Simon Johnson and the Libertarian Critique of Geithner
Much of what has been billed “criticism from the left” of the Obama Administration ( or criticism from the progressive point of view) has actually been criticism from the Libertarian point of view. Like every other “progressive” who has attempted to write an obituary for Tim Geithner’s term as Treasury Secretary, Simon Johnson is silent about Geithner’s biggest use of TARP money - the rescue of the auto industry. Millions of jobs saved, the survival of the nation’s largest industrial union, the construction of the basis of a domestic electric car industry, the precedent setting massive industrial investment, the startling use of government power to reorganize an entire industrial sector, and the imposition of a heavy penalty on irresponsible bondholders are not important enough for Professor Johnson to even mention as part of Geithner’s “legacy”. Instead, Professor Johnson develops a critique based on how capitalism is supposed to work in the imaginary world of libertarian mythology and then indulges in naive speculation about a possible reform Republican agenda. For example, he’s very impressed by GOP Public Relations “journalist” Peggy Noonan who writes: “People think the G.O.P. is for the bankers. The G.O.P. should upend this assumption.” Johnson goes on to explain :
This is a significant opportunity for anyone with clear thinking on the right – someone looking for a Teddy Roosevelt trustbusting or Nixon-goes-to-China moment. Again, Ms. Noonan gets it right: “In this case good policy is good politics. If you are a conservative you’re supposed to be for just treatment of the individual over the demands of concentrated elites.”
I guess the House of Saud should similarly upend the assumption that it is for hypocritical, narrow minded intolerance and take the opportunity to become champions of religious freedom. Maybe the the Koch Brothers could upend the assumption that they are selfish polluters to champion action against global warming. It’s difficult to know how to respond to this level of naivete, but it’s even more difficult to understand what exactly Professor Johnson finds so terrible about Geithner’s actions during the financial crisis because he’s remarkably unclear.
He seems a little confused about what happened:
Much less standard is unconditional government support for troubled banks. Usually such banks are “cleaned up” as a condition of official assistance, either by being forced to make management changes or being forced to deal with their bad assets.
Bear-Stearns, Lehman and Wachovia, were shut down. The managements of Bank of America, Citigroup, and AIG were replaced. Is that “unconditional”? The bad assets were sold off- at a significant loss (and the government made a profit on the assets it took). Maybe he’s against any government guarantees for banks at all:
Any fiscally solvent government can stand behind its banks, but providing such guarantees is a recipe for repeated trouble.
Or maybe not (bold is my addition)
In retrospect, what helped stem the panic was the joint statement of Feb. 23, 2009, issued by the Treasury, the F.D.I.C., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve, that included this statement of principle:The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.
But surely “preserving the viability of systematically important financial institutions” is basically a euphemism for, um, bailing them out. What Professor Johnson’s real complaint appears to be is that he wants bank size reduced so that banks are no longer too-big-to-fail (TBTF) and the government can just let the market solve its own problems and he wants that now. But that’s a plea for theory over reality.
In the real human history of capitalism, “systematically important” companies and groups of companies that run into trouble in powerful nations are often bailed out by the government. And these bailouts are always unfair. The largest bankruptcy in US history before the 2008 crisis, the collapse of Continental Illinois, sent one Vice President to jail for 3 years and launched a subsidized bailout of the company into the hands of Bank of America (helping set the stage for BoA’s TBTF status and later its own bailout). Continental’s CEO Roger Anderson resigned with no legal or financial sanction and served on the boards of other Fortune 500 companies until retiremet. The 1929 crash did not dent the lifestyles of the Mellons or Rockefellers or Morgans. The much advertised Savings and Loan (S&L) prosecutions of the Reagan era focused on vice presidents of small or regional banks and the most important guy who went to jail eventually had his conviction reversed. The S&L bailout cost the public a lot more than the bailout for the much larger 2007 panic and turned into a bonanza for the rich and connected. Some of this is undoubtedly due to corruption, but some of it is due to what “systematically important” means. Regulators who bailed out Continental Illinois correctly recognized that its failure would have a network effect, bringing down other banks and industrial companies that had deposits with Continental Illinois as well as businesses that depended on the bank for loans and this cascade of failures would devastate the economy. The Federal Reserve Bank officials who saved AIG 20 years later made the same calculation as did the Roosevelt administration when they provided shaky banks with all the loans they needed to survive. And contrary to what Professor Johnson appears to believe, failures of large numbers of smaller banks as in the S&L crisis or in 1929 compel bailouts just as much as failures of TBTF banks.
Back in the day, the Left used to argue that these periodic crisis and unfair bailouts were an unavoidable part of capitalism- that capitalism was a fundamentally unjust and unstable system. Those Leftists are absent from the debate. The “progressive” critics of the government in the current crisis seem to have all accepted the Libertarian theory that this is not how capitalism is “supposed to be”. Somehow Capitalism is supposed to be fair although this fair version of Capitalism is something that has never once existed in any human society. Perhaps for some leftists, like Michael Hudson, this imaginary Capitalism is a replacement for the imaginary Communism they can no longer believe in.
Which brings us back to Professor Johnson’s disinterest in the auto-rescue. Letting huge industrial companies at the center of the US manufacturing system crash and burn along with millions of jobs would have had terrible consequences and the collapse of the auto-companies was strongly related to the dysfunction of the financial sector. The government invested $60,000,000,000 in auto companies, rammed through a bankruptcy process that rolled over shareholders and bondholders, and reorganized those companies to get them to operate properly.The rescue and the stimulus, for example, the cash for clunkers program, were instrumental in restarting the US economy. Diverting TARP funds, which Congress allocated for bank bailout, to the auto-rescue was obviously a critical part of Mr. Geithner’s record as Treasury Secretary. So why is the auto rescue something that doesn’t come up in these articles? The answer seems to be that in the economics mythology, apparently now believed by liberal as well as conservative economists, a “properly functioning financial sector” will properly allocate investment magically ,in such as way as to make the nation prosperous. So the auto-rescue does not fit into theory and can’t even be discussed. In the end, Geithner’s sin is that he tried to repair the economy that actually exists instead of the one that is supposed to exist in Libertarian economics theory.