The Banking Emperor Has No Clothes

By Simon Johnson

In a major speech earlier this week to an American Bankers Association conference, Treasury Secretary Tim Geithner laid out his view of what went wrong in the financial sector prior to 2008, how the crisis was handled 2008-10, and what is now needed with regard to implementation of reforms.  As chair of the Financial Stability Oversight Council and the only senior member of President Obama’s original economic team remaining in place, Mr. Geithner’s influence with regard to the banking system is second to none.

Unfortunately, there are three major mistakes in Mr. Geithner’s speech: his history is completely wrong; his logic is deeply flawed; and his interpretation of the Dodd-Frank reform does not mesh with the legal facts regarding how the failure of a global megabank could be handled.  Added together, this suggests one of our most powerful policymakers is headed very much in the wrong direction.

On history, Mr. Geithner places significant blame for the pre-2008 excesses on the UK and other countries that pursued light-touch regulation.  This is reasonable – apart from the fact that he is apparently unaware that the US led the way in lightening the touch of regulation, at least since 1980.  A senior British official retorted immediately, “Clearly he wasn’t referring to derivatives regulation because as far as I can recollect, there wasn’t any in America at the time” (Financial Times, June 8, p.1).

More broadly, Mr. Geithner seems to have forgotten how big banks were saved – by government intervention, at his urging.  He should probably watch Too Big To Fail, now playing on HBO, or peruse Andrew Ross Sorkin’s book, on which it is based – just look in the index for “Geithner” and trace the arguments that he made for repeated and unconditional bailouts of big banks and their creditors from mid-September 2008.  (Sorkin’s book ends in fall 2008 while Mr. Geithner was still head of the New York Federal Reserve Bank; for more on what happened after he became Treasury Secretary, see my book with James Kwak, 13 Bankers.)

On logic, there is a major non sequitor in Mr. Geithner’s thinking when he continues to deny that the size of our largest banks poses a problem. 

“Some argue that the U.S. financial system is too concentrated, which could promote systemic risks.  But the U.S. banking system today is less concentrated than that of any other major country.”

But big banks in almost all other major countries have run into serious trouble, including the UK and Switzerland – where policymakers are now open about the scope for further potential disaster.  French and German banks made large amounts of reckless loans to peripheral Europe and have strongly resisted higher capital requirements – helping to create the current potential for contagion throughout the eurozone (and explaining why the Europeans are so keen to keep control of the IMF).  The Japanese banking system has been in terrible shape for two decades.

Larry Summers, Mr. Geithner’s former mentor, likes to point out that “big banks” in Canada were not in serious trouble during the global recession.  But whatever your view of whether Canada has good regulation or was mostly lucky – put me in the skeptical camp, after talking recently with their senior officials – the simple point is that big banks in Canada are actually quite small in comparison with US and other global banks.  The largest five Canadian banks have a headcount combined roughly equal to that of Citigroup (just under 300,000 people) and even the biggest of them has only about 1/3 the assets of JP Morgan Chase.

Mr. Geithner’s thinking is completely flawed on bank size.  The right lesson should be: big banks have gotten themselves into trouble almost everywhere; U.S. banks are very big; these banks have an incentive to become even bigger; one or more of these banks will reach the brink of failure soon.

On the basic facts, Mr. Geithner’s most serious mistake is to believe that we can handle the failure of a global megabank within the Dodd-Frank financial reform framework.  He argues that expanded powers for the Federal Deposit Insurance Corporation mean that banks can be allowed to fund themselves with more debt relative to equity than would otherwise be the case – because the FDIC can supposedly impose losses on creditors in the “resolution” scenario, i.e., when the bank fails, so management and lenders will be more careful.

“But given the other protections here, including our resolution authority, we do not need to impose on top of that requirement any of the three other proposed forms of additional capital.”  (Italics added.)

I’ve talked with senior responsible officials both in the United States and in other countries repeatedly about the U.S. resolution authority.  I’ve also discussed the issue directly with some of the top legal minds on Wall Street – people who work closely with big banks.  Mr. Geithner’s interpretation is simply wrong.  (To be clear, I’m a member of the FDIC’s newly established Systemic Resolution Advisory Committee, an unpaid group of 18 experts that meets for the first time on June 21, but my assessment here is purely personal.)

There is no cross-border resolution mechanism or other framework that will handle the failure of a bank like Citigroup, JP Morgan Chase, or Goldman Sachs in an orderly manner.  The only techniques available are those used by Mr. Geithner and his colleagues in September 2008 – a mad scramble to find buyers for assets, backed by Federal Reserve and other government guarantees for creditors.

The right conclusion for Mr. Geithner should be: huge cross-border financial operations are immune from orderly resolution; such firms should therefore be run on a completely segmented basis, with separate capital requirements and no recourse to parent companies (including through potential reputation effects – e.g., UBS in Switzerland might support an entity called UBS-UK, even if there were no formal cross-guarantees.)

Consequently capital requirements should also be much higher than currently proposed by any official – this is the buffer that stands between bad management decisions and taxpayer bailouts when bank resolution is not possible.  Real estate trusts that are not too big to fail routinely fund their assets with 30 percent equity and 70 percent debt; in a volatile world, this makes complete sense.  We should move all our big banks, as well as the rest of our financial system, in that direction.

An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.

43 responses to “The Banking Emperor Has No Clothes

  1. Gretchen Morgenson’s book, Reckless Endangerment, helps explain the 2008 crash by drilling down into policies dating back more than 20 years. Geithner, Summers, Rubin, and other Democrats jumped on the deregulation bandwagon, eviscerating laws and regulations that had protected the economy for decades. The description of Jim Johnson’s appalling machinations is very instructive. Anyone who continues to believe that the Democrats have been the white hats is deaf, dumb, and blind. Johnson and his friends in the banking and housing industries, in Congress, and in several administrations used as cover claims to be helping the poor meanwhile enriching themselves to an extraordinary degree and engineering policies that led directly to the 2008 crash. Mr. Geithner, at the New York Fed during much of this time, was a participant.

    This cannot be ignored.

  2. Capital requirements can be thought of as just the inverse of leverage. Anyone who opposes higher capital requirements as part of financial reform is, in effect, stating that they do not believe that high rates of leverage contributed to the financial crisis. Preposterous.

    What irked me the most about Geithner’s message was this: “The question is how much. In making this judgment, the central banks and supervisors need a balance between setting capital requirements high enough to provide strong cushions against loss but not so high to drive the re-emergence of a risky shadow banking system.”

    Excuse me? That passage demonstrates all that is wrong with modern financial regulators. No matter how much legal authority they are given, they always fall back to this defeatist mentality. “If we regulate them too strongly, then they’ll start operating outside of the regulated sphere.” BS. The first principle of bank regulation ought to be – if it operates like a bank, then we’ll consider it a bank (regardless of whether it calls itself something else like a money market mutual fund) and regulate it as a bank.

  3. So Simon, since you are now a member of FDICs Systemic Resolution Advisory Group, what are YOU going to do to change the banking world spinning under the cloud of T.G.s flawed logic? Just show up at the meetings?

  4. Maybe that’s for Simon to know, and for you to find out.

  5. How many more books would there need to be on the 2008 economic crisis? The best advice would be not to buy, but if you had to waste dollars on dated and that-was-so-yesterday’s-news, re-read lines from the U.S. Constitution – contrasting those higher ideas with today’s policies and rhetoric for self-serving political ends; along with the media, pundits and academia riding on the coattails of this crisis with their own NYT best seller(s).

  6. @Simon,

    You wrote, “Unfortunately, there are *three major mistakes* in Mr. Geithner’s speech: his history is completely wrong; his logic is deeply flawed; and his interpretation of the Dodd-Frank reform does not mesh with the legal facts regarding how the failure of a global megabank could be handled.”

    Instead, you should have wrote, “Unfortunately, there are *three major self-preservation tactics* in Mr. Geithner’s speech: his history is completely wrong; his logic is deeply flawed; and his interpretation of the Dodd-Frank reform does not mesh with the legal facts regarding how the failure of a global megabank could be handled.”

    “his history is completely wrong” Well, yeah, but that would mean going against his mentor and capo, Larry Summers who he derailed Brooksley Born’s attempts at derivatives regulation.

    “his logic is deeply flawed”, i.e. on bank size. Again that would mean going against his own judgements while at the NY Fed for looking the other way in terms of regulation in halcyon times and creating even bigger entities during the crisis through forced M&A. Logic in the service of self-preservation and self-aggrandizement is never flawed.

    Your final point, re Dodd-Frank: I have to laugh out loud at this one. Dodd-Frank wasn’t created to regulate financial firms. It was created to deflect the guilt that Dodd and Frank helped hand-maiden in the housing crisis (See Gretchen’s latest book.) Otherwise Dodd and Frank and a few others would have “co-defendants” after their names.

    And you’re right there isn’t any mechanism for orderly resolution of a global megabank failure. Frankly I can’t imagine one. But your notion is making more capital requirements is in fact deeply flawed. It’s not how much capital; it’s what you do with it that really matters. It comes down to things like a bank’s credit policy. Is that flawed? Or their ability to securitize those loans once made. Or how networked their capital relationships are with other megabanks — i.e. the likelihood for chain reaction failures. Just upping the capital requirements ain’t gonna do it.

    PS, how are Sheila and Tim getting along these days?

  7. Mr. Geithner has no understanding of the… well I call it the ‘granularity’ of decision required for (and at the root of) a healthy ‘social metabolism’… and likely has no interest in gaining such an understanding since it would undoubtedly compel his departure and loss of pay and status. Being excessively hierarchical TBTF banks are resistant to that granularity (which requires more distributed, de-centralized decision mechanisms) and do not see it as in their interest.

    (I avoid the term ‘economics’ since I feel its a discipline that has lost its way in its attempts to quantify and proscribe for human life by essentially ignoring inconvenient and difficult to quantify fundamental metrics in its models.)

    I’d like to recommend to those here a (perhaps peripherally but importantly) relevant article out this morning (not by me… this isn’t self-promotion):

    A Brief History of the Corporation: 1600 to 2100
    http://www.ribbonfarm.com/2011/06/08/a-brief-history-of-the-corporation-1600-to-2100/

    by VENKAT on JUNE 8, 2011

    From the piece:

    It will be the dawn of the age of Coasean growth.

    Adam Smith’s fundamental ideas helped explain the mechanics of Mercantile economics and the colonization of space.

    Joseph Schumpeter’s ides helped extend Smith’s ideas to cover Industrial economics and the colonization of time.

    Ronald Coase turned 100 in 2010. He is best known for his work on transaction costs, social costs and the nature of the firm. Where most classical economists have nothing much to say about the corporate form, for Coase, it has been the main focus of his life.

    Without realizing it, the hundreds of entrepreneurs, startup-studios and incubators, 4-hour-work-weekers and lifestyle designers around the world, experimenting with novel business structures and the attention mining technologies of social media, are collectively triggering the age of Coasean growth.

    Okay… with a touch of self-interest behind the impulse:

    I’m convinced that facilitating and unburdening the peer-to-peer micro-transaction and its networking in certain sectors at least (as well as more-typically sized transactions via the same network thereby created) under neither a typical corporate nor governmental organizational structure is a core requirement.

    Leveling The Transaction Landscape: Technology and the Campfire
    http://culturalengineer.blogspot.com/2011/04/leveling-transaction-landscape.html

  8. Maybe it is time to start actually using some Chapter 15 of the U.S. Bankruptcy Code.

    “One of the most important goals of chapter 15 is to promote cooperation and communication between U.S. courts and parties of interest with foreign courts and parties of interest in cross-border cases. This goal is accomplished by, among other things, explicitly charging the court and estate representatives to “cooperate to the maximum extent possible” with foreign courts and foreign representatives and authorizing direct communication between the court and authorized estate representatives and the foreign courts and foreign representatives. 11 U.S.C. §§ 1525 – 1527.”
    http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter15.aspx

  9. @ RA and Anonymous

    I doubt if we can find out. Mr. Simon should resign immediately. I can’t believe he would have anything to do with US Treasury much less the FDIC. When the cookie crumbles as he so rightly has predicted, he will just wind up in the ashes.

  10. If we could just go back and undo everything Sen. Phil Gramm and his (bipartisan) Banking Committee did to “modernize and reform” banking we could make this work. And the next time someone writes into their legislation prohibitions against regulation and investigation of new financial products and activities, maybe we should all be a little more skeptical.

  11. Woop2012@aol.com

    I wouldn’t be quick to relegate old Simon to the ash heap, after all, he’s been arguing a long time for higher capital requirements, to lessen and to mitigate the Ponzi-scheme effects of these behemoth banks.

    The depression never stopped, Dodd-Frank is some ornate icing on a cake-of-puss, and eco-financial leading indicators are suggesting we are headed for another climactic frenzy of panic, and collapse.

    BTW, Those speaking with a forked tongue, naturally are uttering statements filled with non-sequiturs, and disinformation….so nothing has changed. Simon has this diagnosed in perfect accord with objective reality.

    I say, Stop doing business with the Big USA banks, let them all falter and croak. We have putative “free-markets”, we’re told?

    Other banks that are prudent and conservative can take up the slack in such an event.

    To our brothers and sisters in Greece, SOLIDARITY. You folks were swindled by your political elites, acting in fraudulent collusion with investment bankers here, and elsewhere. You don’t OWE most of the $$$ being claimed.

    Americans could learn a lot from peoples’ demonstrating real bravery, as opposed to the fat slobs talking on cell phones here wherever they go.

    Simon, good post, as per your usual.

  12. Owen Owens

    @ Tom: I could use a tax man, you seem right for the job.

  13. Professor Johnson,

    You indicate that there are legal reasons why a large cross-border bank can’t be resolved by forced conversion of debt to equity. I would would like to learn more about why this is the case. Could direct me to some discussion of the question?

    I would have thought forced conversion would work for bank units in any country where the host government is willing to resolve them that way, so long as the host government had required them to hold enough unsecured debt as a condition to operating in that country.

    Richard Smith

  14. John Smith

    How is it worse to have 5 large banks all doing the same bad things andt needing to be rescued in a financial crisis or having 30 smaller banks all doing the same bad things and needing to be rescued in a financial crisis?

    Surely the problem is the “bad things” they were doing, not their size?

  15. Prof. Johnson’s post is fine & makes a find mesh with Prof. Reich’s post today @HuffPo & Prof. Jeff Madrick’s post also @ HuffPo.

    These posts should be required reading for POTUS tonight.
    .
    I agree with Mr. Owens that Mr. Crowl seems a good tax man. Mr. Crowl makes good points that are supplemented by the posts & books of David Cay Johnston @ Syracuse U.

    Mr. Johnson is another source of current thought dismissed by the Clinton retread cadres in POTUS’ WH. They’ve managed to ignore a jobs crisis for 3+ years while failing the consumer public & tossing Trillions @ the banks & their executives who made the mess & refuse to clean it up.

  16. Bayard Waterbury

    But, Simon, all of us know the truth. Tim Geithner is never going to admit the truth. He is intellectually, stylistically and financially captive of Wall Street bank thought and action. You could sit face to face with him and discuss the points that you have raised in this article, and with which I heartilly agree, and he would never admit to the veracity of what you have to say. The only other option in understanding his viewpoint is to say that he is just plain stupid. None of us believe that for one second. He’s just never going to bite the hand he loves and will give mightilly to his boss’s run for reelection (regardless of how they complain publicly). Such is a plutocracy. If Tim admits he’s wrong and goes along with you, he would surely perminently isolate himself from the oligarchy he loves, and he simply can’t do that, regardless how much it might damage his credibility.

  17. Tax Cheat Timmie is obviously in over his head and doesn’t have the slightest idea what to do. The Obama administration is unable to decide what to do with him — e.g., next president of the World Bank? — but is terrified that he will start talking about where the bodies were buried.during both his time at the NY FED and then at Treasury. So sad…….

  18. Great Post as usual:

    “Unfortunately, there are three major mistakes in Mr. Geithner’s speech: his (1) history is completely wrong; his (2) logic is deeply flawed; and his (3) interpretation of the Dodd-Frank reform does not mesh with the (3a) legal facts regarding how the failure of the global megabank could be handled ”

    #1) Mr. Geithner’s history is that of interpretation. Whereas his selection process posits only that of a sequestered text
    in a vaulted conclave of self indulgence. So myopic is his leadership…his very tongue slips over mediocrity as that of a herculean task prematurely finalizing the preface of “Hoovers’ Rooseveltism Shame” – 21st Century-Hellenic-Stylist?

    #2) Mr. Geithner’s , “Logic via Classical Deduction” (ironically the foundation of mathematics lies in logic) lacking inference.
    That is to say emphatically without hesitation that “Timmy” can’t derive {but can follow [?]} a basic flow of logic. That of which is virtually initiated from one idea to another, or vice-a-versa without software from “Turbo-Tax” as that of his sub-innate programmed mindset. Sadly, this poor misguided “Power-Auger-Hermes” (short man syndrome [?]) can’t proceed through induction, or deduction, without the solemn handshake of the ” Deep Six”?

    #3) Mr. Geither’s interpretation of legal facts regarding the failure of global bank handling is reminiscent of a born-again Don Quixote…tilting-at-windmills posting his highness encyclicals on the elusive tumbleweed that runneth the boroughs of K-Street, often on the fringed dark-side of Pennsylvania Avenue. Tiny Tim is the making of a misguided subcutaneous exegesis…or better said that of a forlorn and desultory hermeneutics chimerical choreographer?

    Thankyou, Simon and James

    PS. Doesn’t look good for Ms. Elizabeth Warren?

  19. @John Smith: “How is it worse to have 5 large banks all doing the same bad things andt needing to be rescued in a financial crisis or having 30 smaller banks all doing the same bad things and needing to be rescued in a financial crisis?
    Surely the problem is the “bad things” they were doing, not their size?”

    Mr. Smith, I’m just an ignorant person from Cleveland, Ohio, who never paid any attention to the rarified fields of economics, banking and finance until about 7 or 8 years ago, when well ahead of the national curve, it became clear to Clevelanders that our town was getting royally F–ed over by mortgage fraudsters.

    That caught our attention, at least it did mine, and the evidence led in a straight line to, uhm, Deutsche Bank. Which I had never really thought of in connection with Cleveland. But all of sudden, I learned that Deutsche Bank owned a whole bunch of foreclosed houses in inner city Cleveland. And son of a gun, as it turned out, Deutsche Bank was not a good neighbor.

    I will just cut to the chase, here, and suggest to you, Mr. Smith, that in case you haven’t considered it, big institutions can get away with a WHOLE lot of stuff that smaller institutions can’t. And we all know that folks who can get away with stuff, do. History shows us that when small banks “do bad things,” they are taken over and these days, given to the big banks, so that big banks can get even bigger. But when big banks “do bad things”….

    Oh, my g-d, where have you BEEN, Mr. Smith??? As an ignorant person from Cleveland, I am just worn out trying to explain this to you.

  20. Bruce E. Woych

    Matching cuff links:

    http://www.commondreams.org/view/2011/06/08-3

    Published on Wednesday, June 8, 2011 by TruthDig.com
    The Bernanke Scandal: Full-Frontal Cluelessness
    by Robert Scheer

  21. @earle,

    Wow what an egregiously artless, plagiarized, illiterate rewrite of what Diogenes wrote before you! As Truman Capote would have said, “this isn’t writing, it’s typing.”

  22. Timmy’s no dummy. He’s simply saying what he MUST say. Because:

    The banks can’t increase capital, where would it come from?
    The banks can’t de-leverage, their borrowers can’t pay them back.

    But…..Timmy’s faith in a resolution authority kicks the can down the road. And maybe, just maybe, if he closes his eyes and prays really really hard, it will never ever be tested by the failure of a large bank.

  23. @ Title50

    Truman Capote did most or all his writing on his knees, or back? I certainly prefer typing and the use of the imagination while sitting. There we have it… that’s your exercise for the day Mr. Title50.
    PS. I only give a pass or fail as a liberal? (and) What was it so great about this plagiarizing note-taker Capote…please elaborate.

  24. @ earle (love the ee cummings small letters)

    Actually you have no imagination other then the pretensions of a pseudo-intellectual. Have you considered posting a Braille version of your typings? It would be equally intelligible.

  25. @title50

    Where have you ben title50? Did you just come along to raise a little hell? I will have your know that Earle is a respected contributor to these posts and has been for many moons. If you have a point to make, make it. But personal attacks are unwarranted.

  26. @ Title50

    Actually, Helen Keller is one of my favorite authors, but yours of limited critique is that of a pigeon-holed… sangfroid immolate, quenching your lust for otiose hubris inadequacies?

    Ref: Helen Keller – Quote…”Literature is my Utopia. Here I am not disenfranchised. No barrier of the senses shuts me out from the sweet, gracious discourses of my book friends. They talk to me without embarrassment or awkwardness.”

    http://www.quotationspage.com/quotes/Helen_Keller

    Good Day ; ^ (

  27. Thanks Windmill :-))

  28. @windmill,

    It’s fun to see confessed morons come to the aid-of-earle.

  29. Ronald Mcdonald

    I’m amused by confessed morons, prove to me your not in trouble.

  30. jeff simpson

    Pay no attention to the anonymous troll…he will go away and find a more empathetic quorum over at washingtontimes.com.

    I don’t fault Geithner for his stance. It is natural given his provenance. The challenge lies in decoupling the power his view commands, not in refuting his dogma.

  31. @ Title 50…………..zzzzzzzzzzzzzzzzzzzzzzz

  32. @ earle’s pearls

    As Hitchens would say, your “conduct in your pages is like nothing so much as that of a man who, having relieved himself in his own hat, makes haste to clamp the brimming chapeau on his head.”

  33. Hey, thats some major theater you 2 have goin their. To bad I’m not qualified to chime in.

  34. markets.aurelius

    Again, a great post, Simon. To your litany of how the massive tunneling orchestrated by Timmy and Hank, pls add the following:

    http://www.lewrockwell.com/blog/lewrw/archives/24103.html

    This is a radio clip from Nov 2008, in which Sen. Inhofe recounts a Sept. 19 conf call with Hank Paulsen, in which he used the spectre of another Great Depression, rioting in the streets, martial law being imposed … end-of-the-world stuff … to buffalo the Senate into passing the massive bailout legislation know as tarp. Paulson said, “… this is going to be far worse than the great depression of the 1930s, if … we don’t buy out these toxic assets.”

    The recounting of the events that led us to this point is slowly emerging. It is a tale of perfidy at the highest levels of our society. And a wanton, almost ferel, drive to loot the treasury of the U.S. in the aftermath of a collapse engineered by the very people responsible for the destruction of markets, economies and societies.

    In the history of the world, we have never witnessed such destruction.

  35. “The Emperor wears a “Golden Fleece”! “A Morganite Quilt” – gifted by a grandiose wild Goose `Chase ?”

    Perhaps a little over the top… but none the less on par with our genetic make-up concerning the aforementioned post. That is to say that 95% of our genes are just “Genetic Junk”, and that, it is all but the remaining 5% needed. My point being that the inbreeding amongst our economic/ financial elite has left them barren, or at the very most a fraction of the 5% needed to survive as omnipotent trusted authorities?

    This comment I wrote was back in Sept. 16, 2009 – “Show me the Money”! (was on another syndicated blog, and a lot has changed in nearly two years – but some things never change without good leadership) JMHO

    “Green Shoots” (remember that ?) are fine and dandy as long as the soil beneath is deep, fertile, and plentiful. But, without fertilizer and liquid…and I’m not talking about “Mother Nature”, we are the precipice of the, “Great Dust Bowl” aka. “Great Depression #2!
    Please excuse my overuse of metaphors – its in my blood. The current market is being artificially manipulated by the Federal Reserve Banking System via the United States Treasury (which by the way…30%-40% of their staff employees have either worked for Goldman Sachs, or their partner in crime J.P. Morgan Chase) and so happen to be the two biggest , “Too Big To Fail” behemoths. Please understand that the general public is not aware of their history…that being JP Morgan Chase (Jamie Dimon can do no wrong,… a real life, modern day Aristotle is he?) , and (walk-on-water) Goldman Sachs which happen to be charter members of the “Second Bank of the United States”, also known as our “Central Bank”!
    The Federal (FOMC/ Central Bank – such a convenient symbiotic relationship?) Reserve, US Treasury (shadowy JP Morgan Chase and Goldman Sachs) have been /are shorting the “Gold and Silver (Sterling ie. HSBC’s)” Commodity Markets deliberately for at least a decade, keeping the precious hard asset commodity prices down, thus keeping interest rates down. Why? It makes the independence of a free market capitalistic system artificially barren. This ironically… they are well aware of! Pigeon-holing our economy whereas we are unable to work off inflation, or deflation creating false conceptual market fluctuations as seen “NOT” by the public, as an artificially created recession (all this mumble-jumbo fiscal and monetary jargon of ill-contempt brought to us by our altruistic and loving caretakers?)!
    Why is it that under the “Freedom of Information Act (FOIA)”…. since its inception – the Fed’ , and the Treasury won’t disclose how much Gold is left in the U.S. Gold Reserves (ask Alan Greenspan for starters?) . Perhaps if Nixon were still alive we would know,…?
    Finally, one last noteworthy mention,…the US Government Obligations in 2008 were approximately $65 Trillion vs. $14.5 Trillion GDP! Whereas, the rest of the “World’s Governments Debts” are approximately $30 Trillion vs. $48 Trillion GDP? So …who do you want selling its debt? (I’m aware that a lot of debt has changed hands., but I hope you all realize this is just a fiscal benchmark)
    PS. China and Japan have decreased their purchases (US Debt) since this was originally written.
    Thankyou Simon and James

    God Bless you, Julian Assange

  36. @markets.aurelius

    No one got in their way this time. Proof is in the puddin’, as they say….

  37. Prof. Johnson is quite correct in his claims of illogic and historical inaccuracy on Geithner’s part. But Johnson forgets to mention whom Geithner represents, namely, big capital as a class; which is why the “completely segmented basis” (euphemism for “break up the biggest banks”) and higher capital requirements advocated by Johnson have about as much chance of implementation as honesty in a winning politician today. As long as our real rulers do not want such things, they will not come to pass. The “command economy” (state management, implied by Johnson’s various nostrums) works–you need look no further than the allotment of chores and rewards in a healthy family (if you can find one). But capitalism is not about the mundane economic task of arranging production so that needs are met. Rather, it is all about the endless accumulation of capital via the exploitation of profitable opportunities; an historical reality to which our politicians defer. This deference constitutes the concomitant reality that historian Simon also “forgets”–namely, the historically testable claim that politics is the vehicle of economics in class societies. In eliding this quite literally dominating fact, Johnson reveals himself as every bit as deceived and deceptive as Geithner. Indeed, they work in concert: Geithner, the direct agent, doing the bidding of big capital; Johnson, the indirect agent, telling the rest of us that we can have capitalism as a system but do without its evils if only we would heed reformists like himself. In the upshot, they serve the same masters; the rest of us are fools for believing otherwise. –It is a tale told by multiple idiots, full of sound, fury, lies, violence and pollution of every sort, signifying absolutely nothing of human worth.

  38. @ soloduff

    Oh… give me a break, please! Simon has been out there since day one, along with James fighting for a better government. There clarion calls have brought great openness and transparency to how the underbelly of the beast (Wall Street) works, or better said feeds of the little guys – to educate!
    Nothing they’ve done (said / written) has been in self-interest or for that matter… esoterically encrypted deceptiveness, other than to call a spade a spade. Quite frankly, Simon and James have never pitched “Fairy-Tales”, period!
    Because of people/ individuals like James and Simon, there will be “Anarchy at the Voting Booths” – the people are starting to wake-up from a long slumber. Suddenly finding and realizing that their living quarters within a finite (fiscal ecosystem) forest are shared amongst “mindless feral wolves”, walking on two legs but inside their minds acting upon all four – that have been devouring, and cannibalizing their future.
    Indeed -this post is certainly not for fatalist,…

  39. @ Soloduff, very well written post.

  40. jeff simpson

    Not only does Tim Geithner fail to understand the nature of the problem, thus precluding him from ever arriving at an appropriate solution to propose, but there is a rich legacy of experts and prognosticators praising the status quo, claiming that somehow we just lost our way and soon we will be back on the correct path if only meddlesome government can be kept out of the markets. Case in point, Larry Summers.

    6/13/11 http://blogs.reuters.com/lawrencesummers/

    “The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending it is only resolved by increases in confidence, borrowing and lending, and spending. It follows that the central objective of national economic policy until sustained recovery is firmly established must be increasing confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.”

    I see that Larry Summers still believes that inflating another bubble with ‘confidence’ and taking on additional debt is the curative salve that will minister to our financial ills. That bit about ‘confidence’ might just be referring to the self-fulfilling idea that businesses that invest in the future tend to have a multiplier effect — but he fails to distinguish between predatory and constructive economic activity. I think if you are in the foreclosure business, then business is good. This is not something we want to promote.

    What needs to be done is to tax and regulate more highly the destructive economic activities such as finance (and promote economic activities that contribute favorably to improving standards of living, especially for the poor — not handouts, but jobs, productive jobs). Tax capital gains on stocks and other assets inversely to how long they are held, such that those going long enjoy the lowest tax rate, while those that engage in high-frequency trading are taxed at perhaps 90% for ownership measured in milliseconds. Government investment in basic domestic manufacturing is our best best. That, and ending the bloated military budget that is a nagging remnant of the cold war.

    When one fails to grasp the natures of the system, how can one possibly understand what is needed to fix it? But these are smart people, they understand, they just have no interest in admitting how skewed the current system is in favor of those at the top. Like an expanding black hole, the event horizon propagates outward, swallowing up increasing numbers of those attempting to climb the demographic ladder. So, too, will debt service swallow up a generation or more of young, talented people.

    If you have something to refute, please supply positive alternative solutions, not derision. This is a great forum and much positive information can be relayed here.

  41. I wish I had your confidence Jeff, The phrase “space is the final frontier” is true. It has a limit which is close to being relized. Just where is this growth going to come from? The easily reachable resource are a thing of the past, to place an inefficient gvt as the last resort for manufacturing is questionable. The need to profit handsomely from such contracts can only increase costs. Tax rates will have to rise to meet obligations and someone (banks mostly) will have to pay those taxes on abandoned houses and property, squezzing an already tippy real estate mkt (the heart of the economy). It would take alot of money and power to overwhelm the current system, that constantly resists any change from the status quo. I’m not saying it can’t be done, but alot of powerful people will be extremely angry at their inability to control what had been smooth sailing for a more reasonable approach to this countrys problems. Should the debt ceiling be raised without serious concessions the next move is to say you can’t hold the economy hostage with spending bills, now that we can spend more of the taxpayers money. It a visious cycle that will take a God they don’t believe in to correct their mistakes.

  42. Ref: ” The Social Contract “, or “Principles of Political Right ” – by Jean Jacques Rousseau (1762)

    Note: Four (4) Parts, but well worth picking through certain parts (JMHO). A classical Marcel Proust … “Remembrance of Things Past”? Oh,…and by the way? Does anyone remember the “Latch-Key-Generation”…they’re all grown up now (somewhere in limbo, between Gen` X and Gen` Y Purgatory)? Brothers, and Sisters,… Dante would be having a ball, living in today’s world!

    http://www.constitution.org/jjr/socon.html

    http://en.wikipedia.org/wiki/The_Social_ Contract

    Next… regarding the “Naked Emperor”? America has been neutered,… yes neutered, since the inception of the electronic voting machine/booth, period! Perhaps as far back as 1988/89? Our Republic is now a borderline “Fascist State” because of these “faceless/ paperless/ trust-me” – “High-Frequency Voting Machines” {@ Jeff Simpson hats off tip :-)} that can be managed in China, Taiwan, Russia, Israel, S.Korea, India, or even Cuba via Venezuela (btw, approx. 67% of voting machines manufactured were from two or more of the countries mentioned). All you need are the “Source Codes”, which are sold indiscriminately on the World Wide Web today,…amazing!
    And so there you have it – – Only when the digital divide is conquered by the “Binary Conquistador’s”, will our new emperor be “Digitized-N-4D” !

  43. Ref: ” The Social Contract “, or “Principles of Political Right ” – by Jean Jacques Rousseau (1762)

    Note: Four (4) Parts, but well worth picking through certain parts (JMHO). A classical Marcel Proust … “Remembrance of Things Past”? Oh,…and by the way? Does anyone remember the “Latch-Key-Generation”…they’re all grown up now (somewhere in limbo, between Gen` X and Gen` Y Purgatory)? Brothers, and Sisters,… Dante would be having a ball, living in today’s world!

    http://www.constitution.org/jjr/socon.html

    http://en.wikipedia.org/wiki/The_Social_Contract

    Next… regarding the “Naked Emperor”? America has been neutered,… yes neutered, since the inception of the electronic voting machine/booth, period! Perhaps as far back as 1988/89? Our Republic is now a borderline “Fascist State” because of these “faceless/ paperless/ trust-me” – “High-Frequency Voting Machines” {@ Jeff Simpson hats off tip :-)} that can be managed in China, Taiwan, Russia, Israel, S.Korea, India, or even Cuba via Venezuela (btw, approx. 67% of voting machines manufactured were from two or more of the countries mentioned). All you need are the “Source Codes”, which are sold indiscriminately on the World Wide Web today,…amazing!
    And so there you have it – – Only when the digital divide is conquered by the “Binary Conquistador’s”, will our new emperor be “Digitized-N-4D” !