By: Sudeep Reddy and Damian Paletta
The Wall Street Journal
November 20, 2009
Panel Votes for Tighter Political Rein on Central Bank; Some Call for Geithner to Quit
WASHINGTON -- Political frustration over the rescue of Wall Street and high unemployment erupted in the House Thursday, with one committee threatening to impose tighter scrutiny on the Federal Reserve and another trading verbal insults with Treasury Secretary Timothy Geithner.
The House Financial Services Committee voted, 43-26, to approve a measure sponsored by Texas Republican Ron Paul, vociferously opposed by the Fed, that would direct the congressional Government Accountability Office to expand its audits of the Fed to include decisions about interest rates and lending to individual banks. The Fed says the provision threatens its ability to make monetary policy without political interference.
The vote was the latest blow to the central bank, which has been become a lightning rod for politicians responding to popular anger that Wall Street was bailed out while the public wasn't. The Fed faces a stinging backlash from legislators from both parties who argue that has too much power and too little oversight. On Thursday, the Senate Banking Committee began debating legislation that would largely remove the Fed from bank supervision over the objections of the Fed and the Obama administration.
The Fed audit provision was added to pending legislation on financial regulation that the committee's chairman, Barney Frank, a Massachusetts Democrat, had planned to put to a vote Thursday. But he abruptly announced late in the afternoon that the bill wouldn't move ahead until after Thanksgiving. The reason: Ten members of the Congressional Black Caucus on the committee said they would oppose the bill to protest a lack of action to address the economic pain borne by their constituents. Although the economy appears to be growing again, lawmakers face increasing pressure in their districts to do more to boost growth and address an unemployment rate now at 10.2% and expected to rise.
Glum views on the economy sparked a retreat from stocks and some commodities, as investors moved to the safety of government debt. The Dow Jones Industrial Average fell 93.87 points to 10332.44.
At the Joint Economic Committee, a couple of House Republicans called for the resignation of Mr. Geithner, who, as president of the Federal Reserve Bank of New York, played a major role in last fall's moves to prevent the collapse of the financial system. "The public has lost all confidence in your ability to do the job," said Rep. Kevin Brady, Republican of Texas.
Mr. Geithner, in an unusual public display of pique, fired back. "What I can't take responsibility is for the legacy of crises you've bequeathed this country," he told Mr. Brady.
Although several Democrats defended Mr. Geithner at the hearing, some liberal Democrats have been complaining that the Obama administration isn't doing enough to combat unemployment. Rep. Peter DeFazio (D., Ore.) called on Mr. Geithner to resign this week, and said in an interview that Mr. Geithner is too close to Wall Street.
"Quite frankly, all the gambling on Wall Street is doing nothing to put people back to work in America and rebuild our economy," the Oregon Democrat said.
One issue that has dogged Mr. Geithner is the rescue of American International Group Inc. last fall. A government oversight report this week charged that the New York Fed caved into demands from Goldman Sachs Group Inc. and other big banks and paid them in full for deals they had made with the insurer. Mr. Geithner said Thursday that the government lacked powers it needed to handle the collapse of a financial company that wasn't legally organized as a bank. "Coming into AIG we had, basically, duct tape and string," he said. The legislation pending in Congress would give the government new powers to manage such a situation.
Mr. Geithner's job status doesn't appear to be in jeopardy and several Democrats leapt to his defense. "He was handed an awful deck of cards when he walked into the job, and he's doing the best he can," said Sen. Charles Schumer (D., N.Y.) in an interview. "I think many Democrats share my views."
Mr. Paul, author of a new best-seller "End the Fed," long has been a critic of the Fed. His economic views make him an outlier in Congress, but his attacks on the Fed have resonated in Congress and with the public.
The Paul provision, and the legislation to which it is attached, would have to clear the full House and Senate before becoming law. Though many lawmakers insist they won't do anything to compromise the Fed's independence on monetary policy, the provision's momentum is substantial. It could be diluted before any bill reaches the president.
"Everybody would like to beat up on the Fed and make them the bad guy," said Rep. Melvin Watt (D., N.C.), who opposed Mr. Paul's measure. He said audits would "substantially castrate the Fed so it cannot do what it was set up to do."
Fed Chairman Ben Bernanke has crisscrossed the Capitol in recent weeks, attempting to fend off legislation that would curtail the Fed's power or independence. Lawmakers with whom he has met said he has reminded them how close the U.S. came to economic catastrophe last year and maintained that the Fed's actions were critical to bringing the economy back to growth.
But Mr. Bernanke faced a skeptical audience. Some lawmakers told him Americans are angry and want more oversight; others said the crisis demanded a rethinking of the U.S. approach to financial regulation.
"What he says is that at that point in time, with our economy literally ready to tip over the edge, he did a series of things he thought were absolutely necessary," said Sen. Mike Johanns, a Nebraska Republican.
"He was trying to convey that this point in time was enormously serious, and the country was about ready to lock up from an economic standpoint. He just says, 'Look, I did what I thought I had to to keep the country going,'" he said.
In an interview, former Fed Chairman Alan Greenspan said it would be "a major loss to the country if the Fed were incapable of running an independent monetary policy. If you have the GAO, after the fact, offering its opinions on whether a certain monetary policy action is correct or incorrect, the active deliberations that are so critical to building a meaningful consensus at the FOMC will begin to become unhelpfully cautious."
Mr. Paul maintained that his amendment wouldn't hinder monetary policy, but instead remove a veil of secrecy at the central bank that's unique within U.S. government. At the Fed, "there's plenty of political influence going on now -- presidential politics, influence by Goldman Sachs and the banking industry," he said. "It's all done in secret."
Congressional auditors have been blocked from reviewing the Fed's monetary policy operations, its loans to foreign governments and direct lending to banks since 1978, when a law was passed to shield the central bank from politics. Auditors already have access to the Fed's operations outside of monetary policy, including bank supervision and the special loan facilities created to rescue specific institutions, such as AIG and Bear Stearns Cos.
GAO audits could publicly reveal reams of information that now remain private, sometimes indefinitely. The Fed doesn't identify banks to whom it lends directly for fear of sparking a disruptive run on the bank. It has suggested that it might be willing to release that information after a lag.
The Fed in the past has resisted calls to release information, only to relent. In the 1990s, for instance, after pressure from Congress, the Fed began releasing transcripts of its interest-rate deliberations after a five year lag. Mr. Paul's proposal would delay GAO access to Fed decisions for six months. A companion Senate measure has drawn support from about a third of that chamber.
"If there's anything worse than a secret Federal Reserve, it's Congress controlling it," said Sen. Jim DeMint, Republican of South Carolina. "But I do think that there's a wide majority of Americans who want to know what the Federal Reserve is doing and to make sure that it's achieving its primary purpose, which is to protect the value of our dollar."
Saturday, November 21, 2009
Monday, January 5, 2009
Cars, Kabul and Banks
By Thomas L Friedman
The New York Times
December 13, 2008
If there is anything I’ve learned as a reporter, it’s that when you get away from “the thing itself” — the core truth about a situation — you get into trouble. Barack Obama will have to make three mammoth decisions after he takes the oath of office — on cars, Kabul and banks — and we have to hope that he bases those decisions on the things themselves, the core truths about each. Because many people will be trying to throw fairy dust in his eyes.
The first issue will be whether to bail out Detroit. What is the core truth about Detroit? Auto executives will tell you that it’s the credit crisis, health care, retirement costs and unions. Sure, those are real. But the core truth is that for way too long Detroit made too many cars that too many people did not want to buy. As even General Motors conceded in its apology ad last week: “At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster.” Walk through any college campus today. You don’t see a lot of Buicks.
Over the years, Detroit bosses kept repeating: “We have to make the cars people want.” That’s why they’re in trouble. Their job is to make the cars people don’t know they want but will buy like crazy when they see them. I would have been happy with my Sony Walkman had Apple not invented the iPod. Now I can’t live without my iPod. I didn’t know I wanted it, but Apple did. Same with my Toyota hybrid.
The auto consultant John Casesa once noted that Detroit’s management has gone from visionaries to operators to caretakers. I would say that they have now gone from caretakers to undertakers. If they are ready to bring in some visionaries and totally restructure — inside or outside of bankruptcy — so they can make money selling cars that people will want to buy, then I say help them. I’d hate to see the Detroit auto industry go under. But if all we are doing is prolonging auto undertakers, then we have to let nature take its course.
After Detroit, Mr. Obama will be asked to bail out Afghanistan. Watch out. The tide has turned against us there because too many Afghans don’t want to buy our politics, or, more precisely, the politics of our ally, the corrupt government of President Hamid Karzai. That is “the thing itself.”
The main reason our Iraq bailout — a k a “the surge” — has had a positive effect is because Iraqis voted with their own guns and their own lives, taking on both Al Qaeda and pro-Iranian Shiite militants. Iraq has avoided bankruptcy for the moment — a total meltdown — because enough Iraqis wanted what we were selling: freedom from extremists. That is the thing itself, and right now I’m not seeing enough of that thing in Afghanistan. Beware of a Kabul bailout.
But maybe the most flagrant area where we continue to avoid looking at “the thing itself” is with our banks. What we are dealing with there is the effect of a credit bubble that began in the late-1980s with the advent of global securitization — the chopping up and bundling into bonds of everything from home mortgages to student loans to airplane leases, and then selling them around the world.
When you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up, you have a nuclear financial explosion. The deflating of this credit bubble is so wealth-destroying that even the most prudent banks have been ravaged by it.
What to do? The smartest people I know in banking are praying that Obama’s Treasury Department will tackle “the thing itself.” That is, do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.
Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier. Some experts believe we still need to close 1,000 banks.
This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me. The “thing itself” here is that banks still don’t want to lend because they still don’t know the true value of their own balance sheets, let alone anyone else’s.
The market has to clear. We can do it painfully and quickly, as we did with the dot-coms, or we can be Japan and drag it out.
So whether it's cars, Kabul or banks, we have to stop wishing for the worlds we want and start dealing with the things themselves. If Obama does, his first year will be excruciatingly painful, but he could have three years after that to be creative. If he doesn’t, I fear that cars, Kabul and banks will dog his whole presidency.
The New York Times
December 13, 2008
If there is anything I’ve learned as a reporter, it’s that when you get away from “the thing itself” — the core truth about a situation — you get into trouble. Barack Obama will have to make three mammoth decisions after he takes the oath of office — on cars, Kabul and banks — and we have to hope that he bases those decisions on the things themselves, the core truths about each. Because many people will be trying to throw fairy dust in his eyes.
The first issue will be whether to bail out Detroit. What is the core truth about Detroit? Auto executives will tell you that it’s the credit crisis, health care, retirement costs and unions. Sure, those are real. But the core truth is that for way too long Detroit made too many cars that too many people did not want to buy. As even General Motors conceded in its apology ad last week: “At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster.” Walk through any college campus today. You don’t see a lot of Buicks.
Over the years, Detroit bosses kept repeating: “We have to make the cars people want.” That’s why they’re in trouble. Their job is to make the cars people don’t know they want but will buy like crazy when they see them. I would have been happy with my Sony Walkman had Apple not invented the iPod. Now I can’t live without my iPod. I didn’t know I wanted it, but Apple did. Same with my Toyota hybrid.
The auto consultant John Casesa once noted that Detroit’s management has gone from visionaries to operators to caretakers. I would say that they have now gone from caretakers to undertakers. If they are ready to bring in some visionaries and totally restructure — inside or outside of bankruptcy — so they can make money selling cars that people will want to buy, then I say help them. I’d hate to see the Detroit auto industry go under. But if all we are doing is prolonging auto undertakers, then we have to let nature take its course.
After Detroit, Mr. Obama will be asked to bail out Afghanistan. Watch out. The tide has turned against us there because too many Afghans don’t want to buy our politics, or, more precisely, the politics of our ally, the corrupt government of President Hamid Karzai. That is “the thing itself.”
The main reason our Iraq bailout — a k a “the surge” — has had a positive effect is because Iraqis voted with their own guns and their own lives, taking on both Al Qaeda and pro-Iranian Shiite militants. Iraq has avoided bankruptcy for the moment — a total meltdown — because enough Iraqis wanted what we were selling: freedom from extremists. That is the thing itself, and right now I’m not seeing enough of that thing in Afghanistan. Beware of a Kabul bailout.
But maybe the most flagrant area where we continue to avoid looking at “the thing itself” is with our banks. What we are dealing with there is the effect of a credit bubble that began in the late-1980s with the advent of global securitization — the chopping up and bundling into bonds of everything from home mortgages to student loans to airplane leases, and then selling them around the world.
When you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up, you have a nuclear financial explosion. The deflating of this credit bubble is so wealth-destroying that even the most prudent banks have been ravaged by it.
What to do? The smartest people I know in banking are praying that Obama’s Treasury Department will tackle “the thing itself.” That is, do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.
Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier. Some experts believe we still need to close 1,000 banks.
This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me. The “thing itself” here is that banks still don’t want to lend because they still don’t know the true value of their own balance sheets, let alone anyone else’s.
The market has to clear. We can do it painfully and quickly, as we did with the dot-coms, or we can be Japan and drag it out.
So whether it's cars, Kabul or banks, we have to stop wishing for the worlds we want and start dealing with the things themselves. If Obama does, his first year will be excruciatingly painful, but he could have three years after that to be creative. If he doesn’t, I fear that cars, Kabul and banks will dog his whole presidency.
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