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Monday, January 11, 2010

Geithner must go, says L. Randall Wray

It is not to echo the call for Tim Geithner's head that we publish this excerpt from L. Randall Wray, but for the four keys to understanding how to get out of the mess in the financial sector. Greenspan, Bernanke, Geithner, Summers will all be correctly seen as the poobahs of a failed cult. Here is the means of exorcising the demons they have created.
Fire Geithner Now!
L. Randall Wray
January 8, 2009
New Deal 2.0

More important than such blunders, however, is that Geithner’s policies are not working. As Republican Congressman Brady of Texas put it, “Conservatives agree that, as point person, you’ve failed. Liberals are growing in that consensus as well. Poll after poll shows the public has lost confidence in this president’s ability to handle the economy. For the sake of our jobs, will you step down from your post?” here Today’s employment figures show that rather than a recovery, our economy is still hemorrhaging jobs at a scary pace. While the payroll number was down “only” 85,000 jobs, the household survey was down 589,000 for December. Over the past three months we have lost an average of 325,000 jobs. And that is in spite of the fiscal stimulus as well as the trillions of bail-out funds provided to the financial sector. We are at least 26 million jobs short. Even if the job losses stopped, real recovery will require job creation on a massive scale. The problem is that Congress, and the public, no longer has sufficient faith in the Administration to provide new funding-and the stimulus will soon run out. Rep. Peter DeFazio of Oregon put it this way: “We may have to sacrifice just two more jobs to get millions back for Americans.”  Of course it is not quite that simple, but it is a first step.
We need an economic team that recognizes the following:

1. Banks do not face a liquidity crisis, rather they are massively insolvent.

Reported profits are due entirely to trading activities-which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis. As such, they need to be shut down and resolved. Geithner is not the right person to head such an effort because his past resolutions have always been designed to protect Wall Street, not Mainstreet.

2. Saving financial institutions does not save the economy.

The financialization of the economy promoted by Greenspan and Rubin has led to a financial sector that is at least three orders of magnitude too big. If anything, all the efforts directed toward saving Wall Street have only made the economy more fragile. Another financial crash is inevitable because the financial system is still too large to be supported by the economy-even if the economy could recover. We need a Treasury Secretary who recognizes that the best course of action is to downsize the financial system. Geithner is not that guy.

3. As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound.

Not because we cannot “afford” them but because they are dangerous. Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Mainstreet. Thus, even if the Wall Street bail-outs were not dangerous, they need to be reversed to generate fiscal policy space for another economic stimulus package. It will not be easy to convince Congress that the solution to our economic crisis is more government spending. And Geithner is not the Treasury Secretary to lead such an effort because he has lost the confidence of Congress and the public.

4. Finally, we need an economic team that understands government finance.

The current team is hopelessly confused, led and misguided by Robert Rubin. He thinks government is nothing but a big household, which must balance its budget. He continues to believe that the Clinton boom was due to federal budget surpluses, not recognizing that it was actually due to an unsustainable boom of household borrowing. Indeed, as Clinton’s Treasury Secretary, he oversaw the creation of the conditions that led to this current crisis. The new team must have no connection to Rubin (or Pete Peterson) and his anti-deficit hysteria. The Great Depression of the 1930s only ended with the massive spending of WWII, when the budget deficit reached 25% of GDP. Our current situation is not yet that severe, and it is likely that a sustained recovery can be obtained long before the budget deficit reaches such a level. However, the longer that Geithner, Summers, Bernanke, and Rubin remain in charge, the greater the probability that this could still turn into another Great Depression.

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