Monday, November 24, 2008

Tim Geithner and Larry Summers "understand markets"?

John Batchelor, or maybe one of his guests, made a claim on the radio tonight that Tim Geithner, the presumptive nominee for Obama's Treasury Secretary, and Larry Summers, former Clinton Treasury Secretary, "understand markets." As I said the other night, this is how parents can explain the phrase "The more things change, the more things stay the same" to their children. For all his talk of "change," Obama is hell-bent on bringing aboard such insiders as Clintonistas and entrenched Fed officials.

Most Americans probably couldn't tell you who Larry Summers is, or if they can, they don't know him beyond the Harvard controversies. Geithner is even less well-known, and Americans should be truly shocked to learn how personally responsible he was for this "financial crisis." I knew nothing of the man prior to his nomination, but all I needed to know was his specific position at the Fed, and I immediately realized what the man himself has done. The New York Federal Reserve Bank is responsible for the Fed's "open market operations," which is how the Fed distorts interest rates and the dollar's exchange rate. Geithner has been its president since 2003, and he and his predecessor William McDonough bear personal responsibility for doing Alan Greenspan's bidding of low interest rates.

As I wrote last May, Congress threatened mortgage lenders with the stick of investigations and regulations, if the lenders didn't give money to unqualified applicants, and borrowers were irresponsible to take out loans they should have known (and often did know) they couldn't repay. Both of them should bear blame for the housing bust. But it was the Federal Reserve who is mostly to blame, because only it could provide the carrot that facilitated all this: interest rates far too low for far too long, anywhere from 4-plus to 6 years, depending on whether you draw the baseline at 4% or 5%.

The Fed's sudden interest rate cuts began in 2001, a quick reaction to the last year and a half of tightening interest rates. It's much like when I was 16 and first learning to drive. Traveling 55 in the center lane of a highway, the teacher warned me that I was starting to drift into the left lane. So I mindless jerked the steering wheel to the right, and quite quickly. I kid you not, we felt the left wheels go up six inches and then plop back down on the road. It scared the crap out of the teacher, who said "Goddamn it, Perry, don't ever do that again!!!" I understand he was still telling the story for years and probably still does to this day. Well, my idiotic maneuver is exactly how the Fed bankers do their own operations: they're not paying attention (Hayek would remind us it's because central planners can't possibly have all the information to determine what interest rates should be), suddenly discover they need to correct course, and then just as suddenly do something boneheaded because they never knew all along what they're doing.

So back to this thing about Geithner and Summers "understand markets." If they really understood markets, then they'd know that free markets exist only when government doesn't interfere. The moment that government does an iota in "markets," they're no longer free, and hence only a semblance of "markets." Geithner and Summers are chief proponent of government interference. Summers' very job under Clinton, by definition, was figuring out ways for the federal government to meddle with financial markets. Geithner's assuming that role after having been on the other side: as Treasury Secretary, he'll be working with his successor at the Fed about how many Treasury securities the Fed will buy or sell.

If Geithner and Summers don't really understand markets, it means they're very dangerous in their ignorance. If they do understand markets, then they're misguided or perhaps malintentioned in their jobs that subvert markets. I wouldn't doubt that they understand markets, although in the same way that Satan understands what God wants: "Thou believest that there is one God; thou doest well: the devils also believe, and tremble." One can "understand" but still not believe or heed.

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