The NYT editorial page is very unhappy with Geithner's proposals. It thinks that he has not gone far enough on any of the factors that the NYT econoheads have been peddling as the major causes of the crisis. Some excerpts:
"...Mr. Geithner called for all large hedge funds and private equity firms to register with the Securities and Exchange Commission, a move that could bring much-needed disclosure and oversight to vast pools of capital that fed the bubble economy. But the S.E.C. would not have the full authority to resolve all concerns. Rather, it would report its findings up what could turn out to be a convoluted chain of regulatory command. [So, too little regulation of hedge funds]
"...Mr. Geithner called for oversight of unregulated derivatives, like the credit default swaps at the heart of the debacle at American International Group. But he made a troubling distinction between “standardized” derivatives and “non-standardized” ones, and proposed different regulation for each. That looks like a loophole disguised as a new rule. Derivatives, now swapped one-on-one, ad infinitum across the financial system, need to be traded on a fully regulated exchange, period. [Same goes for derivatives and CDS's]
[And now for the Gramm-Leach-Bliley narrative...]
"...firms, like A.I.G., have proved dangerous mainly because of their involvement in a web of often conflicting financial practices and products. The A.I.G. financial unit that sold credit default swaps did not have the wherewithal to make good on its obligations, but leeched off the AAA rating of the company’s strong insurance business.
"...Mr. Geithner...called for a single powerful regulator to police the most powerful institutions, presumably intervening to require more capital whenever sheer size and conflicting activities appear threatening. In the all-too-likely event that firms would get too big to fail anyway, he called for new government powers to seize and restructure them, if failure seemed imminent.
"No one disputes that this authority is needed in today’s world to avoid calamitous bankruptcies and bailouts. The aim would be to make such takeovers as orderly as a bank seizure by the Federal Deposit Insurance Corporation.
The important question, however, is whether, in a reformed future, any firm should even come close to getting too big — too diverse, too interconnected — to fail. Geithner’s plan assumes that such firms will be a feature of the financial landscape going forward. That is a radical shift in perspective. [Wow. "Radical shift in perspective" is putting it mildly. It's a rejection of the basic left/NYT narrative about G-L-B as the basic cause of the crisis.]
Depression-era legislation, after all, prevented financial firms from mixing commercial banking with investment banking and insurance. Only in the last 10 years — with the passage in 1999 of the Gramm-Leach-Bliley Act — have such financial supermarkets been allowed to re-emerge.
Supporters of Gramm-Leach-Bliley recognized that too-big-to-fail firms posed a risk of taxpayer bailouts. Their concerns were soothed by a belief that market discipline, combined with innovative ways to reduce risk — namely derivatives like credit default swaps — would mitigate the danger. [Interesting idea here, that CDS's were thought of as a way of mitigating the risks of G-L-B and the "too big to fail" issues that might result from it. I had never heard that before, though it sounds plausible.] We now know that discipline failed and the innovations actually amplified risk greatly.
"In some cases, these big firms allowed ever more financial risk to be piled on ever-thinner cushions of capital. That helped to juice Wall Street profits, but did it really outweigh the disadvantages that are now so painfully evident in taxpayer-funded bailouts?
"If there is no proven way to reduce the systemic risk in big and interconnected firms, why should they be allowed to exist? It would take some time to dismantle them, so the government should, in the meantime, be granted the resolution authority to seize them if needed. But that should not substitute for a debate on whether such firms should be allowed to exist at all.
"The urgency to repair the financial system is mainly political. Crises create intense public awareness and with it, the opportunity for change that reform-minded officials do not want to squander. [Never waste a crisis to push through an agenda that may or may not have something to do with it.] Even lawmakers who would prefer the status quo feel the pressure to act.
"But does anyone understand with specificity what brought on the financial meltdown? Can the lawmakers and other officials charged with writing the new rules explain the transactions, interactions, norms, products and relationships that got us in this mess? Can anyone parse how much of the crisis is due to regulatory failure, how much to recklessness and greed, how much to fraud and manipulation? Why, exactly, did Goldman Sachs get $12.9 billion in the A.I.G. bailout?
Without the answers, which we do not yet have, Congress and the administration cannot be confident that they are coming up with the right reforms. [I agree with everything in this paragraph. An honest, public debate is necessary, though any that would take place would be political and nasty. Why GS got money from the AIG bailout is an excellent question.]
"It is clear, however, that there is bipartisan resistance to a thorough investigation of what caused the collapse. There have been hearings galore. But they are often little more than hazings of corporate executives and government officials. Even the illuminating hearings have not been connected in a meaningful way that will help us all understand what went wrong. [All very true. The hearing have been useless; nothing more than an opportunity for Barney Frank to display his various psychological pathologies. The Dems don't want to do anything because they are invested in the status quo. Many in the GOP are equally invested, and those who aren't are clueless, to put it charitably. The pathetic display this past Friday was a perfect example of GOP cluelessness.] [END OF QUOTE]
There's more, and I may get back to it. It's interesting to see that the left are as unhappy with Geithner as those of us on the right. Kudos to the NYT for being honest about the Geithner disaster; their attempt to soften it by starting with the pluses fools no one.
