News Release

Change on Economy?

TIMOTHY CANOVA
Canova is professor of international economic law at the Chapman University School of Law in Orange, California.

He said today: “The selections of Larry Summers as chair of the National Economic Council and Timothy Geithner as Treasury Secretary are disappointing. Although President-elect Obama has referred to their ‘sound judgment and fresh thinking,’ when it came to the issue of deregulating banks and derivatives, both Summers and Geithner have shown very poor judgment and old thinking. Summers, as Treasury Secretary in 1999, was shoulder to shoulder with Robert Rubin and Alan Greenspan in sweeping aside the Glass-Steagall Act provisions from 1933 which had kept commercial banking and insurance separate from securities and the casino economy. A year later, Summers was behind the legislation that was signed by Bill Clinton to shield derivatives from federal regulation. What made the deregulation of derivatives particularly outrageous was that it came on the heels of the meltdown of the Long-Term Capital Management hedge fund because of its speculation in the derivatives markets.

“As a result of such deregulation, the market for derivatives has exploded in size and volatility. Credit default swaps, with a notional value of more than $50 trillion, helped bring down AIG, an insurance giant that has required more than $150 billion in taxpayer support. The market for exchange rate and interest derivatives is even bigger, at least $500 trillion in face value. What’s needed is a central clearing exchange with the authority to set capital requirements and margin requirements for credit derivatives. Geithner, as president of the New York Federal Reserve Bank, has been talking about such a clearinghouse for the past two years. Six months ago, Geithner promised to have such a clearinghouse in place by the end of this year. But there is no evidence that there has been much action, even though Geithner has used this time to negotiate multibillion-dollar bailouts and deals associated with the collapse of Bear Stearns, Lehman Brothers, AIG, and now Citigroup. Even with the kind of leverage the New York Fed has enjoyed, Geithner has been unable, or unwilling, to impose a central clearinghouse on derivatives. No wonder the stock market reacted favorably to the initial news of his nomination. Perhaps Wall Street is hoping that little will change with Geithner at Treasury.

“At a time when the pleas of General Motors and other carmakers for a $25 billion federal bridge loan are being closely scrutinized, Wall Street continues to enjoy the endless financial support of the New York Federal Reserve Bank, and with no strings attached. For Wall Street firms, there have been no limits on executive compensation or dividend payments, no commitments by the banks to maintain their lending levels to industry and homeowners, and unlike in Britain and elsewhere, no public officials have been appointed to their oversight boards. Hedge funds and derivatives remain unregulated, and many billions (perhaps trillions) of dollars in toxic assets remain hidden in off-balance-sheet accounting shells.

“Supporters of President-elect Obama will be tempted to embrace the experience argument, and it is true that Geithner and Summers have lots of experience at crisis management and doling out bailout funds to their Wall Street clientele. However, there are others with plenty of experience who have actually showed sound judgment and fresh thinking, including economists like Joseph Stiglitz, Paul Krugman, James Galbraith, and Dean Baker, and financiers like George Soros. The selection of Geithner and Summers to top administrative posts rewards past failure and protects special interests. It also sends the wrong message to those who thought they were voting for change.”

Canova’s articles related to the current crisis include the piece “ The Legacy of the Clinton Bubble,” and the recent “Massive Stimulus May Be Needed to Stem Crisis” for the Wall Street Journal.

A recent video interview is available online.
More Information

For more information, contact at the Institute for Public Accuracy:
Sam Husseini, (202) 347-0020; or David Zupan, (541) 484-9167