UPDATE 5/8/09- 

Dr. Lawrence Hunter
Letter To Charlie Rose

Dear Charlie Rose: Yesterday, I suggested you would do well to interview someone from outside the political-financial-academic Establishment, say an economist from the Austrian school of thought, to give an alternative view on the economy. You couldn’t do better than invite Thomas E. Woods to your show. Here is his succinct take on the economic situation, which you will find worlds apart from the conventional line we hear from Geithner, Summers, Bernanke and their Establishment “critics,” such as Paul Krugman.
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Original Post 5/7/09

In an hour-long interview with Charlie Rose last night, Treasury Secretary Timothy Geithner displayed an impressive depth of knowledge of facts and details about the economy, which only a bureaucrat can possess, while simultaneously revealing a profound ignorance about money and the actual dynamics of markets and government intervention into markets, which is so typical of technocrats.

At first, Geithner seemed to lay the source of all our economic woes at the feet of greedy bankers and investors.  In response to Geithner’s proclamation that the Obama Administration will not allow us to go back to the situation that caused the current mess, Rose asked him specifically what situation the Obama Administration would not allow us to go back to?  Geithner’s knee-jerk response was (at 20:40 minutes into the interview). . .

Geithner:  “We can’t go back to the situation we’ve had over the last ten years.”

Rose:  “Characterize the situation over the last ten years. . .that we can’t go back to.”

Geithner:  “We had a period where compensation practices just became completely unmoored from reality, defied gravity, and they created incentives for risk taking that overwhelmed all the basic checks and balances in the system; overwhelmed the discipline shareholders are supposed to bring to management of firms; overwhelmed the checks and balances of risk management and of supervision; and we’re not going to go back to that situation; and we are going to make sure that as part of our broader regulatory reform effort that we are putting in place standards that help change those incentives. . .and apply across the financial system.”

A few minutes later (26:20 minutes into the interview), Rose returned directly to the question of what caused the financial meltdown and economic recession:

Rose:  “Looking back, what are the mistakes and what should you have done more of—where were your instincts right but you didn’t go far enough?”  

Geithner:  “There were three broad types of errors in policy.  One was that monetary policy here and around the world was too loose for too long.  And, that created just this huge boom in asset prices; money chasing risk; people trying to get a higher return; that was just overwhelmingly powerful.” 

Rose:  “Money was too easy.”

G:  “Money was too easy, yeah. . . .Real interest rates were very low for a long period of time. . .Second thing was in supervision and constraints. . .For a lot of reasons, partly for the first reason [too loose monetary policy] the supervisory system was just way behind the curve.  You had huge pockets of risk build up outside the regulatory framework—and not enough effort to try to contain that—but even in the core of the systems banks got to be too big and over leveraged. . . And the third thing I would say is even as the crisis started, and it was obvious this was going to be a high risk of a very damaging recession, with enormous damage. . .governments were late to move.  They were late to put in place the kind of forceful stimulus we now have in place, and they were late to escalate to try to contain the damage. . .“

This is really a remarkable admission by the Treasury Secretary who for much of the time during the last ten years was part of the Federal Reserve System, which he admits put the country through years of inflationary monetary policy, which he admits generated “overwhelmingly powerful” forces, creating a boom and its attendant greedy/risky behavior, which in turn led to the economic bust.  Yet, he doesn’t seem to recognize that monetary-policy errors are unavoidable under discretionary central-bank manipulations, woven into the very fabric of fractional-reserve banking operating in a world of floating, fiat currencies unanchored to anything real.

If one carefully deconstructs Geithner’s explication of the mistakes that were made, they are of three types:  Mistakes that CAUSED the crisis—inflationary monetary policy; mistakes that FAILED TO ABORT crisis once it began by effectively dealing with the behavioral consequences set in motion by the crisis—ineffective regulation; and mistakes that FAILED TO REVERSE the crisis—untimely countercyclical fiscal and monetary policy.

What is fascinating, and distressing in the extreme, is that when Geithner explains what the Administration intends to do to prevent “going back to the situation we’ve had over the last ten years,” he doesn’t even mention monetary policy, the failure of which he admits caused the crisis. 

Instead, the Treasury Secretary focused on strengthening and broadening regulations that will “apply across the financial system” in an effort to constrain the harmful effects of central banks’ inflationary, boom-bust monetary policy.  Rather than trying to reform monetary policy to prevent the problem from arising, Geithner suggests strengthen and broadening the regulatory system to grapple with the inevitable consequences of discretionary monetary policy.  What he neglected to tell Charlie Rose is the Administration’s true intention to address monetary policy appears to be to internationalize it and turn it over to the IMF to run.

A rough analogy of what Geithner laid out in his interview with Charlie Rose is trying to prevent a balloon from bursting—a balloon that is being inflated by an air compressor without an automatic governor, which is being operated manually by a deaf and blind person—by strengthening and reinforcing the material out of which the balloon is made.   If central-bank management of a floating fiat currency with fractional reserve banking is the economic equivalent of an irresistible inflationary force—which history has shown it to be—then Geithner is suggesting that immovable regulators can weave an unbreakable net around the economy to prevent it from overinflating and bursting under the pressure of this irresistible inflationary force.  It’s a Goldilocks’ fairy tale in search of “just-right” government intervention that only a technocrat could conceive.  It mistakes the consequences of the problem for the problem itself, and it applies ill-conceived, unrealistic, impractical and counterproductive policies that would ultimately do more harm than good.

Secretary Geithner represents the very political-financial-academic establishment that got us into this mess.  Charlie Rose would do well to interview someone from outside that establishment, say an economist from the Austrian school of thought, to give an alternative view.