Saturday, March 07, 2009

A Disssent on Geithner's Smarts

Hooboy.

When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.

The initial impression was good.

But:

...In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."
In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.


Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts

In fact,

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.
The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind


So what?

Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.

China invested most of its reserves in US debt markets. Keating again: "So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it.

"That is the fundamental cause of the problem - the imbalance is the fundamental cause."

Well, maybe. But Keating's analysis is interesting.

1 comment:

Deekaman said...

The CW is that Geithner is a smart guy. That said, he still hasn't filled all (or any) of his top deputy positions. He may be afflicted with "analysis-paralysis". If so, he needs to go (no rhyme intended....ok, maybe).