The occasion of this year has lent itself to what I sense is more and more the drive to set down “history” before a full review can coalesce interpretations that might not be kind. I’m talking about Ben Bernanke now “speaking his mind” and the cast of 2008 writing books to tell their side. It is highly natural of any important affair or episode, not just to set the story straight but in the case of the Great Financial Crisis to try to ensure successful deflection of blame and retribution.
I said it before and I will continue to make the case that the actions taken by policymakers and those in “important” positions within the industry should discredit the entire mainstream monetary and economic philosophy for all time. Everyone associated with that should be removed from their positions and made to answer for their actions. The release of the 2008 FOMC transcripts this year demand as much, which is why I suspect the timing of this flood of historical revision is not coincidence.
The latest, and maybe the worst, of such is Tim Geithner’s latest offering. From what I understand, Warren Buffet is quoted on the back jacket of the book “delicately” advancing this cause to reimagine Beavis’ role.
Sensational…Tim’s book will forever be the definitive work on what causes financial panics and what must be done to stem them when they occur.
If there is any subtleness to that thought it is likely the intent of the entire book – to use what came after to frame what came before. If you accept the idea that TARP and QE “saved us” from utter ruin you are more likely to accept his version of events that came before. And, more importantly, to do so suspending all disbelief.
We have seen this before. Milton Friedman’s 1963 masterwork (with Anna Schwartz) was more than a little revisionist. He is credited with “saving capitalism” by finding a monetarist “answer” to the Great Depression. Using his theories and analysis, it was believed possible to design “what must be done to stem them when they occur.” The Fed erred in 1930 and again in 1931. And then again in 1936.
If you favor that interpretation, you are less likely to be curious about where the panic came from in the first place. In fact, scholarly inquisition is very conspicuous in its almost perfect avoidance of the 1920’s, devoting immense volumes and effort at only the 1930’s. Could it be that the decade preceding the Great Depression was the first time that central banks openly experimented with economic control? That’s where the focus on the 30’s subtly washes away the 20’s, as it restores the idea of a command economy once it was suggested the downside could have been “contained.”
For myself and what I believe as the vast majority of the human race, I’d much rather avoid the destructive impulse in the first place that to place all effort, energy and systems management to belated mitigation of disaster.
In the late 1920’s it was highly evident where the bubble was coming from, particularly since the Fed’s control attempts at sterilizing gold movements (which wasn’t supposed to occur in a real gold standard) created a vast and durable subsidy for stock speculation. By holding the federal funds rate (a relatively new and not fully understood development) and the discount rate artificially below call money (a primitive form of margin debt) it was a direct pipeline from credit creation to stock prices.
Call money balances outstanding in 1926 were about $2 billion, growing to $3.9 billion by the end of 1928. Just before the crash call money balances were an insane $6.4 billion (to put that into perspective, total money stock according to Friedman and Schwartz in 1929 was just $45 billion). Against that bubble backdrop there was the 1927 recession and weak recovery. In other words, a bubble in asset prices (and not just stocks, but also real estate) occurring while the economy only “muddled.” Given what has transpired recently, you might think a more detailed analysis of the pre-crash era, setting aside the subtly misleading focus on afterward, would be at least interesting if not downright instructive.
From what I can tell of the past few months, it seems the orthodoxy has garnered another lesson of that age, namely don’t wait two decades to begin rewriting history.
August 10, 2007 – Eurodollar market freeze
GEITHNER We have no indication that the major, more diversified institutions are facing any funding pressure. In fact, some of them report what we classically see in a context like this, which is that money is flowing to them. That, of course, could change quickly. But apart from those that are more narrowly in the mortgage market that can’t basically sell any non-agency products, I don’t think we’re seeing any sense of funding pressure.
GEITHNER If we think that there’s a liquidity problem that could be effectively relaxed by encouraging people to come to the window and that would make them more likely to help meet that constraint, then we can get to that point. But at this stage I don’t think it’s helpful or necessary for us to try to induce these people to on-lend what they may come to us later in the day for at the window. We may get to that point, but I don’t think that makes sense now.
GEITHNER I think there is a general sense that a lot of this subprime stuff ended up, as it has in the past, in institutions in Europe. So I assume that we have the risk that, as the tide recedes further, you will see more distress there. But, again, we have no indication from any of our counterparts yet that any major institutions face a significant funding or solvency issue.
All contained then.
December 11, 2007
GEITHNER The United States is, I think, a remarkably resilient economy still. Outside of housing, we don’t have the same imbalance in inventories with the same degree of overinvestment in other parts of the economy that we have had going into past downturns. Corporate balance sheets still seem relatively healthy. The world economy is no doubt stronger. Current account imbalance is coming down. Our core institutions entered this adjustment period with a fair amount of capital. It is very encouraging to see so many of them start to raise capital so early. The financial infrastructure is more robust. Inflation expectations imply a fair degree of confidence in our ability to keep inflation low over time. The speed and the extent of the adjustment that we’ve seen in housing and by financial institutions to this new reality are really signs of health, of how well our system works.
March 10, 2008
GEITHNER I think we are a stronger institution than we were. Jeff, you invoked the 1970s. We’re a substantially stronger institution than then, and we have the ability to decide what we think is enough and what line we’re not prepared to cross, and we should be confident that we’re willing to draw that line and that we can sustain it.
March 18, 2008
GEITHNER On balance, the rate of growth in underlying inflation suggests that growth in demand in the United States will have to be below potential for a longer period of time if inflation expectations are to come down sufficiently. This means that we will have to tighten monetary policy relatively soon compared with our previous behavior in recoveries—perhaps before we see the actual bottom in house prices and the actual peak in unemployment.
A little late to be concerned about the junk floating around as collateral, a discussion that should have been held in 2006, if not 1990.
GEITHNER It is very hard to make the judgment now that the financial system as a whole or the banking system as a whole is undercapitalized. Some people out there are saying that. In some states of the world, particularly if there is no liquidity, then any financial system will be systematically insolvent. But based on everything we know today, if you look at very pessimistic estimates of the scale of losses across the financial system, on average relative to capital, they do not justify that concern.
If that was the case, then something like TARP (what is was used for, not what it was sold as) never should have been needed.
June 24, 2008
GEITHNER This is a subject for discussion tomorrow, part of our problem is that we have much less confidence in judging the integrity of what goes into those measures of risk – not to mention whether the risk weights are any good, which is a harder thing for the market to judge. But for the first time the market can see what their risk-weighted measures are, at least on an SEC basis, which is pretty close to Basel II, and those ratios were, if I recall correctly, north of 10, tier 1, for the three that reported – significantly higher than they were on March 1, by their own measures.
GEITHNER It is important to recognize that the current stance of policy embodies not just the fed funds rate today, relative to our best measure of equilibrium, but also the expectations about policy that are now built into the Treasury curve. That policy today does not look that accommodative. If you look at the Bluebook charts and at a range of measures of real fed funds rates today relative to different measures of equilibrium, policy is less accommodative just on that simple measure than it was at the most accommodative point of the last two downturns. That said, we’re going to have to tighten monetary policy, and the question is when. My sense is soon but not yet.
August 5, 2008
GEITHNER On balance, the rate of growth in underlying inflation suggests that growth in demand in the United States will have to be below potential for a longer period of time if inflation expectations are to come down sufficiently. This means that we will have to tighten monetary policy relatively soon compared with our previous behavior in recoveries—perhaps before we see the actual bottom in house prices and the actual peak in unemployment.
That is just a sample, though the Vice Chairman was mostly silent during many meetings, ceding his allotted discussion time to Chairman Bernanke. But even from this portion of policy discussions it is clear that he was as much in the dark as the rest. If anything, he was a voice of concern, consistently pointing to the fact that it could get worse. That is not the picture that is being sold now though, which is the point (disclaimer, I have not read his book nor would I ever).
For anyone that missed or isn’t aware of the Beavis reference, simply Google “tim geithner beavis.” It may be unprofessional to refer to ad hominem attacks such as that, but it is one thing to be a full part of what is really a shameful period and very much another to attempt to rewrite one’s place in it as almost heroic while trying to make money off it.
The quoted material above is taken directly from the FOMC transcripts, not public speeches. If there was merited honorific in his actions, it should have been in the transcripts where he could freely speak his mind. But, like the preening of Yellen’s reputation before her coronation, there is nothing in these vital policy discussions that even hint at special focus, knowledge or even a heated argument that the world was headed for a panic of extreme proportions. It takes little courage or heroism to point out the obvious, that there exists downside risks, even in the extreme. True accomplishment would have been putting his professional reputation on the line, in advance, not after, to argue persistently and forcefully that the worst case was the likeliest case.
To be truly heroic, he might have done so not in 2007 or 2008, but in 2004 or earlier when the Fed was busily recreating the 1920’s.
