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The "Cave In" to Goldman Sachs a Big Problem

By Jeff Madrick, The Daily Beast - November 20, 2009

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If the economy does not bounce back, Obama will have to consider a change. When crisis descended, other ineffectual Treasury secretaries did not last. Reagan replaced the befuddled Don Regan, former head of Merrill Lynch, with his trusted and intelligent adviser, James Baker, who immediately engineered a devaluation of the dollar to restart the economy. Nixon replaced the mild-mannered David Kennedy in 1971, as inflation began to rise in the nation, with the flamboyant John B. Connally—who famously told anyone who would listen that he could play it anyway they wanted. With Connally as his strong man, Nixon was able to deal with his great fear, losing his chance for a second term due to a weak economy. Connally got the job done, with measures not all to the good—cutting the nation loose from Bretton Woods, imposing price-wage controls, devaluing the dollar, and enabling Nixon to set off on a spending spree to assure his reelection in 1972 (the easy monetary policy at the Fed under the helm of his good friend Arthur Burns also helped).

Other Treasury secretaries have been quietly strong. George Shultz, an economist, served Nixon solidly as a man who spoke his mind and did not try merely to parrot his superior. Bob Rubin stood tall when he took over from Lloyd Bentsen, and engineered the bailout of Mexico during its currency crisis in 1994 and the Asia economic crisis in 1998.

On the other hand, Michael Blumenthal, Carter’s Treasury secretary, could not help his president get past his own ambivalence about fighting inflation. Paul O’Neill was let go by George W. Bush for talking back, but he probably sleeps well at night. John Snow, his successor, was at best forgettable. Henry Paulson, a stronger man but one who engineered the giveaway to Wall Street, will not be looked upon kindly by history.

Recall that few thought Geithner was seasoned enough to be Treasury secretary when Obama picked him. Rubin wasn’t ready to be Treasury secretary when Clinton was elected and he had run Goldman Sachs. Was Geithner’s main attraction that he could easily be controlled by Summers and the White House political advisers? It’s a good bet. A better strategy, some argued, would have been to name Paul Volcker, the former Fed chairman, for a year’s worth of service and give Geithner as his deputy time to grow. But Volcker would have been far harder to control by the White House.

But now the president needs a Treasury Secretary who is respected enough to stand up to Wall Street, restabilize the world’s trade flows and currencies, and persuade Congress to join a battle to get the economic recovery on a strong path. He also needs someone with enough economic understanding to be a counterweight to the White House advisers, led by Summers, who have consistently been behind the curve, except for the $800 billion stimulus. And now that is looking like it was too little. The best guess is that Geithner is not telling the president anything that the president does not know or doesn’t hear from someone down the hall.

The problem for Geithner and his boss, is that the stakes if anything are higher than ever. Is this the man who can bring Wall Street into line, to herd an international consensus on financial reform, to convince the increasingly bold Chinese they must revalue their currency against the dollar, and to sell Congress on the next jobs stimulus program?

Obama is a patient man. And if the economy muddles through, and there is a small chance it will, Geithner will survive the president’s first term. But unless Geithner finds his form, the nation will pay the price. Over the long run, prosperity will suffer.

Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.

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Alexander Hamilton is turning in his grave.

Isn't this the guy they told us was the only one smart enough to handle the crisis? Even if he couldn't quite master Turbo Tax?Then dithered and dallied, then gave the store away to the tune of 50 billion or so? Money that could have easliy been negotiated in the favor of US taxpayers?Sure would be a shame if he lost his job. But you know Obama will make the right decison for the country, not one based on politics or on saving face. Right?

Dear Jeff Madrick,This is all very fascinating, and maybe you're one of the good guys and all that, but..."He is already in serious danger of being ranked with the most ineffectual Treasury secretaries in recent history"Name who's ranking him. You? The Muppet handlers at Sesame Street? Name names. "So far, Geithner shows few signs of recovering as unemployment continues to rise, ongoing defaults may still hamper the credit of the U.S., Wall Street pays itself huge bonuses, and China refuses to budge on its undervalued currency."1) I think the problems that the United States are a lot deeper than the Secretary of the Treasury has the powers to fix. A lot deeper.2) If we don't own them and they're making money, then what business is it of yours? Do they need to be regulated better? I missed that in your article.3) Why would China budge on its undervalued currency? They are milking the cow for all it's worth. How much Chinese currency do you yourself own?"Geithner was president of the New York Federal Reserve Bank when it saved AIG last fall; by all accounts, he was the principal decision maker."It's amazing what one will agree to in order to stave off what is perceived to be another Great Depression? Wasn't that the real reason that Bush and his Congress signed off on TARP? Because they thought the financial apocalypse was on America's doorstep?"Geithner now looks to many serious observers like a mug. " Name names. Don't be bashful."Now the bank bailouts are widely criticized for not requiring more of Wall Street -at least a serious equity stake-in a deal under George W. Bush to which Geithner had been a party."Yes, NOW they are. "If the economy does not bounce back, Obama will have to consider a change. " That's pretty funny. If the economy doesn't bounce it will be Obama that's looking for a new job in 2012. Filling Little Timmy's current will be the least of his problems. "Obama is a patient man. And if the economy muddles through, and there is a small chance it will, Geithner will survive the president's first term."If the economy continues the way it is right now into early 2012, the voters are not as patient as Obama. Hmmm...What really irritates me about this article is that you aren't naming names, particularly those of people that you believe would deliver the United States and its people from the current mess. Yours truly,Whipmawhopma

Let's try getting at least a few facts straight...Bush may have "signed off"..but it wasn't his Congress..the Congress had a clear Democrate majority...and...before the 2008 election McCain and Obama were both called to Washington...in the middle of the debates..to be briefed...All aboard...every one of these people bought into it....EVERY web site that supported Ron Paul..and certainly Paul himself..was ADAMANTLY opposed to this bailout giveaway...Let's get down to some facts...Warren Buffett did a deal that should have been a templte for the CIT giveaway..h gave, and demanded, senior status as a bond holder for loans made to nearly insolvent companies. Geithner was criticized at the time..and even more so now..for not demanding a first in line position for billions of taxpayer monies...Bottom line...Paulson and Geithner have been pimping for Wall Street financial firms (specifically Goldman Sachs) for years....only a handful stood up to them..and Bush AND Obama weren't men enough...

Georealist - Bush and his Congress refers to George Bush and whoever was holding power in the Congress at the time the deal was done. I am quite aware that it was controlled by the Democrats as of 2006, and would assume everyone else interested in an article like this would know that as well. Both the President and the Congress, including McCain, signed off on this deal. Bush did not have to sign it if he thought it the wrong thing to do.It's not a Republican versus Democrat thing for me, as the first seems to borrow and spend while correctly accusing the latter of tax and spend. Both seem less than optimal to me. As for Warren Buffett and the rest, I don't really know if TARP was a good thing or not, other than as a psychological sedative for the financial markets and the public in general in the midst of a grand panic attack, regardless of what Ron Paul thought and regardless whether or not Ron Paul was right. The only way we're going to know for sure is to develop the technology that would allow us to visit parallel universes and find one where TARP was rejected and see what happened there.Geithner was criticized by whom? Name names, so I can look them up. Otherwise your comment is like Madrick's article where he says a bunch of interesting things without pointing the reader in some specific direction, except for his making it clear that Geithner sucks at his current job and sucked at his previous one as well, and then not recommending people that would not suck.As for Paulson and Geithner pimping for Wall Street, I have come to the conclusion that pimping taxpayers for Wall Street, big business and big banking is the business of government and has been this way going back maybe 40 years regardless of who holds the White House and regardless of who holds the Congress.

whipawhatever...Let's not dilute this by saying it has been going on for 40 years...we're talking about the last 3 years...Congress was controlled by Democrats..hardly Bush's Congress..that is simply obfuscating the issue. Barney Frank and Dems on the most influential committees lobbied big time for Banks to lend to people who couldn't pay...Fannie and Freddie bought the garbage...Wall Street bought the packaged stuff and sold it off...Bush said nothing..they were ALL in this. They bought Paulson's and Geithner's line because it suited their political interests..Don't you dar leave Obama out of this..he was right along side McCain in telling us during the campaign we "needed" this bailout..The bailout was unnecessary and will end up prolonging what will be..into 2010..a horrendous depression....The article this discussion is based on is criticism of Geithner...but it could well include his handler..Paulson. You don't know if TARP was a good thing or not??? Then why are you commenting. You need to do a little due diligence and discover how YOU and ME and the AMERICAN TAXPAYER have been had.

He's Wall Street's butt boy. He was complicit in weakening the financial system which made the meltdown inevitable. He should be in jail just like Rubin, Paulson, Summers, etc. Making him Secretary of the Treasury was a huge mistake, unfortunately not the only one President Obama has made. George Patton

I'm going to keep posting this until the end of the first quarter of 2010. The direction we are going will throw us into a deeper recession than we have seen, even guessed. When the retail sales reports hits the market for the holiday receipts all hell is gonna break loose. If this administration doesn't begin to follow sound advice on the market you are going to see entire malls closing down. The evidence is there and there's nothing but bull headedness keeping the economy in this job slump. Nobody is going to listen to the GOP so you dems had better get on your congressmen and women and make them move.

crypto - As far as I can tell the only difference between the Democratic pols and the Republican pols is the color of the bunting at their parties and dry champagne versus sweet champagne. One taxes and spends, the other borrows and spends.

No argument here.

Too true.Time for Mr. G. to step down.

Way to tell it concisely, whipmawhopma.If only we could re-animate Theodore or Franklin Roosevelt and get their opinion on how the President should behave, vis-a-vis Wall Street's selfish-cretins, during a merely-postponed economic-crisis of this magnitude.I'd bet that the threat of legal-action would be the first thing out of Teddy's mouth if he called the heads of J.P. Morgan and Goldman Sachs onto the carpet in the Oval Office."You don't give orders to me, I give them to you."That might put them in their places and stop the spending of $70 million for lobbying against needed reforms (from a government that bailed out their butts and looked the other way on their many crimes, inside-trading and secret derivative insurance-markets).That's how Teddy handled the trusts of his time and that's how Obama needs to act today.Start with bringing in more than just a fall-guy like Geithner and let Paul Volcker have some real power to make decisions that can't be so easily dismissed as radical anti-market ravings by big business. Volcker's got guts and Street-cred and everybody involved knows it and fears him (especially the power-hungry Lawrence Summers).The fact that Obama isn't even considering this tells me all that I need to know about his true agenda. Its simply to give the Street whatever it wants and hope that time and spin will rescue us until 2012.Some strategy, Mr. President. What's more amazing is that being tougher is a political win-win for him (and he's too smart not to know it). It would get him votes from Democrats, Independents and maybe even some disaffected Republicans (who are too clued-in not to know who started rolling up such unsustainable deficits).Instead he'll blame inaction on Congress or Geithner in the long-run. Which leads me to wonder, "what do they have on him, anyway?"

Geithner is one of those highly adept fanny sniffers who looks much smarter than he really is....and Obama bought it. Bush bought Paulson'e line of oversized BS so I suppose that makes it a wash..Make anyone whose a taxpayer feel better that both Bush and Obama are selling you out????I disagree quite often with people who post here..but I mean this in the most magnanimous spirit a very cynical man such as myself can muster..the next bubble is the TAX bubble. YOU are going to have to pay for these con artists snow jobs and (in Paulson's case) fear mongering.Cover yourselves and be VERY skeptical..whatever you thing the Administration is giving you will be out of someone else's hide..probably yours! We are headed for some extremely challenging times..and it's going to be a wake up call for many that those who they thought were allies and friends aren't.

Georealist - There won't be a tax bubble because the upcoming hyperinflation and resultant devaluation of the dollar will wipe out our debts, along with our savings. I understand what you're saying, but I think it's going to be worse, and if I actually manage to win at PowerBall I'll be converting my winnings from dollars to Euros, Norwegian crowns, and maybe Australian dollars as soon as possible.

You couldn't be more mistaken...again NO due diligence. Hyperinflation won't take place because it depends on Fed reserves being translated into credit and then pyramided upon..That's not happening. It's FAR worse than than hyperinflation..it is the tip of an enormous deflationary implosion.People..ordinary people..State governments..the Feds..can't pay their bills..that means debt default and far more taxes from the Fed...It will include excise taxes on imports...very likely a National sales tax and/or a European style Value Added Tax (VAT). Pay attention..these are the FACTS..the real estate market is 4 times larger than the stock market (both nationally and world wide)..the bond market is 4 times large than the real estate market..IT is the basis for all credit and the existence of governments...No bonds..chaos. As soon as any hint of inflation..let alone hyperinflation... takes place rates will go significantly higher..and markets and money supply will implode.Why is deflation the soup of the day?? Because hyperinflation breeds uncontrollable black markets and takes power out of governmental hands..deflation simply depresses and subdues the populace and allows them to be bought off piecemeal by handouts..kind of a "food and shelter for clunkers" plan.

Please do keep writing about the cabal of Bankers who have destroyed the US Economy on the Mars-Uranus Opposition at 46 degrees....whatever that is supposed to mean. A Banking signal written in the stars? A traditional moment of mugging? When you get a chance don't forget to ask our Nation's Great Lawyers where the Class Action suit is against these Banker's for the crimes they have committed against The People. It would be my guess that the Bankers, when added together, have nearly earned 1% of the grand total that they have cost the rest of us collectively. If you are uncertain as the the full extent of the damage these Bankster's have caused the Nation, just ask the students at Berkley who are 'rumbling' over the 32% increase they have been handed in their Education costs as a result of Goldman Sach's run on the US Treasury and the fallout which has occurred under concentric contraction, which has now spread to the student's at Berkley.http://www.msnbc.msn.com/id/34044243/ns/us_news-educationI do so love it when the media and Bankster's play dumb, not knowing suddenly what concentric contraction is, it's effects on The Poeple, and their absolution of responsibility simply because they have been paying everyone off for a lot of years. Goldman Sach's is clearly the dumbest guy in the room using that argument.

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