On Monday, Treasury Secretary Henry Paulson and President George Bush announced they would be committing $20 billion in capital and guaranteeing a record $306 billion in risky assets now belonging to CitiGroup, at one time the world’s largest and most profitable financial institution. Meanwhile, Obama announced the twin towers of his economic team, Tim Geithner, current head of the New York Federal Reserve, and Larry Summers, former Treasury Secretary under Clinton, to head-up the Treasury and the White House National Economic Council respectively. In our interview with Timothy Canova, Timothy provides a historical analysis of Geithner and, in particular, Summers. He believes that a great deal of the current economic crisis can be put on Summers for his role as Treasury Secretary in the deregulation of the derivatives market, and Geithner for the refusal to re-regulate that market, and in doing so allowing it to grow to unthinkable proportions. He ends by noting that neither Summers nor Geithner have admitted openly that their actions and commitment to deregulation were wrong, something that Alan Greenspan did in a congressional hearing just last month.
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VOICEOVER: Markets rallied on Monday after President Bush and Treasury Secretary Paulson announced that they would be committing $20 billion in capital and guaranteeing a record $300 billion in risky assets in order to bail out ailing banking giant Citigroup. On the same day, Barack Obama confirmed the appointments of Tim Geithner to be his Treasury secretary and Larry Summers to head up his National Economic Council when he takes office in January. The Real News spoke to Timothy Canova, writer and professor of economic law at Chapman University in California, in order to get his reaction to the appointments.
TIMOTHY CANOVA, INTERNATIONAL ECONOMIC LAW, CHAPMAN UNIVERSITY: Timothy Geithner has been the president of the New York Federal Reserve Bank for the past couple of years. Prior to that, he had been at the International Monetary Fund for a little while, and prior to that, he had been a Treasury Department career bureaucrat. He had been mentored by Larry Summers, who was just appointed by president-elect Obama to be the chair of the National Economic Council. And, in fact, Larry Summers and Robert Rubin and Alan Greenspan were, you could say, three of a kind. In fact, I have here the Time Magazine issue of the three of them on the “committee to save the world.” That’s troubling, and it is ironic. I mean, these are figures who—Larry Summers in particular, Timothy Geithner a bit less so—who had really been involved in creating a lot of the conditions that led to this financial crisis, and failures being rewarded in many ways right now. I’d say among the most significant things that occurred in the late 1990s happened while Robert Rubin was Treasury secretary, and then his transition to Larry Summers becoming Bill Clinton’s Treasury secretary. And during that period of time, the Glass-Steagall Act had been swept away. The Glass-Steagall Act had been passed in the 1930s to keep commercial banks out of the casino economy, out of Wall Street. Then, a year later, in December 2000, while Larry Summers was the Treasury secretary, the Clinton administration deregulated derivatives. Derivatives have now become a major part of this financial crisis that we’re in. The size of the derivatives market is mind boggling. And while it sounds great to have insurance—everyone [inaudible] insurance on their own home, for instance—these insurance contracts have become so enormous and they’ve become tradable [inaudible] that essentially they’ve become gigantic wagers on the movement of stocks, on bonds, on interest rates, on exchange rates. The size of the credit default swap market alone has been estimated at between $50 trillion and $80 trillion in face value. Then, of course, there are exchange rate and interest rate derivatives which are in the many hundreds of trillions of dollars in face value.
INTERVIEWER: See, those numbers are just getting out of the realm of reason. They just don’t seem to have any connection to reality, like, a number like $100 trillion. That’s bigger than the world economy.
CANOVA: That is right. And what made it possible was that, December 2000, Bill Clinton signed away the derivatives market and allowed it to remain deregulated. There’s so much uncertainty, not just in the marketplace but among policymakers, that the longer we wait to impose some type of regulation, not for the sake of regulation but for the sake of bringing some kind of transparency to the financial system, I think we’re in for a long, tough ride.
INTERVIEWER: In Obama’s speech today, when he introduced his team, he talked quite a bit about moving in a new direction and reforming the financial system.
SEN. BARACK OBAMA (D-IL), PRESIDENT-ELECT: I’ve sought leaders who could offer both sound judgment and fresh thinking, both a depth of experience and a wealth of bold new ideas.
But it appears that he’s tapped the architects of the system to do this. Alan Greenspan admitted recently that there was a flaw in his model.
House Oversight Committee Hearing
October 23, 2008
REP. HENRY WAXMAN (D-CA), CHAIRMAN, HOUSE OVERSIGHT COMMITTEE: You found a flaw in the reality—.
ALAN GREENSPAN, FORMER CHAIRMAN, US FEDERAL RESERVE: A flaw in the model that I perceived as the critical functioning structure that defines how the world works, so to speak.
WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working.
GREENSPAN: Precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
Is there any evidence to believe that Summers and Geithner have made similar updates to their models and to their ideas?
CANOVA: Well, Larry Summers [inaudible] The Financial Times of London about the need for a fiscal stimulus. However, there’s been no mea culpa, no admission of wrongdoing on his part, as far as the role, the very significant role he played in deregulating derivatives, in sweeping aside the Glass-Steagall Act. The whole idea that these appointments, Larry Summers and Timothy Geithner in particular, are necessitated because they both have experience—it seems a little overblown to make that argument. I mean, there are a lot of other good economists out there who were not implicated in all of this deregulation during the 1990s and the past decade who have plenty of experience, and one name that comes to mind right away is Joseph Stiglits. He was the chair of the Council of Economic Advisors under Bill Clinton, he was the chief economist at the World Bank, and he happens to have a Nobel laureate in economics. There’s no shortage of very top quality people that have experience that could have been selected. Selecting these two particular figures is somewhat problematic, and I think they both have their work cut out for them.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.