Now Fire Geithner And Summers
By Richard C. Cook
22 January, 2010
Countercurrents.org
The new restraints on bank lending for speculation proposed yesterday by President Barack Obama follow the advice of former Fed Chairman Paul Volcker but will be much more credible if the president now fires Secretary of the Treasury Timothy Geithner and National Economic Council director Lawrence Summers.
What President Obama is calling the “Volcker Rule” would take us back in the direction of the 1932 Glass-Steagall Act which kept commercial and investment banking separate for 67 years, until 1999 when it was foolishly repealed by President Bill Clinton. Then-Treasury Secretary Summers strongly supported the repeal.
It was the demise of Glass-Steagall that allowed commercial banks to create the vast amounts of unbacked credit which fueled the gigantic financial bubbles in housing, commercial real estate, hedge funds, equities, and derivatives during the catastrophic years of the George W. Bush presidency. It was the blowing up of these bubbles that brought the financial crash of 2008-9, the multi-trillion dollar bailouts of the financial industry by the Treasury and Federal Reserve, and the worst recession since the Great Depression.
American financiers became filthy rich in the meantime. Timothy Geithner, as president of the Federal Reserve Bank of New York from 2003-2009, worked closely with Bush’s Treasury Secretary Henry Paulson in overseeing the bailouts of Bear Stearns and AIG. He also favored reducing the capital required to operate a bank which would have exposed the financial system to even greater risk of failure.
Since becoming charter members of the Obama administration, both Geithner and Summers favored a much milder approach to bank reform. According to the Washington Post, industry executives were “startled and disheartened that Geithner was overruled” in favor of Volcker’s approach. Under Geithner’s watch, though, the banks have been using taxpayers’ money not to restart lending but to take over smaller banks, invest in the stock market, and continue to pay their executives obscene bonuses.
The poor bankers, now standing like deer in the headlights, are breaking our hearts. Their flight from the stock market, which began yesterday, caused an immediate drop in the Dow Jones Industrial Average of over 200 points. It shows the stranglehold the banks have had on the nation’s wealth. But in reality, the proposed “Volcker Rule” should be only the first step in the nation’s recovery from the worst financial crime spree in history.
Think about it for a minute. Banks are allowed to create credit “out of thin air” only under a public charter. It is a fiduciary trust that should be regarded as sacrosanct. One way this trust has been abused has been for banks to use this created credit to buy companies whose employees are then fired and assets stripped before the company is sold at a profit to pay off the loans and the bankers’ brokerage fees. If this isn’t a crime against the national interest, what is?
This type of scenario has been repeated in endless permutations since the long wave of financial industry deregulation began with the “Reagan Revolution” a generation ago. It continued under President Clinton and reached a nadir with the vast amounts of credit that pumped up the housing bubble through “liar’s loans” and subprime mortgages while regulatory agencies looked the other way. The banks packaged these loans and sold them as asset-backed securities worldwide, knowing they were worthless.
Geithner and Summers were part of this sordid history and must go. But this should only be a start. There are rumors that the Justice Department may soon release indictments against a number of Wall Street crooks involved in the abuses of the era. One only hopes it were so. The road back from financial hell will be a rocky one and will take a long time to travel. But the alternative is too grim to contemplate.
Richard C. Cook is a former federal government analyst. His website is www.richardccook.com. His latest book is We Hold These Truths: The Hope of Monetary Reform.
Copyright 2010 by Richard C. Cook
