Must We Further Enable Financial Elites?


Now we know why no one but the tax-flawed Timothy Geithner would do as the new Secretary of the U.S. Treasury. Ronald Orol’s report contains clues supportive of some observers’ contention that Mr. Geithner is under the influence of power hungry elites. Mr. Geithner’s proposal comes with the same directive as Paulson’s 2008 TARP proposal: We have to act without delay or be sucked into a black hole of collapsing banks and unemployment. As Paulson’s demagoguery showed, there is little time for public dialogue when financiers want the public’s money yesterday.

Geithner’s ideas, to be fleshed out shortly, are Paulson’s strategies tailored to fit the evolving public mind. The public has bought into the idea that bank bailouts are straining governmental resources at a time when the federal government needs to borrow heavily to “jumpstart” the economy. As President Obama explained today, “[W]e can no longer afford to wait...we can no longer...resort to the same failed ideas that got us into this mess in the first place.... That is why I put forth a Recovery and Reinvestment Plan.” Does this sound like Bush’s imperatives of the moment?

Aside from the fact that we are doing quite nearly what got us into this mess in the first place — acting with haste and spending borrowed money that we have no ability to repay — what we have here is a notion that by fixing the current economy we protect our great Republic. Nonsense. We are risking the Republic to save economic growth and keep establishment elites in power.

In this presidency, as in the several that preceded it, we are subjected to stories designed to help us feel the pathos of the proletarian masses. Today, it is Ed Neufeldt of Elkhart, Indiana, intended to be representative of laid off workers in the other 49 states (see Obama’s speech, Feb. 09). Supposedly, if we feel this man’s pain, we will buckle to “imperfect” but nevertheless “necessary” policy decisions. This disconcerting situation coincides with evidence that growing blocks in both parties are ready to barter America’s future to save their homes and jobs. Perhaps this figures into Lawrence Summers’ recent statement, “The desire right now is to keep the focus...on the economic recovery program.” In other words, if the public believes jobs will be saved, the masses will capitulate to financial “correctives.”

Does the U.S. Treasury believe that the public is sufficiently worn down by the constant drumbeat of dreadful woes to succumb to a plan in which Geithner and company discover new money to help us weather our banking crisis? As of now the great private financiers of the world have largely stood aside while Wall Street seemingly burned, their bounty safely vaulted away from the public’s gaze. Geithner now rises to bring the encouraging news (I speak sarcastically) that with his public/private bailout plan, sufficiently sweet incentives can lure hedge funds and private equity companies back to the table. Alas! Without the bounty of elites, how will we shore up the balance sheets of financial institutions? Heal our housing markets? Turn around unemployment trends? Must we enable the Wall Street rich to in turn be “saved” by them on their terms?

As Ronald Orol explains, some observers think that hedge fund money will add credibility to Geithner’s program because other investors will trust that the participating hedge funds will calculate the true value of illiquid assets before they put in their money. If Geithner’s deals are sweet enough for the lead players, others will follow. “Affinity class” investors will pony up big sums just as they did when Madoff was a hot commodity (per the public testimony of Harry Markopolous last week before the U.S. Senate in regard to “affinity” investors). After all, when people have billions to invest in fast moving markets there just isn’t time enough to research everything thoroughly. Elites watch each other. If mistakes are made, politicians can be pressured into providing the salve of public money.

If emerging news is right, Geithner’s position will include the idea that participating hedge funds and private investment groups should be protected by government subsidies, guarantees for mortgage securities, and loss limitations. Furthermore, since the federal government’s finances are likely to come under increasing pressure, the U.S. government should prepare to sell its convertible preferred shares to certain private investors, especially activist hedge fund managers who want to own securities convertible into common shares with voting rights (per Orol’s report). Whose ghost appears here: Alexander Hamilton’s or Maurice Joly’s?

More than a few commentators in the MarketWatch audience saw this coming months ago; namely, an unfolding plan in which a Wall Street crisis allows the government to penetrate deeply into the private financial sector. Later, when the engorged government cannot handle its gargantuan meal, it regurgitates the assets on terms attractive to financial elites — the same process witnessed in Russia beginning in 1917 and culminating in the 1991 to 2000 period. Unfortunately, too many Americans are in a state of denial, deluded by the prejudice that superficial appearances best explain the hidden world of high finance. Interestingly, the massive Madoff scheme should put a flame to that kindling.

In short, the much heralded ‘banking bailout’ is actually a set of maneuvers aimed at reducing the diversity in bank ownership as a first step toward bigger plans. Large banks will continue their “public stewardship” of swallowing damaged banks and blighted assets, the pitch being that massive money will be made as the government inflates the economy. But the government’s financial problems will delay economic recovery, resulting in continuing calls for “private investment” arising from the shadow banking industry. The fact that Geithner believes he can sell this proposal on the heels of the recent TARP debacle shows the degree to which his handlers believe both party’s legislators lack the courage and insight to defend the public’s true interests.

Eventually, it will be the government itself that needs blood transfusions. All of this will lead to the redefinition of many things including the concepts of freedom, First Amendment Rights, and the public good. You can bet that Homeland Security will be ready to enforce new laws on American soil. Perhaps the day comes when Americans will realize that economic growth is not so precious as the Founding Fathers’ gifts. Meanwhile, brace for the political and financial excitement that the establishment machine will inject into the marketplace as a reward for policy cooperation.