By William K. Black. This article was first published on New Economic Perspectives.
FDR transformed the nation when he was confronted with the Great Depression and World War II. He famously welcomed the hate of the banksters. President Obama wanted the love (and the contributions) of the banksters. He chose Timothy Geithner to be his pipeline to the banksters because Geithner shared Obama’s lack of passion for holding the banksters accountable for their frauds that drove the ongoing crisis. We have known the core of these sad facts for years, for they were revealed (irony of ironies) in a May 22, 2010 article whose theme was that we had all done Geithner and Obama a terrible injustice by criticizing them for their servile approach to the banks. The key facts that the article disclosed can be summarized in a sentence: Obama developed a “man crush” on Geithner and decided to follow Geithner’s policies to bail out the banksters rather than hold them accountable for the frauds that made them wealthy and caused the Great Recession. Obama’s “man crush” is particularly odd given the fact that Geithner is a Republican who, as a fig leaf, became an independent.
I emphasize that Obama is the President and the man who chose Geithner to head Treasury and, eventually, become his principal advisor on finance and economics. While this article focuses on Geithner’s role, the responsibility and culpability lie primarily with Obama.
I find the May 2010 article’s sycophancy towards Geithner so appalling that it is acutely painful to, in the interest of brevity, ignore its defects and simply report its disclosures. Books published recently by Suskind, Barofsky, Bair, and Connaughton have confirmed and expanded these disclosures about Geithner’s all-encompassing dedication to the interests of the banksters.
I argued in my first appearance on Bill Moyer’s in April 2009 that Obama’s acceptance of Geithner’s advice to serve the interests of the banksters rather than America could cost him reelection. Romney and Ryan have been such terrible candidates with awful policies that recent polls have indicated that Obama has a substantial advantage in the electoral vote. Wednesday’s debate, however, has exposed the political insanity of Obama’s embrace of the banksters. (I have often explained why the policy is substantively insane and provide only the briefest summary here.)
The single most important thing that Obama could have done to respond effectively to the crisis and to prevent future crises was to take on the systemically dangerous institutions (SDIs) whose fraudulent CEOs drove the crisis. The SDIs inherently put us constantly at risk of systemic crisis, are so large that they are inefficient, make “free markets” impossible because they receive a huge, implicit federal subsidy, and pervert democracy into crony capitalism. Leaving the banksters in charge of our largest banks also guarantees recurrent, intensifying financial crises. Taking on the SDIs, particularly their CEOs who grew wealthy by looting “their” banks would have also been the single most just and politically popular action Obama could have taken.
I want to emphasize the “just” aspect. Holding the banksters accountable for their crimes has nothing to do with “pitchforks,” vengeance, or scapegoats. Holding elite criminals accountable is a minimum condition for a democratic state that aspires to be a great nation. Americans yearn for a president who demands that we live up to our best natures. The May 2010 article unintentionally demonstrates the author’s, Geithner’s, and Bill Clinton’s inability to even fathom the concept that justice requires holding the banksters accountable for their crimes. Indeed, the article descends into this loathsome slander of the American people.
[Geithner’s] objective was to rescue the economy from ruin, and if the price was that a bunch of bankers benefited, he was happy to pay it. But Geithner was smart enough to realize that the simmering wrath of voters could complicate the politics around his efforts considerably. So the secretary ventured to Harlem to ask Bill Clinton’s advice as to what might be done to cool the cauldron. According to Jonathan Alter’s new book, The Promise, Clinton told him that his options were limited.
“You could pull Lloyd Blankfein into a dark alley and slit his throat,” Clinton said, “and it would satisfy [people] for two days, and then the bloodlust would rise again.”
Note the depth of their contempt for the American people. The American people did not want any executions of banksters, much less their murder in “a dark alley.” Geithner, Clinton, and the author cannot even consider the compelling evidence that accounting control frauds led by the banksters drove the crisis. They have no understanding of accounting fraud, justice, or the damage caused to a nation when elite frauds can grow wealthy (and massively destructive) through fraud. They have no conception of what any competent regulator, economist, criminologist, or attorney would understand about a “Gresham’s” dynamic. If cheaters prosper, then bad ethics drives good ethics out of the marketplace and fraud can become endemic.
The “price” that results from allowing elite frauds to become wealthy with impunity is endemic fraud, recurrent financial crises, grotesque economic inefficiency, and the perversion of markets and democracy through the descent into crony capitalism. Geithner will not bear this “price” – America and Americans will. We were not informed of this price or asked whether we were willing to bear it. There was no legitimate need for us to bear the price because Geithner’s grant of impunity to the elite frauds was unjust and harmed the economy and nation. The banksters are the most undeserving recipients of a U.S. government bailout in history. The odds are strong that the banksters will eventually share a portion of the massive bounty they received from the U.S. due to Geithner’s policy recommendations with Geithner. They may hire him, arrange for him to run an international organization, or give him Larry Summers-level (massive) fees for speeches on the wonders of faux “stress tests.” There are numerous ways for a senior government official to cash in.
No regulator would ever believe that leaving fraudulent CEOs in charge of banks produces economic stability. While Geithner, as President of the FRBNY, was supposed to be one of the nation’s top regulators he, by his own admission, refused to regulate. Like Clinton, Geithner was a strong proponent of the financial regulation that helped to produce (with a huge assist from Bush) the intensely criminogenic environment that caused the crisis. Geithner and Clinton would be two of the last individuals in the world that one would ever select to create an effective program of regulating or prosecuting banksters.
It is amusing that Geithner would choose Clinton as his go-to guy on how to neutralize the public’s outrage at Geithner’s successful effort to convince Obama not to prosecute (or even seriously investigate) the elite criminals who grew wealthy by causing the crisis. First, it’s not exactly a socially desirable expertise for which one wants to be known. Second, Clinton was the subject of the criminal investigations. He was the elite guy that much of the public was demanding be prosecuted. Third, Clinton immediately displayed his contempt for the American people by describing us as eager to murder bank CEOs by slitting their throats in a “dark alley” without any trial.
I am sure that that all Americans will be delighted to learn that Geithner decided that we should bear the price of his recommendation (accepted by Obama) to give the banksters who grew wealthy by causing the crisis de facto immunity from prosecution plus a bailout that would save their jobs and reputations and make them even wealthier. How convenient that the banksters were, as the May 2010 article shows, Obama’s leading contributors (and Geithner’s most likely future employer). Our saying as regulators during the S&L debacle remains true today: “the best return on assets is always a political contribution.” In our day, the political contributions were used to influence politicians who sought to block us from holding the banksters accountable. The author’s effort to render Geithner noble and Clinton sagacious for braving the public’s (fictional) bloodlust in order to protect the noble banksters (aka: contributors) from the murderous public is revealing and comic.
Taking on the banksters would have required the Obama administration to rebuild the vigorous regulatory system essential to prosecute the banksters and prevent future crises. Obama, however, followed the advice of Geithner and Orzag (Obama’s OMB appointee and another leading foe of regulation) and attacked regulation and regulators as the problem. Geithner’s answer to Congressman Ron Paul’s question about his role as the chief regulator of many of the nation’s largest bank holding companies was “I was never a regulator.” So true, but you’re not supposed to admit it. Geithner was a catastrophic failure as a regulator.
Obama followed Geithner’s advice and did not shape Dodd-Frank to target the true causes, particularly accounting control fraud, of the financial crisis. Obama did not appoint vigorous regulatory leaders and he appointed Attorney General Holder, whose failure to prosecute any elite white-collar Wall Street CEO involved in causing the crisis has continued the national disgrace of the Bush administration.
What does the Obama administration stand for with respect to the greatest financial crisis in four generations? Obama stands for bailing out the banksters and not prosecuting them. The administration’s most cynical act was claiming that programs that were actually designed to bail out the banksters were programs to help distressed homeowners. Barofsky’s (SIGTARP) book reveals the sickening details.
[Elizabeth] Warren asked Geithner repeatedly about HAMP. After several evasions, Geithner said about the banks, “We estimate that they can handle ten million foreclosures, over time… this program will help foam the runway for them.”
Romney lied repeatedly when he claimed that the Dodd-Frank Act creates a safe harbor for the SDIs. Obama failed to rebut the lies, but the greater problem is that because he listens to Geithner’s advice Obama has done nothing to end the SDIs, which would have turned Romney’s attack into Obama’s triumph. Dodd-Frank should have ended SDIs and it would have if the President had rejected Geithner’s advice. If Obama had pushed for Dodd-Frank to end the SDIs it would have smoked out the SDIs’ defenders – which would have included Romney and Ryan. The continuing failure to remove the threat posed by the SDIs has nothing to do with (non-existent) Dodd-Frank safe harbors for the SDIs. But that actually demonstrates that the fault lies with Obama listening to Geithner. The administration, prior to and after the passage of Dodd-Frank had and has the statutory authority to shrink the SDIs to the point that they no longer pose a systemic risk to the global financial system. The Obama administration has followed the Bush administration policy of refusing to use that authority and the SDI problem increased greatly under both administrations.
During the debate, Romney changed his positions when he backed away from his plan to repeal Dodd-Frank and its financial regulations. Obama failed to point this out or explain why greater financial regulation was necessary. But we need to step back and consider why Romney would think he could get away with his lies and evasions on these points. If Obama had appointed vigorous regulators and prosecutors and made it a national priority to remove from office the banksters who control our SDIs and prosecute them Romney could not have attempted these lies. Obama would not have been on the defense – he would be presenting himself as the president who led the successful campaign against the banksters. Similarly, if Obama had appointed vigorous regulators who reestablished the criminal referral process that is essential for prosecuting elite banksters and adopting and enforcing the rules that would prevent future crises he would have been on the offensive taking credit for these successes. If Obama had fought to establish real relief designed to aid distressed homeowners rather than “foam the runway” for the banks Obama would be the hero. Instead, Obama followed Geithner’s and Orzag’s advice and derided and reduced regulation and cynically used programs purportedly designed to help homeowners to as yet another means to bail out the banks. Obama is incapable of reversing fields and endorsing vital regulations and real programs for the homeowners because of his “man crush” on Geithner – the banksters’ pipeline to the Obama administration.
The debate revealed that Obama does not stand for anything positive when it comes to the banksters or distressed homeowners. Geithner is not a banker or a technocrat. He is an American apparatchik who rose by attaching himself to powerful political patrons and telling them what they want to hear. That reflects badly on Obama. Geithner gave Obama the answers Obama wanted to hear – we must not act against our largest donors (and Geithner’s most likely future employer), the banksters, by holding them accountable for their frauds because if we were to do so the economy would collapse. Geithner’s answer, which became administration policy, was to lie about the banksters’ role in causing the crisis and the financial condition of the banks. Obama should hold Romney accountable for his endemic lies during the campaign and debate, but he would be in a better position to do so if he fired Geithner and Holder, ended his administration’s lies about the banksters, and reversed the administration’s unjust and destructive financial policies. Obama needs to stand for something – he should stand for the American people against the banksters and the SDIs. The irony is that by following Geithner’s advice Obama acted dishonorably and foamed the runway for Romney’s lies about the financial crisis.