Free Markets, Free People

Timothy Geithner


Will Proposed Bank Regulations Kill US Bank Competitiveness?

That is certainly what New York City Mayor Michael Bloomberg believes.  And, surprisingly, his position is supported by none other than the Secreatary of the Treasury, Timothy Geitner.

The proposed bank regulations, all driven by President Obama’s war on Wall Street, would limit big bank’s trading and size. Obama claims that the nation will never again be held hostage by institutions deemed “too big to fail”.

Well, here’s a clue – the only ones who claimed they were too big to fail and threw all that money at them are the same ones now trying to regulate them into noncompetitiveness. You’d almost think this was part of a plan if you didn’t believe they weren’t smart enough or quick enough to do such a thing. But, as they’ve claimed, they won’t let a crisis go to waste.

In fact, this is another battle in the long class war against the rich. Nothing symbolizes the “rich” like Wall Street. And nothing serves Democrats in trouble better than a populist cause (or at least one they deem to be populist). So while voters continue to send messages to the Democrats via VA, NJ and MA, health care reform implodes and the President’s job approval rating tanks, he’s warring on the institutions which are critical to the economic recovery of the nation.

How freakin’ tone deaf can one be?

Mayor Bloomberg has some immediate local issues that concern him – possible layoffs and the erosion of the tax base. But he also recognizes that handicapping US banks when no such handicaps exist for foreign banks, hurts their long term competitiveness and will therefore have negative long term consequences.

Obama’s proposals would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.

He called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.

The proposed rules also would bar institutions from proprietary trading operations that are for their own profit and unrelated to serving customers

According to sources, Geithner says the proposed regulations “do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown.”

He’s not alone in that criticism:

Lawrence White, a professor at New York University’s Stern School of Business and a former regulator, said Obama’s proposals were “a solution to the wrong problem.”

“They have this rhetoric that it was proprietary trading that was the problem,” White said. “That’s wrong.”

Of course the Obama war on Wall Street is certainly having an effect – bank shares have declined as has the dollar against other currencies.

If you don’t get the idea that this is mostly an ideologically driven “war” trying to cash in on populist anger at a time when nothing is going well for the administration, you’re not paying attention. It also points to an “war of choice” based in a very poor understanding of economics and the fact that we’re engaged in a global economy where competitiveness is critical. If these regulations pass and when the recovery falters because banks are hobbled and noncompetitive, I’m sure that somehow the White House will again play the “greed” card out in a effort to hide the effects of their own short-sighted and ideologically driven economic malpractice.

~McQ


The Perfect [Tax] Storm

Raising taxes is the preferred method of increasing revenue to the government (see “Zombie Government”) by both Obama and the Democrats, according to James Pethokoukis. He lists 5 reasons why Obama will raise taxes on everyone:

1) Obama knows the budget math doesn’t work.
2) Obama seems to prefer tax hikes to spending cuts.
3) Obama has already tried raising taxes.
4) Obama’s advisers are for higher taxes.
5) Obama doesn’t seem to think high taxes are harmful.

Pethokoukis explains each of his points in his article, but I listed them in short form so you could easily see that together the 5 create the atmosphere and ingredients necessary for the perfect tax storm. It is obvious to anyone that the 10 year budget proposed by this administration is outrageously expensive and without adequate revenue to implement it. What is also obvious, given the first Obama budget, is there is no desire to cut spending.

That leaves government with few choices for raising the revenue necessary to pay for the planned fiscal profligacy. International interest in our debt instruments is at a low. Mortgaging off the future of our grandchildren is much harder to do now. That leaves the administration with very few alternatives, all dealing at some level or another with taxation. So prepare to hear about increased taxes relatively soon – Turbo Tax Tim Geithner has already floated the “middle class tax” balloon. And of course there are any number of other sorts of taxes – sin taxes, fees, etc. – that the creative minds in Congress will explore and implement.

Yup, the tax man cometh, all the while telling us we have to cut the deficit the administration has run up. They’ll tell us it requires “hard choices”. Of course the only “hard choice” will be when to enact sweeping tax increases so they’ll be the least damaging politically.

Pethokoukis concludes:

Bottom line: The belief in the need for higher, European-style taxes (like a VAT) fills the policy cloud that surrounds Obama. It’s hard to overstate this. It’s right up there with global warming. Obama knows he faces a looming fiscal crisis and higher taxes will be his weapon of choice. To paraphrase Mondale, “Obama will raise middle-class taxes. He won’t tell you (yet). I just did.

Fair warning.

~McQ


U.S. Spurns Aid To California. Really?

In one of those “make sure you read the whole article” stories in the Washington Post, it begins like this:

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy — the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching “fiscal meltdown” caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California’s fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

If you read no further than that, you’d probably think, “thank goodness, a modicum of sanity has returned to the federal government”. It is California’s mess and California, along with the other states, need to learn a hard but necessary fiscal lesson here.

But, while perfectly correct in your assessment, you’d be wrong to think that the present rejection is final. Buried a few paragraphs down is this:

These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions.

I’m sure he or she didn’t. This is another Geithner plan based in the premise that California is “too big to fail” – the 8th biggest economy in the world and its failure would slow down the economic recovery of the US.

Given that inclination on the part of Geithner, it would appear that nothing has been learned from the Chrysler and GM bailouts, failure and eventual bankruptcies. Granted, California’s “failure” would be quite a bit larger than those two, but haven’t we yet learned that propping up a unsustainable business or government model just doesn’t work?

While it may be painful for both California and the US, nothing changes in California unless massive cuts and changes are made in that government. And, as has been evident to even the most tuned out of constituents, the California government model has been unsustainable for over a decade.

Naturally, California wants to characterize their plight in the way that will appeal the most to the emotions:

“After June 15th, every day of inaction jeopardizes our state’s solvency and our ability to pay schools and teachers and to keep hospitals and ERs open,” Gov. Arnold Schwarzenegger (R) said Friday.

But the hard fact remains that the solvency of all those institutions are in jeopardy with or without a bailout. We’re simply talking about how long we want to extend the problem not how to solve it. Solutions mean massive cuts in government spending and resultant reductions in government services. Or said another way, California is finally going to have to live within its means or fail.

That’s not a condition the rest of the taxpayers in this country brought about, and it certainly isn’t one they should be on the hook to “bailout”. And that goes for every other state in that condition as well (see the article and its mention of how Treasury is thinking about doing something with auto suppliers in Michigan – is that the job of Treasury).

~McQ


“Suddenly”, Social Security Is In Trouble

Turbo Tax Tim Geithner tells us:

Social Security’s annual surpluses of tax income over expenditures are expected to fall sharply this year and to stay about constant in 2010 because of the economic recession, and to rise only briefly before declining and turning to cash flow deficits beginning in 2016 that grow as the baby boom generation retires.

Of course what Geithner and the Democrats want you to believe is this sudden problem with both Social Security and Medicare has been brought on by the recession and, of course, that means it’s Bush’s fault.

But I took the opportunity to hit the QandO archives and found a couple of interesting live blogs Dale did. The first was the State of the Union address from February 3, 2005.

Thirteen years from now, in 2018, social Security will be paying out more than it takes in. And every year, the annual shortfall will get larger…By 2042 the system will be bankrupt.

That line, of course, was met by Democratic jeers.

A couple of months later at one of his rare news conferences, Bush again emphasized the point and adjusted the dates. As Dale live blogged it:

—Social Security will start spending more than it take in 2013. By 2040, it’ll be bankrupt. Like, you know, it’s not bankrupt now, really.

Again, that was met by Democratic jeers. That’s because Bush mentioned private accounts. Incredibly, much to the horror of many on the right, he also mentioned means testing. But still, the Dems were more interested in blowing off the impending crisis as fiction than addressing it.

The same story was told the next year with the same results.

Our boy Harry Reid in May of ’06:

In a statement released Monday, Senate Minority Leader Harry Reid (D-Nev.) said the trustees’ report “confirms that, despite White House scare tactics, Social Security remains sound for decades to come.”

According to Reid, “The real threat to Social Security comes from Republicans, most of whom support and voted for privatizing Social Security.”

As it turns out Medicare/Medicaid is in much worse shape than Social Security, and deserves some discussion as well – but the Social Security question is instructive. This isn’t some ‘sudden’ problem brought on by the recession. This is one that was identified years ago and ignored by the very same people who are now trying to lay blame elsewhere. Just something to remember when they stand in front of the microphones, look directly into the cameras and lie through their teeth.

~McQ


IRS Workers See A Double Standard And Lack Of Leadership

A little dissention in the IRS?

The Treasury secretary, who oversees the IRS, didn’t pay all his taxes. Neither did five other top nominees for the Obama administration, or their spouses.

Now, as Wednesday’s tax deadline looms, some Americans are wondering why they should comply with the arcane requirements of the Internal Revenue Service when top administration officials failed to do the same. Even some IRS employees are upset at what they see as a double standard.

The most criticized example has been Treasury Secretary Timothy Geithner, who admitted not paying $34,000 in payroll and Social Security taxes, saying his failure to pay was an oversight. Five other nominees disclosed similar tax issues, including one as recently as two weeks ago when Kathleen Sebelius, President Barack Obama’s pick for secretary of health and human services, admitted she didn’t pay $7,040.

“Our members are upset and angry,” said Colleen Kelley, president of the National Treasury Employees Union, referring to concern bubbling up within the IRS over unusually strict rules that can cost agents their jobs if they make a mistake.

Indeed – while the man who has Cabinet level authority over the IRS was essentially a tax cheat, IRS employees are held to a very strict standard concerning their taxes and returns:

In some cases, IRS employees have lost jobs for simply filing a late return or failing to report a few hundred dollars of interest income.

Of course, the union representing IRS workers doesn’t want to see Geithner or anyone else held to the same standard. Oh, no – instead they want those standards loosened:

In an interview Tuesday, Kelley said the Geithner case underlines the need for a change of the rules governing IRS employees.

“My issue is not that I want Geithner or anyone else punished,” Kelley said. “I want there to be a re-examination of the law that holds IRS employees to a separate standard: one in which a simple mistake can cost them their jobs with no right of appeal.”

Yup – again, something the Obama administration and some of our commenters don’t seem to understand – the essence of leadership is setting the proper example – not do as I say but not as I do. That “essence” is still missing from this bunch.


GM Probably (Finally) Heading To Bankruptcy

After skillfully managing the bailout of GM and throwing billions of dollars in taxpayer money at it, our man Timmy (Geithner) has told GM to prepare for bankruptcy:

General Motors Corp. is believed to be preparing to file for bankruptcy by June 1 after being directed to plan for a filing by the U.S. Treasury Department, according to a report Sunday in the New York Times.

The Times, quoting unidentified sources, said the Treasury Department has directed officials at General Motors to lay the groundwork for a “surgical” bankruptcy filing that could last as short as a few weeks for portions of the company. Those portions would be the “good” parts of the company, and the “less desirable” parts of the company would remain in court for much longer and possibly be liquidated, according to the Times.

One has to wonder who gets to determine what the “good” parts are, but that said, if the following is true, it won’t be GM’s present “health care obligations”.

The parts of GM that may get bogged down in a lengthy court restructuring or liquidation include the “unwanted brands, factories and health care obligations,” sources said in the report.

That should fire up the UAW. The union won’t be the only one who isn’t going to be happy with an attempt to rush through a GM bankruptcy.

A report in the Wall Street Journal on Sunday said that any attempt at a “quick” bankruptcy for GM could face legal challenges from bondholders of the company.

As they have every right to do — but it certainly isn’t going to make the bankruptcy either surgical or short. My guess is the bondholders are realizing that pirates aren’t only to be found off the coast of Somalia.

~McQ


GM – It’s Beginning To Look A Lot Like …

Bankruptcy.  Something many of us advised before the government threw 20+ billion of our dollars down the proverbial rat hole:

A week into his new job as chief executive of General Motors, Fritz Henderson said on Sunday he was confident in the future of the company but a structured bankruptcy remains a possibility.

Mr. Henderson has just 55 days remaining to meet President Obama’s timetable to come up with a new plan to save the struggling car giant. Speaking on NBC’s “Meet the Press,” he said that the company was working to avoid bankruptcy, but that if it failed to meet its goals for cutting costs and shrinking the company, it “may very well be the best alternative.”

“If it can’t be done outside of a bankruptcy process, it will be done within it,” he said.

Ah, how nice. And what, we had to fire the CEO, put a new board together and essenitally give control to the government to come to this conclusion?

Even Timothy Geithner, the tax-cheat of a Treasury Secretary, is now saying the “B” word is a possibility:

Treasury Secretary Timothy F. Geithner stressed Sunday that G.M. “is going to be a part of this country’s future,” but said that a managed bankruptcy was among the options for the company.

“These guys have made some progress in putting together a restructuring plan, but they’re not there yet,” Mr. Geithner said on CBS’s “Face the Nation.” “We wanted to give them the time to try to get it right. But, again, our objective is to allow — is to help these companies emerge stronger in the future so they can survive without government assistance.”

Of course had they left this all alone, we’d be 20 billion to the plus side and they’d already be in the middle of the bankruptcy process and well on their way to emerging as a stronger auto company.

Irony of ironies, I just picked up my new company car – a Chevy Malibu. It is a very nice car and has a lot of standard bells and whistles that I wouldn’t expect for a car of its price range. Frankly it’s not the engineering or the quality, as I see it – its legacy costs. And bankruptcy is the only way those are going to be actually approached and dealt with properly.

And you can’t lay this all off on the Obama admistration either – the Bush bunch was the first to throw money at the problem. However you can blame the Obama administration for continuing to do the same thing.

Time to back off, let the legal process that has worked for literally thousands of companies do its thing and see what comes out the other end. My guess is a stronger and more competitive GM.

~McQ


Stiglitz Calls Geithner Plan “Ersatz Capitalism”

A number of economists, including Paul Krugman, have panned Timothy Geithner’s plan to recapitalize banks by buying toxic assets in a complex and highly leveraged way that puts the taxpayer’s dollars at risk.

Joseph Stiglitz, a Nobel economist, has piled on. In fact, his is probably the most damning opinion I’ve seen. Stiglitz says that first of all, Geithner has analyzed the problem incorrectly. Geithner keeps telling us it is a “liquidity” problem. Stiglitz says “poppycock”:

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

What he means is their “capital”, or assets are in worthless loans. Yes that’s right – worthless. So, as he points out, paying “fair market value” for these assets won’t work, will it? They’re worthless.

So what does Geithner propose?

Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Stiglitz explains the proposed process very well, demonstrating it fairly simple and straightforward examples how the taxpayer takes the majority of the risk, and, given the nature off the “assets”, will absorb the majority of the losses.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

That is a process driven problem. The Geithner process guarantees the outcome because that is the most likely outcome, banks not being stupid and with the government bearing the cost.

Bottom line – taxpayers are going to get hosed and hosed good.

Stiglitz provides an interesting alternative which gives you an idea of how poorly he regards Geithner’s plan:

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well.

Given only those two option, I’d say Stiglitz has a point.

Of course, the argument we’ve made since day one is we ought to let them go bust, get it over with and begin the recovery. That’s the same argument we made concerning GM and Chrysler.

Instead we’ve gotten these insane plans driven by the administration which has thrown literally trillions of good dollars after bad – and to no apparent avail.

This madness has got to stop.

~McQ


Geithner Off By A $100 Billion?

It gives you great confidence in someone when they can’t even tell you how much is  left in a fund which they control.  Apparently Treasury Secretary Tim Geithner thinks he has about $132 billion left in TARP funds.

But the Government Accountability Office, a non-partisan federal agency, reports that figure is closer to $32 billion, which is what ABC News and other independent analysts thought.

The Treasury Department continues to insist GAO and others are double-counting commitments and underestimating potential paybacks.

So everyone but Treasury is wrong. I’m willing, at this point, to wait until a final determination is forthcoming, but I have to tell you, if I were a betting person, I wouldn’t be backing Geithner’s position.  And don’t forget how cooperative his department has been with the oversight folks.  

~McQ


You’re Doing A Heck Of A Job, Timmy …

You remember TARP. The “Troubled Asset Rescue Plan”? The plan which the Obama administration and the Treasury Department said they were monitoring closely? In fact, they even put a “watchdog” in charge of its oversight.

Transparency. Oversight. Hope and Change.

And any other buzzword promise that was thrown out there to describe how this administration would be so different from the last.

But apparently all the oversight promised depends heavily on cooperation, not stonewalling, by the Department administering TARP. That would be Treasury:

Looks like the same old stuff to me

Looks like the same old stuff to me

“We do not seem to be a priority for the Treasury Department,” the Congressional Oversight Panel’s Elizabeth Warren told a Senate Finance Committee hearing today.

“We have sent letters. We have requested that there be someone named so that we can get technical information. And so far, we have not been a first priority,” Warren said. “We use what you give us, and we will exercise the leverage given to us by Congress. In part, that’s why I’m here today. I’m here to talk to you about what’s happened so far, what we have discovered so far, the inquiries that we have in mid-stream and for which we continue to await responses.”

Warren, visibly frustrated with a lack of cooperation from the administration, emphasized, “This problem starts with Treasury.”

Now part of the problem, obviously, is that several key positions in Treasury have yet to be filled, over 60 days into the new administration and in the midst of a financial crisis. Apparently that’s not a priority either.

Oh, and you’ll love this:

Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program, voiced similar concerns.

He noted that his office just conducted a survey of all 364 TARP recipients on their use of government funds, something they had requested Treasury do, only for the Department to decline to do so except in the cases of Citigroup and Bank of America.

“One thing is clear: complaints that it was impractical, impossible, or a waste of time to require banks to detail how they used TARP funds were unfounded,” Barofsky said.

I continue to be unimpressed with Tim Geithner and his management and leadership style. What you’re reading here is totally unacceptable. For once, Sen. Chuck Grassley (R-IA) said the right thing:

“Unfortunately, despite saying all the right things about open government, the new administration has not made any major changes aimed at making TARP more transparent,” he said. “Moreover, I have heard about potential problems with access to information from all three of the oversight bodies testifying.”

Hope and Change.

~McQ

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