High Noon: Geithner v. The American Oligarchs

There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that – they say – will deliver you back to growth.  The person has political support, a strong track record, and every incentive to enter the history books.  But one nagging question remains.

Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?  The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about.  And fully escaping the grip of crisis really means breaking their power.

Not only is this a standard way of thinking about crisis resolution in many developing and post-communist countries, it also turns out to be a good guide to thinking about the US today.  We have a powerful banking industry that has mismanaged its way into deep trouble.  Yet these banks obtained an initial bailout – the Troubled Asset Relief Program, or TARP – on generous terms, and have consistently failed to use the opportunity provided by this government support to turn their operations around.  Not only that, but they have flaunted their power – and their arrogance – through paying themselves large and largely inappropriate bonuses.

We come now, this week, to the podium.  And Treasury Secretary Tim Geithner takes the stand (on Tuesday), to tell us how he proposes to use the remainder of the TARP funds, support from the Federal Reserve, and other policies to turn around the financial system and pull us out of recession.  We previously posed relevant technical questions for this week; answers (or lack of answers) to these should determine if Geithner’s approach is likely to succeed.  Think of that as a framework for reasonable technocratic assessment.  But there is also the key political dimension to emphasize.

The elites who run the US banking industry have had a great run of economic good fortune.  They used this wealth to further strengthen their political power, both through donations to politicians of almost all stripes and more broadly through taking positions of formal and informal influence throughout the executive and legislative branches.

Our unsustainable debt-fuelled boom, in other words, produced both the conditions for a major global financial disaster, and a political strengthening of the people who benefited most from the risk-taking and associated compensation packages that made this disaster possible.  Ending the financial crisis is relatively straightforward – a forced recapitalization and change of ownership/management in the banking system – although this will not immediately lead to an economic recovery (more on that here).  But seen in deeper political terms, decisive action to restructure large banks is almost impossible.  Such action would require overcoming perhaps the single strongest interest group in the United States today.

How can you do it?  The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one.  Can this be done?  Definitely, yes.  In particular, bank recapitalization – if implemented right – can use private equity interests against the powerful large bank insiders. Then you need to force the new private equity owners of banks to break them up so they are no longer too big to fail.  And then… there is always more to do to contain the power of a lobby that is boosted by any boom and which, the more it succeeds, the more likely it is to ruin us all.

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Originally published at the Baseline Scenario and reproduced here with the author’s permission.

9 Responses to "High Noon: Geithner v. The American Oligarchs"

  1. David   February 9, 2009 at 9:03 am

    Tool. Timothy Geithner is part of the oligarchy and his only interest is protecting them, their money & power as well as making sure he fleeces the US taxpayer one more time for them on their way out the door.

    • Guest   February 13, 2009 at 11:11 am

      I agree that Geithner doesn’t care about average people. He is going to screw up all of us at expenses of Wall Stgree elite, just as Paulson has done.

  2. John   February 9, 2009 at 10:26 am

    Only the American people can dilute the power of the oligarchs. Geithner and Summers were hand-picked, and will only bring us closer to the financial abyss. The American people need a voice within the power structure. Obama, or someone in a position of power, will need to break with the ruling elite and rely on the American people to force concessions and change.Without an aroused populace we will march like lemmings into the sea.

  3. pchris   February 9, 2009 at 11:02 am

    I agree that the powerful banking interests must be dealt with. The large insolvent banks must be nationalized. You only need to nationalize one or two, then the rest of the managers will start taking the government seriously and clean up their act. If they want TARP funds, they have to restructure on their own or be taken over. The legislation under Glass-Steagall Act should be put in place as a framework to follow to reduce risk. It is the only way to take power away from the banking elite swiftly so that the banking system can be restructured. It worked with the Savings & Loans very well. I worked at Columbia S&L at the time, and the RTC did a great job. Everyone says the government can not do as good a job as the private sector, but the private sector made this mess! Sweden did a great job with nationalizing their banking sector. There were mistakes, but we can look back to see what they were and learn from that.

  4. Guest   February 9, 2009 at 12:51 pm

    Sorry, it’s 12:50 and Geithner missed the showdown.Richard Berlin

  5. klh   February 13, 2009 at 3:49 am

    Isn’t it ironic that everyone says the government cannot manage anything and will do a terrible job, yet at the same time they demand that the government fix this disaster, only to give it back all fixed up to the people and institutions that brought us the disaster in the first place?The non-politicized agencies of the government do great work – NOAA, USGS, OMB, and the non-political part of the military are just some examples.

  6. L in Tucson   February 13, 2009 at 12:29 pm

    When Obama picked Geithner it smelled of fish. We will soon see where Geithner stands when Citi and Bank of Crooks open their books to see if they are solvent. The world will be a much better place when these two banks get there due. Chase and Wells Fargo should follow close behind. Maybe they will actually be solvent.

  7. Bruce McGillis   February 13, 2009 at 6:15 pm

    1. I say Americans have far too much faith in the mastery of capitalism.2. The need of politicians to get elected and re-elected fosters unsound governing. US Senators should not be elected, should not be subjected to the whims of the populace.Since we have much evidence related to human failings, surely we know bank executives and politicians like everyone constantly need adequate policing laws enforced.

  8. Dr. Fred in PA   February 15, 2009 at 3:58 pm

    These banks need to go bankrupt. Guarantee the depositors and then let them go under. If there’s fraud, send executives to jail. But putting the federal government more in charge of banks is like making the arsonist the new fire marshal. Geithner was supposed to be the one watching Citigroup and Barney Frank and Chris Dodd were supposed to be watching him. They did such a fine job. Nationalization will not work and has never worked. Putting politicians in charge inevitably politicizes the process and corruption and favoritism ensues.