Larry Summers, Economic Recovery, And Ben Bernanke

In a memo to Congress on Tuesday, Larry Summers – the head of the White House National Economic Council – laid out his view of where we are and what is likely to happen next in our economic recovery.

His tone was more upbeat than we’ve heard in recent utterances, although he has been heading in this direction for a while – contrast this April speech with this appearance in July.

What is beginning to turn the economy around?  Summers claims great effects from the fiscal stimulus Recovery Act, but much of that money has not yet been spent. 

He also puts weight on “an aggressive effort to tackle the foreclosure crisis.”  There have been sensible steps in that direction, but so far the effects have been decidedly modest.

The main explanation has to be that the administration prevented the financial system from collapsing.  In an economy as large and diverse as that of the United States – with much more government spending than at the time of the Great Depression – as long as the entire provision of credit does not disintegrate, we will recover.

Summers refers to “A Financial Stabilization Plan”, but this is ex post grandiosity.  In fact, the government simply demonstrated unflinching support for all big financial firms as currently constituted.  We the taxpayer effectively guaranteed all these firms debts, unconditionally.  Once the market figured out that the Treasury, Federal Reserve and other officials could pull this off, the panic was over.

But this victory brings also real danger.

Rahm Emanuel, the White House Chief of Staff, put it well recently, “The [finance] industry is already back to their pre-meltdown bonuses.  We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”

Summers does not shy from this issue.  In his letter to Congress he says we need, “Comprehensive reform of the nation’s financial regulatory system so that a crisis like this never happens again,” and “Financial regulatory reform is vital to preventing against (sic) the asset market bubbles that have characterized previous recoveries.”

There are, however, three problems with what he proposes.

First, he says that the administration “has unveiled a sweeping set of regulatory reforms.”  But the reality is more modest.  There will be some slight strengthening of capital requirements, somewhat more attention paid to “systemic risk” (although this is not well defined), and mildly tougher regulation of derivatives.  Most of this amounts to essentially business as usual.

Second, to the extent that the administration does have a few good ideas – for example on a new consumer protection agency for financial products – it has let opposition build to the point where the lobbyists may well be able to prevent progress.  The time to push for change was earlier this year, when banking was still in political disarray; now the sector is stronger than even on Capitol Hill.

Third, the administration can’t even bring its own regulatory agencies along with its modest reforms.  Last week, Treasury Secretary Tim Geithner expressed extreme frustration with the efforts of these agencies to block reform.  This week, appearing before the Senate Banking Committee, the same people were still in serious blocking mode.

Even the Federal Reserve chairman, Ben Bernanke, does not seem to be on board with reform as proposed by Geithner and pushed by the White House.  It’s not clear if Bernanke has become too close to the banking industry or too captured by his staff, but in any case Treasury feels that he is not fully on board.

If the administration really wants to put the economy on a path to sustainable bubble-free growth, it looks increasingly likely that it will want to replace Bernanke when his term is up early next year.

Secretary Geithner is the most plausible replacement.  He was previously head of the New York Fed and vice chair of the Federal Open Market Committee, so he knows the system intimately.  He has spearheaded all the financial rescue efforts of the past few years; better than anyone he knows what went wrong.  The markets see him as a safe and friendly pair of hands.

And, increasingly, if he wants any kind of real reform, it looks like Secretary Geithner will have to go to the Fed and implement it himself.

By Simon Johnson

This post originally appeared on the’s Economix blog and is reproduced here with persmission.  The usual fair use rules apply to short quotations, but if you wish to reproduce the entire post, please contact the New York Times.

For more on why I’m taking the side of Secretary Geithner against the regulators, see my conversation with Ben Eisler of The New Republic.

58 thoughts on “Larry Summers, Economic Recovery, And Ben Bernanke

  1. It is interesting that Rahm Emmanual and Larry Summers do not seem to understand that Goldman is as successful as it is and as profitable as it is because it is engaged in the same business model as before the crash.

    But they became a bank holding company last fall supposedly to reign in the risk.

    We see now that becoming a bank holding company has done nothing to diminish the risk Goldman takes on. Now, however, the taxpayer is openly on the hook should their risk end in failure. Their VAR model apparently opens them to lose as much as $245 million on any given day!

    The PR machine at Goldman is as deft as its traders. They want us to believe that they didn’t need the AIG bailout (then why did they take the money?) They want us to believe that they didn’t need TARP to survive.

    They’re wrong. The profits of Goldman exist only because of the extraordinary interventions of the government last fall. Can’t be the big fish if the pond has been sucked dry – the feds made sure the water was pumped in so they didn’t die.

    I really do not understand why we continue to offer loan guarantees and money to a firm that so clearly believes they need nobody but themselves. Let ’em have at it – I don’t ever want to have to clean up after them again.

  2. “Reform” is in the eye of the beholder. Ordinarily the term connotes good, but in this case the changes seem to be of marginal value. As regards resistance to Geithner’s proposals, that seems to be legitimately motivated given the Fed’s indifference to proper regulation prior to the meltdown.

  3. I wonder whether or not the Administration is reluctant to reign in risk taking because they want to continue to feed the finance sector for the future tax revenues and also so that NYC and state are not socked too bad with an even larger decrease in the tax base?

  4. Is this the way forward?

    …”that banks once again are making dangerous loans to borrowers who can’t repay them and selling toxic investments to investors who don’t understand the risks—all of which could cause blowups in the banking sector and weigh on the economy. ”

    As a taxpayer, I am tired of the big bank bailouts only to watch them return to the same dangerous behavior that brought the global economy to its knees. They have learn a very profitable lesson, the bigger the risk the bigger the profit and failure is not an option because the taxpayer will always bail them out.

    Where is the FED regulation that prevents this behavior? Obviously, the FED is not capable of regulating the banking industry.

    Congress needs to regulate and establish another agency to protect the taxpayer. A strong message should be sent that no company is “too big to fail”. Otherwise “moral hazard” is only an empty slogan. We need regulation to takeover and unwind the big banks. We need consumer protection.

    That the banks have returned to this business practice should be no surprise now that the government is willing to buy their toxic debt. Everyone knows that profits are easily made if you don’t have to pay your debts.

  5. It isn’t for “future tax revenues” that they’re feeding them, its for campaign cash, period. You’re dealing with theives here, sir, not the cannonized.

  6. Agree wholeheartedly.

    Why put a stupid tax cheat at the Fed? What did Geithner accomplish in 4 years at the head of the NY Fed? Lowered capital requirements on his friends running the big banks.

  7. It strikes me that Geithner and Summers are more part of the problem than part of the solution. They’ve already had the chance to push for sweeping reforms, and either failed to persuade Obama, or simply did not do so.

  8. “As regards resistance to Geithner’s proposals, that seems to be legitimately motivated given the Fed’s indifference to proper regulation prior to the meltdown.”

    A terrific opportunity for Timmy to generate a snit, isn’t it, this regulatory business. And just as with the public presentation of the rest of the slugs in this den of theives, all is in the giving of impressions.

    No, eric20008, I wouldn’t get too excited about the either Timmy’s sincerity or the ferocity of his emotions. He’s just trying to convince you that despite what is plain about every aspect of his public record, he’s really on your side. And no one in their right mind believes that.

  9. Dyna,

    Libertarianism, absolutising as it does the personal relativism of an amoral late adolescent, all too frequently reduces to a kind of sociopathology. You see much of the same kind of illness on the left in the case of life questions. Self-centered phoniness is ubiquitous it would seem.

  10. Negative sum finance needs to be less profitable. Perhaps this calls for Congressional action.

  11. Since when is Geithner unaffiliated? Am I the only one who finds his self-righteousness amusing?

    If I were to pick a litmus test for reform, it would not be the CFPA but the OTC derivatives market. That’s where you will see who owns our government.

    As usual, my favorite non-proposal of this whole endeavor involves the rating agenices:

  12. Yeah let’s appoint bankruptcy law professors to Federal Reserve Chairperson…. fantastic idea

  13. During the booming heydays of the credit bubble, the financial sector partly recycled its enormous profits into political system to gain political power. It’s sad that it seems their power has become great enough to create resistance to obviously needed reform like the consumer protection agency for financial products.

    A powerful and excessive financial sector has been the death knell for many nations historically — think Britain in the 19th century or the booming Dutch economy before that.

  14. I find it weird that Simon Johnson now seems to wholeheartedly support Geithner. If you look at his track record Geithner has been in bed with the financial clique for most of his career. I think we could be excused for questioning his recent conversion to tougher regulations.

    How sincere is he? Has he suddenly seen the light on the way to Damascus? Is his back starting to hurt from all the kowtowing?

    If he’s sincere we should of course welcome him. But Simon Johnson would be well inspired to wait a bit before helping send another Trojan horse to the Fed.

  15. So, they shouldn’t publish in the Atlantic because one of their columnist’s father was a bad guy? Huh? When did we start blaming the sins of the father upon their seed? And arguing that she should support big government because it enabled her father (excuse me, “daddy,” we’re trying to be as sneering as possible here) to lead a corrupt lifestyle and put her through college…makes my brain hurt. Maybe her libertarianism is in reaction to that exact corruption. Maybe she’s rebelling against her dad. Pointing out that their ideologies differ is not exactly a gotcha moment.

    This whole article is absurd. For example:
    Megan showed how much she owes to her dad’s way of doing business when she admitted in a blog post that she owes her success to personal contacts “I sent out about 1400 resumes blind after my firm failed. I got not one response. All the jobs I interviewed for came from personal contacts.”

    Uh, that’s call networking. That’s how the majority of people get jobs.

    Anyway. I’m sorry for feeding the trolls.

  16. anne: “But {Goldman Sachs} became a bank holding company last fall supposedly to reign in the risk.”

    Really? I thought it was to get the gov’t goodies. ;)

  17. I fail to see how Mrs. Warren can be worse than Greenspan, Bernanke & Geithner. What have they accomplished besides fueling then failing to prevent the bubble? And then giving trillions of OUR dollars to stupid, greedy bankers for fat bonuses etc.

    Bernanke & Geithner have really been fantastic!

  18. The finance oligarchs own the government. I personally as one who fought for, supported, and voted for Obama feel deeply betrayed. His administration has turned it’s back on the promise of giving voice to the voiceless and instituting real change, and instead, poured TRILLIONS of tax payers dollars into the coffers of the predatorclass fiends, swindlers, thieves, criminals, and PONZI scheme frauds on Wall Street who have returned unchanged, stronger, and more obdurate to the halcyon days casino capitalism that drove the entire global economy to the brink of collapse. NOTHING has changed!!! Nothing changed but the burdens, suffering, and imponderable debt heaped on shoulders of our children. There is moot and empty silly talk about regulatory reform, and hollow discourse of stricter capitalization and derivative requirements, – but as of this moment – NOTHING HAS CHANGED, but the amount of debt heaped on the American people.

    The only thread of hope I can hold is that Obama and his administration are being extorted by the predatorclass thieves and swindlers on Wall Street. Basically the predatorclass threatens to intentionally cave the economy and retire to their individual oppulent palaces, unless the Obama administration backs off of reform, continues to flow trillions of the peoples dollars into predatorclass offshore accounts, and bow down to, and support every whim and wish of the finance oligarchs and the predatorclass fiends and swindlers and thieves who profit from those oligarchs and the FAILED and toxic irredeemable debt models.

    Perhaps, the tables will turn once the real economy recovers enough for Obama to stand up to the finance oligachs. Of course this is only a hope. More likely, Obama and his cohorts are willing participants in the most grievous and the largest redistribution of wealth in the history of the world.


  19. Yes, please, let’s put yet another Goldman-Sachs alum in charge of the whole shebang.

    Why not? GS owns all of government as it is, let’s just make it official and out in the open instead of the current wink-wink setup.

  20. If you are looking for hopeful signs, there’s this one from zerohedge today:

    When nothing at all has changed in two years except the size of the pool of the destitute in America, scum like Hoyer – and he’s about as scummy as they get – will need to arrange for Secret Service protection – you know, goons – if they are ever again to chance making public appearances like this one.

  21. If you go back and look at coverage from that time, the MSM is filled with predictions of minimal profit ahead of them, thanks to the minimal risks such a move would enable them to take.

    But as you noted, the move to bank holding company allowed them unfettered access, apparently, to a lotta federal loot.

  22. “The markets see him as a safe and friendly pair of hands.”
    I have some difficulty reconciling this line with the notion that TG wold institute strong and effective reforms. If I could get past that, I would still have difficulty believing that our astute host would seriously condone turning over the helm of monetary policy at a juncture as critical as this to TG, based merely on the effect on regulatory reform. I would agree attitude may be more important than ability, but it still seems like having the tail wag the dog.

  23. Geithner has shown he is as bubble-friendly as Bernanke or Summers. All of these people are interchangeable in any senior economic role.

    As Simon pointed out, the govt essentially guaranteed all debt starting in late 2008. It will be decades before the moral hazard released by that action is undone, if ever.

  24. Alan Blinder is the best choice for Chairman of the Federal Reserve. Alan Blinder is the best choice for Chairman of the Federal Reserve. Alan Blinder is the best choice for Chairman of the Federal Reserve. Alan Blinder is the best choice for Chairman of the Federal Reserve. Alan Blinder is the best choice for Chairman of the Federal Reserve.

  25. I hadn’t seen it, but I also can’t evaluate it–too much stuff this dilettante bird doesn’t know. Right now, I’m most concerned about the “end game”–the moment when it all comes apart again, and there’s no way for the government to borrow enough to put matters right.

    There is, of course, a chance that the administration or the Congress will turn back before that point. Perhaps the new “Pecora” commission will bring some changes, enough conservative Senators will discredit themselves to allow some moderate, or even liberal, legislation. These are chances only.

  26. According to Market Ticker, the Fed bought nearly half of last week’s Treasury offering. Uh-oh. No wonder the 10 year barely moved.

    One would have to say Bernacke and Geithner are in bed together at this point. Geithner and Bernarcke have each facilitated the greatest accumulation of public debt for their respective institutions by far in America history in a matter of months. This enormous debt load will surely drown any future recovery.

  27. Here’s a suggested incentive-neutral methodology for rating agencies:

    Someone issuing a security pays a fee to an agency, which then submits the security to _all three_ bond agencies. The agency which has the rating in the middle of the other two gets the entire fee. If two agencies are tied, they split the fee. If three agencies are tied, they split the fee.

    The security receives the rating of the agency that received the fee.

    Assuming you could prevent collusion, this would remove the incentive for issuers to “shop” around, and also remove the incentive to inflate the rating.

    The government does not need to be in the business of designing/mandating specific methodologies, or even conducting oversight (other than to prevent collusion).

  28. Anne – speaking of AIG –

    I wish someone could explain to me how AIG’s toilet paper stock price literally DOUBLED in value in 24 hours yesterday? So wonderful of a windfall that Hank Greenberg instantly stepped up to pay and settle his 15 million dollar fine for financial fraud, which if you looked into it, was one of the underpinnings of this entire, recently forgotten debacle. Lucky boy.

    I guess the point is about asset bubbles again, what is causing them and can we do anything except hug the procelain throne and throw up at the thought of this stock that traded as low as 15 cents a few months ago hitting $20 again (yes, rev. split blah, blah) but don’t you know there was collusion and manipulation in our markets for this ghastly event to occur yesterday. Don’t you realize that there are hundreds of faceless “Andrew Hall’s” out there who made more nmoney in this explosion than the GDP of the bottom five EU contries. Individuals!, who assuredly made hundreds of millions overnight. Just within the last 24 hours. Can that be comprehended or explained or do we know that there was fraud, and we just swallow another dose of it.

  29. Interesting… But while it would remove the incentive to inflate the rating, it would not provide an incentive to conduct due diligence on the information the issuer provides (especially if they found something terrible that would cause them to provide the lowest rating).

    I do not think the government could dictate methodology if it tried. Ultimately, there is too much subjectivity involved.

  30. First, Larry Summers is part of the problem and always will be. Second, Tim Geithner substitutes the wisdom of those he worships (Jaime Dimond, et al) for his own original thought; he has none. Elizabeth Warren would be my choice, that is if I didn’t believe so strongly in Ben Bernanke. But if he must be replaced, it should be either Elizabeth or Simon Johnson (or maybe Niall Ferguson, who may not qualify by citizenship).

  31. I haven’t heard this name put forward for Fed Chairman yet: Paul Volcker

    He is still around, still cognizant of the issues, and has extensive experience as a former Fed Chair in guiding the US out of economic crises.

    Or if we go with Prof Johnson’s suggestion and make Geithner Fed Chairman, can we have Mr. Volcker take his place at Treasury? Any takers?

    And where does Larry Summers fit into this game of musical chairs…

  32. Simon, the end to this article was was strange.

    I think many readers of this blog would like you to write a longer post on why you think Tim Geithner is the most plausible person to “put the economy on a path to sustainable bubble-free growth.” What evidence can you cite to support that argument? That would really be illuminating.

    I think of TG’s actions during the past two years–Bear, TARP terms, Wachovia, WaMu, the struggle with Bair re Citi management, stress tests, PPIP, FDIC-backed bankster bonds, warrant pricing, giving powers to the Fed at expense of tougher regulators–and I do not see that. In terms of your own arguments re American Finance Oligarchy, I think only Paulsen exceeds TG among major policymakers in terms of advocating policies favoring the oligarchs. I just don’t understand how you get to your position on TG specifically.

    Leaving out the personalities and specific institutions, I think it’s dangerous to give so much power to one actor. Especially if the actor itself has no direct political accountability. It leaves the US and the world vulnerable to one bad person. Much better to divide powers among a few competing entities.

    A good regulatory reform would give each of a few competing regulatory bodies *independent* powers to stop financial risk in its tracks. That is, one body does NOT need to coordinate with another to act. For all I care give them each the same powers to assess capital requirements, deposit insurance, and to declare insolvency. That means the most hawkish actor can stop growing systemic financial risk without having other regulators stop it. That reduces the risk that one dishonest or stupid person can drive the whole system.

  33. Bond Girl: “Interesting… But while it would remove the incentive to inflate the rating, it would not provide an incentive to conduct due diligence on the information the issuer provides (especially if they found something terrible that would cause them to provide the lowest rating).”

    What is the incentive to conduct due diligence now?

    And if they found something that would skew the rating, they could inform the other raters. In fact, it would be in their best interest to do so. You cannot allow unrestricted communication, so such facts could be channeled through, say, the SEC.

    “I do not think the government could dictate methodology if it tried. Ultimately, there is too much subjectivity involved.”

    This is not a free speech issue. In fact, since the gov’t uses ratings in regulation, it should probably license raters anyway.

  34. Who is the ‘we’ in ‘we will recover’ ? And what does recover mean ? This is just one of those nonsensical feel good add-ons .

    I know a few people who never recovered from the 80’s recession and its aftershocks.

    And for that matter,’we’ did recover from WW2, in a way.

  35. Frankly, Professor Johnson,after all of your excellent reporting on the financial mess, I’m shocked at your conclusion that Tim Geithner is the one who can lead us to a sound and secure financial system. The current insiders – Summers, Geithner, and Bernanke have had their chance to introduce the needed systemic changes and regulations and failed. It’s as though you’ve given up on any real change that only someone new can achieve. I note that several others of your commenters today have said similar things. PLEASE RETHINK YOUR CONCLUSION!!
    We are counting on you to be the voice of reason and real leadership here!

  36. Let me add to my post above. All of the Obama economics advisers have conflicts of interest from their close ties to Wall Street – most notably Mr. Summers and the $6+ million he was paid by a hedge fund and the banks for speaking engagedments in 2008.
    Mr. Geithner has especially close ties to Goldman Sachs and even hbas a former Goldman lobbyist as his chief of staff. How can he possibly champion changes that will put tough new financial regulations in place. We need a “new broom”, not minor cosmetic changes.

  37. Good point on incentive to conduct due diligence. Here’s another try, moving to a two-round system:

    Round 1: Issuer submits security to a federal agency for rating, which gets submitted to all three ratings agencies independently. All three then submit an initial rating, with their full report.

    Round 2: Each agency can then read through the full report from the other agencies. If one agency comes up with a good piece of evidence, then it becomes public knowledge. All three agencies independently submit a new rating.

    Compensation scheme:

    60% of the compensation is based on how well the first-round rating compares to the median of the second-round rating, and 30% of the compensation is based on how well the second-round rating compares to the median of the second round ratings.

    Thus, if a ratings agency has a piece of private information in round 1, they can rate the security differentially. When this info becomes available in round 2, they are rewarded for their independent due diligence. Shifting 40% (or so – TBD) of the compensation to be based on round 2 consistency gives agencies an incentive to converge on a consensus so that they each get part of the pie.


  38. I think Geithner’s strong support for the consumer financial products safety commission won Professor Johnson over… It did swing my opinion somewhat.

    One of the main challenges to Geithner’s unflinching support for financial firms in Q1 of this year was skepticism that he would follow through with support for the regulation he promised when events stabilized. It appears that he is following through to some degree.

    However, I cannot see a reason for concentrating so much regulatory power into an already obscenely powerful institution that is run by a conglomerate of banks and 16-year term congressionally appointed conservative economists. The purpose of the Fed – to serve as a commitment mechanism against inflation (and, ideally, deflation – although did a poor job in that department from September 08 – February 09) – is served by insulating the institution against consumer pressure.

    Precisely that insulation from consumer pressure is what makes it a spectularly bad decision to empower the Fed with enforcing consumer protection law. Geithner knows this; Bernanke is either protecting banks or building his empire – either of which is bad.

    I absolutely agree that Geithner has not proven himself yet, but Bernanke is a known quantity. And what’s known is that Bernanke’s Fed (and the Open Market Committee) has taken only the weakest and most delayed steps to fight deflation. Even as the economy was tanking in August 08, before the financial crisis, they held rates steady. ONLY when the FINANCIAL sector was in danger did they open the floodgates of Fed financing. And in spite of repeated promises to deploy QE to combat deflation and restore monetary policy to the long term 2% inflation target, they did not react until the evidence of deflation was overwhelming (even though the markets expected them to deploy QE in November/December…)

    The failure of the Bank of Japan to _credibly_ commit to 2% inflation is partly responsible for the lost decade.

    Right now, in a mere month or so, the Fed will wind down QE, well before the recovery has taken root. There are deep concerns that we are repeating 1937…

    A contractionary Fed, at this moment in time, is deeply dangerous to Obama’s other reforms and to the health of the world economy. I think Bernanke is a good guy – really honest – but I don’t know if he’s the right leader for the Fed right now.

  39. I really don’t understand why everyone has been blowing Elizabeth Warren for the last 6 months. Nothing against her, she’s competent, but her job is easy.

  40. They would have an incentive to converge on a consensus, but the value of whatever information they gather will be offset by the costs of obtaining the information. Since they get paid on a transaction basis, the easiest way for all of the rating agencies to make money would be for them all not to go beyond the information the issuer provides and complete as many transactions as possible, right?

  41. They have incentives to converge on consensus, but there are two strong incentives to go beyond the mere minimum of information provided by the issuer:

    1) If they can (inexpensively) find information that they can use to shift the consensus in round 2, they benefit. If seeking that information is too expensive, then the fee is either too low or, alternatively, the cost of ferreting out the information does not justify the improvement in accuracy.

    2) If they fail to make the minimum investment, and someone else does and finds info, then they will lose money out in round 2.

    Additionally, this removes negotiating power by taking away “shopping around”. It largely depends, however, on preventing collusion between the ratings agencies.

  42. One other potential issue is that wild differences in ratings might communicate something useful, although that seems easy to get around…

  43. It’s simply beyond credulity that Greenspan, Bernanke, Summers and Rubin, over the years, did not understand what was happening, and what they were doing.

    The Fed knows exactly what is happening in the credit markets.

    It’s impossible that they did not know they were blowing these giant bubbles.

    Brooksley Born was shut down by these guys, simply for writing a sketch of how and why derivatives might be regulated.

    There’s something more here than simple incompetence.

    Oh, and none of these people should be allowed to run more than a bath. And even then, they should be careful supervised, lest it overflow.

  44. Bernake is too academic, and too slow to response to crisis, and a lot of market folks heve been sick of with his work at the Fed. I believe Summers will do a great job at the Fed. He’s both academic and practical, and very suitable given the challanging job ahead.

  45. Hiya, Uncle Billy,

    You’re really suggesting that what I post here is of sufficient import to justify a Secret Service file? Why it never occurred to me that I might enjoy such prominence. I know, you’re only saying this because I’m good looking. You could sense that from the all the love-filled relies my comments typically receive here. :-)

  46. ________

    Read “Bernanke’s Dark Kingdom.


    I am going to show here that central banks have excessive powers which are coherent neither with democratic principles nor with morality. Their existence can not be justified from a mathematical point of view.

    Worse, in light of the exercise of their extraordinary power by Bernanke, I argue that they can pose a real threat to democracy, peace, privacy and individual freedom.

    Because of the immediate dangers that are evoked in these lines I strongly suggest that you reproduce my deeds.

    My Yield Curve.


  47. Attention Messrs. Bernanke, Geithner, Summers, et al.

    Re: Professor Amartya Sen on Adam Smith and what’s missing in contemporary economic theory and policy

    “[Smith’s] 1st book [was] ‘Theory of Moral Sentiment,’ … first published in 1759…. Penguin is producing a new edition in which I am writing the foreword explaining why Smith is so relevant today… and that’s all about moral issues. And that’s relevant for economics too.

    “In fact when he went into ‘Wealth of Nations,’ Smith described it saying, ‘This deals with one part of my engagement in the theory of moral sentiment.’ And I think we have to see his economics connected with it. It’s that insight that we very much need today, which is lost.”

    (This excerpt starts at 6:50.)

    Old-fashioned as it may sound, Prof. Sen is asking you to reconnect with a much more deeply rooted moral compass to navigate a passage through the current financial purgatory.

  48. Professor Johnson,

    Suggesting that Geithner will be a good replacement for Bernanke is as outrageous as some commentators pointing that Summers will be a good one too. What I do are weekly podcasts where I document the true nature of these bureaucrats and back it up by data or quotes from humans with some credibility. My podcasts are located at , the website where I also announced my upcoming book tentatively titled “The 20 Trillion Dollar Value Drain: How Goldman and other Banks robbed America and Why They Will Do it Again.”

    A former Asst. Treasury Secretary (albeit from the Regan era when the deregulations really started) has quipped that Geithner works for Goldman Sachs. He may actually go to Goldman after his stint in the Treasury; following the footsteps of Rubin, Summers, etc. We have documented in the “Thoughts” section of our website what Geithner had to say when quizzed about the Goldman bonus of 2008 (it can be argued that the money came from the AIG handout of $12.9 billion or the TARP of $10 billion which the bank took last year)… Geithner said, “it is for the Goldman board to decide that.” Professor Black on Bill Moyers journal has rightly pointed out that Geithner failed to regulate as NY Fed President. However, the way things are moving with the Obama administration, I won’t be surprised if Geithner gets the job. What you should not do is prop up a semi-wall-street insider (Geithner’s job as President of NY Fed was to regulate the NY banks, that he did not do so or does not agree that he was ever a regulator shows a lack of responsibility), for Geithner was also assistant to a powerful banker by the name of Rubin during the Clinton era.

    Now, one of the commentators has suggested Summers as the other choice. Summers? The Friedmenite who threw away the provision within the Glass Steagall Act which regulated the banks and prevented them from being too big to fail? The defence Summers and others give is that Wall Street bankers have houses and jobs and they are people. But as you had rightly pointed out, these bankers mismanaged their business, and should have paid the price…instead they are getting the same nice bonus in 2009. Whatever happened to Obama’s comments 6 months back on the fact that 20 billion dollars in bonus were paid in 2008 to these bankers; Obama was sitting there next to Geithner expressing outrage, but they let Goldman pay back the 10 billion in TARP so that Goldman can escape the comp czar.

    From the fumblings of Hank Paulson during his congressional hearings, it is clear that a Pecora II needs to be started ASAP. May be Paulson broke the PCA (prompt corrective action) law by not taking these banks, inluding Goldman, into receivership. The Law should hold equal sway, no matter whether someone is a powerful ex-treasury secretary or a road-side thug who mugs people…

    Coming back to our fellow MIT alum Bernanke,
    it looked to me when he bailed Bear Stearns out and then chuckled in the subsequent congressional hearings that he had everything under control, it is obvious that he is inept at using the resources he has as a federal reserve Chairman. I had challenged him when I wrote the First of my Value Drain series of articles on the eve of the AIG bailout (Sep 2008) that he had still not gotten his act together 6 months into the Bear Stearns bailout in terms of adding up the derivatives and coming to a number. In fact he has acted like the Kudlows of the world, who have been going every month for a year now that the economy is turning around, it is turning, it is going up.

    Every month 300 to 500 thousand people lose employment; and foreclosure data show that personal bankruptcies are going up, along with unemployment. It seems to me that the only entities who are doing well, along with the Goldmans, are the banks who are into mortgage business. Previously, the banks had to pay us 3.5% on CD and could lend us at 6% mortgage. Now they will pay us 1.5% on CD and will still lend us mortage at 6%.

    When will the American consumer learn? Never. I am shocked at the short memory of some of the commentators here. They think as if the crisis has been averted. No! The crisis is in the psyche of these Greedy Friedmenites: we will loot and plunder; you just watch!

    Hence the title of my forthcoming book “The 20 Trillion Dollar… Why They Will Do It Again?” I will send you a copy when I am done. I am after radical reform, including reforms such as preventing Cabinet Level Secretaries from starting hedge funds or joining Wall Street: You want to start a hedge fund, fine. But don’t get into public service then! Put a limit to your greed…Else, everybody would like to be a Madeline Albright, and then start a hedge fund.

    Your former student,
    Sam Mishra, MBA (MIT Sloan)

  49. I agree. I think it’s because we all believe that Elizabeth Warren is on our side. She’s smart, but I gather even she’d admit that she’s not the expert that some people believe her to be.

    And somewhat relatedly, if people would actually read what Simon Johnson is writing, they’d see that Geithner is not as evil and incompetent as they may think. Personally, I think we could all stand to show a little more deference to people who’re smarter than us (like Johnson) rather than falling into the characteristically Republican trap of denying our ignorance and browbeating our points into the debate.

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