrow money that could not be paid back.  Your economic policies resulted in millions of people losing their jobs not only at Bear Stearns, Merrill Lynch, Citigroup, etc but at millions of businesses across the country.  The list goes on…

Your prediction of a housing recovery is chilling news based on your own admission of your inability to see the bubble and collapse in housing until it was well underway.

Greenspan’s Remarks Reaction to Geithner’s Criticism of Fed Policies

The only one trying to recalibrate financial history is you, Mr. Greenspan.  Perhaps you should read the surprising admission from one of your own that artificially low rates and poor Fed policy decisions are the root cause of the economic mess that you put us in.

Geithner’s Revelations

The Earth stood still, the seas parted and a member of the U.S. political class admitted last week that the Federal Reserve helped to cause the financial meltdown.

The revelation came from Timothy Geithner last Wednesday with PBS’s Charlie Rose, who asked the Treasury Secretary: “Looking back, what are the mistakes and what should you have done more of?

Mr. Geithner: “But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.”

Mr. Geithner went on to cite a lack of supervision over bank risk-taking and the slow pace of government response to the problem — both of which are now conventional wisdom. But the real news here is Mr. Geithner’s concession that monetary policy was “too loose too long.” The Washington crowd has tried to place all of the blame for the panic on bankers, the better to absolve themselves. But as Mr. Geithner notes, Fed policy flooded the world with dollars that created a boom in asset prices and inspired the credit mania. Bankers made mistakes, but in part they were responding rationally to the subsidy for credit created by central bankers.

Mr. Geithner’s concession is important nonetheless because before he moved to Treasury he was vice chairman of the Fed’s Open Market Committee that sets monetary policy. His comments mark a break with the steadfast refusal of Fed Chairmen Alan Greenspan and Ben Bernanke to admit any responsibility. They prefer to blame bankers and what they call the “global savings glut,” as if the Fed had nothing to do with creating that glut.

Mr. Geithner’s remarks are a sign of intellectual progress, and they suggest that at least some in government are thinking about their own part in creating the mess. The role of Fed policy should also be at the heart of the hearings that Speaker Nancy Pelosi is planning on the causes of the financial meltdown. We won’t begin to understand the credit mania and panic until we acknowledge their monetary roots.

Apparently, the only one still puzzled by the  economic bust is the very same person who caused it.

Markets Plunging On Geithner’s Remarks

bearGeithner Does It Again

The Treasury Secretary said Sunday that some banks will need large amounts of financial aid.  Geithner’s comments seemed to imply that his recently announced rescue plan for the banking industry is only a first step and that additional government funds will be needed.  Markets responded with a massive selloff in Asia and the Dow futures are down heading into Monday morning.

Bloomberg: “Some banks are going to need some large amounts of assistance,” Geithner said yesterday on the ABC News program “This Week.” The terms of a $500 billion public-private program to aid banks “cannot change” for investors or they’ll lose confidence in the plan, he said on NBC’s “Meet the Press.”

The Obama administration is pursuing the most costly rescue of the U.S. financial system in history while facing taxpayer concerns the aid is bailing out Wall Street firms that took excessive risks. After allocating about 80 percent of $700 billion in aid approved by Congress, administration officials want to keep open the option of seeking more.

Geithner said the Treasury has about $135 billion left in a financial-stability fund while declining to say whether he will request additional money.

“If we get to that point, we’ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively,” he told ABC News.

Most members of Congress probably wouldn’t support a request for new bailout funds because they aren’t clear about how the government used the $700 billion authorized in the first legislation, McCain said.

“We still don’t have the transparency and oversight,” McCain said on “Meet the Press.” He said his biggest concern is that the cost of stemming the financial crisis will worsen annual deficits projected to exceed $1 trillion for many years.

“What I am most worried about is laying the debt on future generations of Americans,” he said.

Private Investor Participation Is A Sham

It seems clear that there is dwindling public support for further massive bailouts of Wall Street and the banking industry.  Geithner’s plan of bailing out the banking industry with a “public/private” partnership is an attempt to deceive the public about the true extent of the cost of the bank bailout.

Taxpayer backed loans will be used to fund most of the asset purchases under the so called Public-Private Investment Program (PPIP).  Private investors can lose no more than their initial investment but can potentially earn huge returns if the assets purchased recover in value.  Geithner is offering these generous returns to lure in potential private investors who will be deceptively portrayed as the risk takers in the bank bailout, when in fact, the taxpayers are the ones at risk.

“We’re all mad here” – Lewis Carroll, Alice in Wonderland

Geithner’s solutions to solving the banking and financial crisis is increasing being viewed by many as something straight out of Alice In Wonderland.

Banks need to show more willingness to take risks and restore lending to businesses in order for the U.S. economy to recover from the recession, Geithner said.

“To get out of this we need banks to take a chance on businesses, to take risks again,” he said.

Banks did not become insolvent because they made too few loans or took too few risks.  The banking crisis was caused by too much lending to unqualified borrowers who are now defaulting.  Proposing to lend more to those already carrying an intolerable debt burden is sheer madness.   The President of the European Union, Czech prime minister Topolanek, called the bailouts and stimulus plans “a way to hell”.  The Emperor has no clothes and people are starting to notice.

The United States has been pushing other nations to imitate our borrowing and spending rampage with little success.  In fact, opposition to the American “solution” has become so vocal that this topic has been taken off the table by the Obama administration for the upcoming Group of 20 economic summit.

WASHINGTON — U.S. officials preparing for the Group of 20 economic summit on Thursday in London are playing down fiscal-stimulus targets and focusing on objectives such as new rules for tax havens and coordination of financial regulation.

European opposition to additional spending to stimulate economies has grown sharper over the past weeks. Obama administration officials have opted to back off the public spat.

Avoid All Pain At All Costs

A recession is the solution to curing economic excesses.  Recessions bring economic pain but lay the groundwork for a fundamental economic recovery by reallocating capital to healthy enterprises.  Attempting to paper over inevitable economic corrections with oceans of debt and spending only serves to further destabilize any recovery.   Economic policy makers did not see this financial disaster coming and their “solutions” have made the problem worse.

Rolfe Winkler, Option ARMageddon, makes a clear assessment of the current crisis.

The problem isn’t falling asset prices, it’s not rising foreclosures, it’s too much debt.

And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund “stimulus,” another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they’ve absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers.

If I may offer just one reason this will all fail: rising interest rates. Interest rates need only revert to their historical median in order to hammer asset values, and balance sheets, into oblivion.

Picture it if you will: the economy stabilizes, money flows out of Treasurys, which drives interest rates back to normal. Asset values that had appeared to stabilize fall again. More writedowns ensue, more balance sheets turn up insolvent. The debt deflation conflagration ignites again, burning up what’s left of the economy.

If our experience to date has taught us anything it should be that kicking losses up to bigger balance sheets solves nothing. Losses have to be taken. The balance sheets on which they reside will end up insolvent. Why compound our problems by piling up more debt and concentrating all of it on the public’s balance sheet? Is American arrogance so great that we believe our Treasury and our currency will survive the trillions of $ worth of losses and stimulus we’ve already agreed to fund?

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Economic Summit

The Group of 20 economic summit will accomplish nothing.  They have decided in advance to eliminate debate on the major issue – whether more debt will solve our debt problems.   The Czech prime minister should be the main speaker at this summit and our Treasury Secretary should be put in the front row.  It is a time for fiscal austerity – not more reckless borrowing.

Are Geithner’s Days Numbered? Banks And Investors Have Zero Confidence

First Impressions Hard To Reverse

The old saying in the recruiting business is that one is judged in the first 15 seconds of a job interview.  Irregardless of what happens for the rest of the interview, that first impression cannot be changed.  No doubt, Treasury Chief Geithner wishes that he could take back that first big interview on February 10 when he announced his Financial Stability Plan.  The plan was so lacking in details that one could only wonder why Mr Geithner did not postpone his grand announcement.   Investors on Wall Street rendered prompt judgment on Mr Geithner with the Dow plunging almost 400 points.

Forget The Learning Curve

A month later, Mr Geithner has still not come up with anything of substance to deal with a broken banking system, which by some estimates could cost upwards of $4 trillion dollars.  In fairness to Mr Geithner, he is tasked with solving a problem that only time and the free markets may ultimately cure.   There are no quick and easy answers to the banking and housing crisis, but we cannot afford the luxury of allowing Mr Geithner a multi month learning curve period.    Mr Geithner’s delay in coming up with a detailed plan after his disastrous first attempt may have destroyed his credibility to the point where it doesn’t really matter what he does for an encore.

Banks Burning Mad As Geithner Fiddles

“As Americans recover from the shock and disgust of this latest [AIG] revelation, they will justifiably ask who got us into this mess,” writes Henry Blodget. “The answer, in part, is the same man who has yet to come up with a coherent plan to get us out of it: Tim Geithner.”

Geithner told Bloomberg TV this weekend he will “move quickly to lay out a new financing program” to help banks deal with their toxic assets.

In other words, Geithner still hasn’t put the finishing touches on the “Financial Stability Plan” he announced in mid-February to rousing condemnation because it lacked detail. More to the point, Geithner still doesn’t have a coherent plan he’s willing to share a year after the Bear Stearns-JPMorgan shotgun wedding.

Similarly, Geithner & Co. have yet to unveil their new blueprint for regulating banks. But, again, it’s coming soon

Recipients Of Bailout Cash Stage Revolt

The original TARP bailout plan which was supposed to save the banking industry from collapse has turned into a disaster.  Many banks are saying that they were forced to take expensive TARP money that they did not need or want and now want to return the money – see Banks Push Back On Bailout Plan – Wells Fargo Calls Stress Test Asinine.   The Chairman of Wells Fargo voiced some remarkably blunt criticism of the TARP plan yesterday when he called the governments plan to “stress test” banks asinine.  Relations between the banks and Geithner’s Treasury seem frayed beyond repair at this point.

Effective Leadership Needed

Mr Geithner seems to command zero confidence or respect at this point – he should be replaced by someone who can get the job done.