The Committee to Save Wall Street?

It’s 10 years ago last week. There, on the cover of Time magazine, looking more self-satisfied than ever, stood the three men who would ostensibly save the world economy from the Asian Crisis: Federal Reserve Chairman Alan Greenspan, US Treasury Secretary Robert Rubin, and his deputy Larry Summers. The committee to save the world.

Where are the superheroes now? Alan Greenspan is now widely derided for having created the bubble that has since burst. Robert Rubin – after helping Greenspan to weaken the nation’s regulatory structure – left the Clinton administration and went to Citibank, where he pushed speculative plays; they backfired, and 95% of the worth of the company’s stock disappeared in the current market meltdown (Mr. Rubin was forced to leave).

Some committee. After the Asian Crisis, the Nobel Laureate Joseph Stiglitz wrote a blistering critique, which argued that what the men really did during was to take advantage of the temporary weakness of the world’s governments to advance the interests of Wall Street banks. It was all going to come crashing down one day, he warned.

Rubbish, was the reply. Weren’t we living in the new paradigm? We’d invented the Goldilocks economy, the Dow was headed to 33,000, and – oh, this is my favourite – Bill Clinton was telling us we could save the planet from environmental catastrophe by buying more stuff (on the discredited logic that growing companies would invest more to improve their efficiency). Mr. Greenspan was the Maestro. Mr. Rubin could do no wrong.

What a difference a decade makes. But just as it seems we can never get enough Leatherface or Jason movies, when you think the carnage is done, back they come. And they’re doing it again. Except this time they can’t pretend they’re out to save the world. They’re in a last desperate effort to save Wall Street, making the American taxpayer foot the bill for the huge errors the banks made.

After being kicked out of Harvard for hinting that women might be a tad thicker than men, Larry Summers has been resurrected as US President Barack Obama’s chief economic advisor. Mr. Obama’s Treasury Secretary is former Fed governor Tim Geithner. Mr. Geithner, in turn, comes from the New York Fed. If two men were tighter with Wall Street than these two, well, they’ve probably already jumped off skyscrapers.

Their first job is to stop the implosion of the American financial system. The diagnosis is straightforward. The US is deep in the throes of a financial crisis. The US financial crisis, as we also know, is dragging the world economy down with it. And financial crises, as all economists know, are fairly straightforward affairs. A massive loss of trust leads to a situation in which the government needs to step in to restore confidence to markets.

This isn’t rocket science. The textbook on banking crises has been written, and both Geithner and Summers have studied it at length. When banks have lost the trust of the public, the government must step in and take over those on the verge of bankruptcy, wipe out their shareholders, fire their boards, and clean up their balance sheets. They then sell them back to the public.

But they won’t do it. They’re postponing nationalisation, and instead concocting opaque bailout schemes. And they’re doing it, reportedly, because Larry and Tim’s friends on Wall Street are urging them to let them keep their jobs.

Investors have registered their disdain. Stock markets are plunging further than ever. It may be the best thing to happen. Until the government does the right thing, investors will treat the banks like toxic assets. To forestall complete collapse, the Obama administration will have no choice but to step in and take the bitter medicine.

The much-vaunted pay caps are apparently unenforceable. Anyhow, they’re just shreds of clothing thrown to slow down a charging bear. If a bank is well-run, let it pay its people what it wants. But for the rest, let the buffoons who created this mess join bread lines, I say.

Posted by John Rapley in Hot Money | February 23, 2009 1:10PM |