Jan 162013
 January 16, 2013  Posted by at 10:32 pm Finance

Russell Lee Family Car 1939
"White migrant and wife repairing clutch in their car near Harlingen, Texas"

On January 25, Timothy Geithner will step down as US Treasury Secretary. A lot of people will say and write a lot of things about him at that point, and it sounds like a good idea to be ahead of the game and provide some perspective.

There are voices claiming (there will be many more, promise) that Geithner pulled us out of the recession and the crisis, and saved the economy. That seems presumptuous. It may just as well be true that Geithner has fooled us into thinking that. Just because the stock markets are pulling through so far doesn't mean, let alone prove, that the economy has recovered or been saved. You would need something better, more substantial than that. While acknowledging that relatively strong stock market numbers are at least in potential a great way indeed to fool people about the economy.

And going forward we can wax nostalgically about everything Tim has done, and about where the economy is now compared to 4 years ago, but when all else is said and done, there is still just one question that counts: what happened to the debt? What has Geithner done when it comes to debt? As long as you don't know what happened to the debt, you won't know the true state of the economy.

Well, Americans still have higher personal debt levels than they ever had before (in fact, the best anti-gun law would be to ban paying for them with credit) and government debt has grown exponentially. Those things at least we know to an extent; when it comes to bank debt, we don't know much of anything. Tim has made sure of that. He's handed trillions of dollars in our money to Wall Street and we haven't received anything in return. Well, yes, we have the semblance of a somewhat stable stock market, but is that worth all that extra debt? Moreover, we still don't know what happened to the debt that caused the crisis in the first place, because Tim made sure it has been kept hidden from view. And how's that a good thing again?

Look, you can save banks that are in deep debt trouble, and perhaps that's not necessarily such a bad thing, since letting them fail outright would have been a risky proposition. But you can't make the choice to save banks and not at the same time restructure those debts and expose and prosecute the bankers who put their firms into a situation that necessitated saving them in the first place, and were paid big bonuses for doing it. That is not alright by any stretch of the imagination, either ethically or economically. Because the money used to save them comes from outside of the financial system; it comes from the taxes that everybody pays. And that means it has to be accounted for. But it never was.

The only reason the policy – if you can call it that – of handing banks trillions in cheap credit appears to work is because its consequences cannot be felt immediately, but are pushed forward into the future. That doesn't absolve us from having to ask what happened to the debt, though, but we still have no answer to that question, and Tim Geithner carries a substantial part of the blame for that.

If you're interested only in yourself, and you're just looking to make a quick buck, sure, things may look good. And if you think you can best achieve your goals by things staying the same, by keeping the system going as it is, yeah, you're likely to think that Tim Geithner has done a swell job, because from that point of view he has saved you.

But if you care about anything that goes beyond just today, and beyond the few square miles that make up your world, if you care about your family, your friends, your kids and their future, Tim Geithner is not your man. He set up the system so it would continue to provide fast money for the horses with blinders, but he's done it with money that everyone else is on the hook for. Just not today, not right away.

And that plays perfectly to our proverbial human short – term – attention span: Hey, look at the markets, they're doing fine. We're in recovery. We left the crisis behind. We made it.

But what's that bulge under the carpet there in the corner? Is that perhaps what happened to the debt? We tell ourselves we love our children. That what we need to do is put aside money for their education. That what they need for their futures is money. And that's it. It's not about the world we leave for them. It's not about the debt we leave for them. But it should be. The education we buy for our kids today will mean very little if and when they will be forced to pay back all our debts. We should face up to the responsibility for it ourselves. We don't. We prefer the cloud cuckoo land illusion that Tim Geithner has spun before our eyes. We prefer to let our kids deal with reality.

The main problem from a purely technical point of view with the way Geithner has gone about business is that it's to a large extent zombie money that drives markets today, money that would not have existed if debts had been properly restructured. If anytime in the future, either driven by markets or governments, banks are forced to restructure their debt after all, this poses a gargantuan risk to both the financial system and the overall economy. And we'll have Geithner to thank for that. Not only him, there's Ben Bernanke, Alan Greenspan, Hank Paulson and many more. Still, Geithner has had the option and the power to do the right thing, for four long years, and declined.

Obama said this about Tim Geithner recently: "When the history books are written, Tim Geithner is going to go down as one of our finest Secretaries of the Treasury…" And that the "unofficial" saying at the Treasury is "no peacocks, no jerks, no whiners" and "Few embody that ideal better than Tim Geithner.".

That says much more about Obama than it does about Geithner. The reality is that Obama will go down as one of the worst American presidents in history. Because four more years of the above will sink the US economy to levels not even imagined today, and Obama will be seen as an accomplice if not the main perpetrator of a whole series of – financial – crimes against the people. The president that brought the country to its knees.

That is inevitable precisely because Geithner and Obama have done nothing at all for four years to restructure bank debt. All they've done in that time is keep the existing financial system, which was then and is now as bankrupt as any industry has ever been, standing upright. Or more correctly: appear to be standing upright. What the president and his Treasurer have done is feed zombies. With – future – human flesh. WIth the future prospects of our children. Obama has said that what Wall Street did was unethical but not illegal, but that is up to the courts to decide, not the president, and not Congress.

If you leave the decision making in a time of crisis to those who stand to profit most from keeping things as they are, it would perhaps be foolish to expect them to not try and do just that. Thing is, they can do so only by throwing others under the bus. And since this crisis is the biggest, the most widespread and the worst we've ever seen, it means just about everyone else will end up under that bus. Even the majority of those who think they would be better off keeping the system going: be careful what you wish for.

Timothy Geithner is a Robert Rubin protégé. Under Bill Clinton, then Treasury Secretary and Citigroup made man Rubin, assisted by Greenspan and Larry Summers, set the terms for US government (non) policy for derivatives that stands to this day.

Geithner certainly never touched it after he and Summers took over the Obama finance team. And now he will be succeeded by Jack Lew, who was director of the White House Office of Management and Budget when Rubin and Summers were there. Lew isn't just a revolving door man, he does you one better: he went from K Street lobbyist to Citigroup director to the White House, rinse and repeat, pocketing a million dollar bonus from Citi three months after it received billions in taxpayer bailouts.

Once again, if we let them, it would perhaps be foolish to expect them to not try and do these things. Jack Lew's nomination tells us all we need to know about Barack Obama's intentions. Which are to let the bankers and their shareholders continue to hide their debts, and continue to use the zombie money they thus seem to have to make leveraged wagers whose profits they can pocket and whose losses they can pass on to you.

And you can continue to play the game as well as long as it lasts. So you can, if you're lucky, hold on to your job and your home and use your money to pay for your children's education. If you do, it might be a good idea to take a look at what it is they learn. Make sure they're never tempted to look under the carpet. Or they may turn against you.


Home Forums Tim Geithner, the King of Cloud Cuckoo Land

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    Russell Lee Family Car 1939 "White migrant and wife repairing clutch in their car near Harlingen, Texas" On January 25, Timothy Geithner wil
    [See the full post at: Tim Geithner, the King of Cloud Cuckoo Land]

    Ken Barrows

    The last chance for Obama sure disappeared quickly. What did it? The Lew nomination? I’m curious, though: what exactly will bring the stock market down? Until oil climbs substantially, I don’t see anything on the near term horizon.


    No one thinks to look under the carpet just yet. On the carpet is ugly enough:

    Golden Oxen

    May we assume Ilargi, that Obama has forfeited his last chance to become a great president with the appointment of Lew?


    So sad, so true.

    But maybe it isn’t the banks that are at the root of our troubles. Maybe it is the Ivy League. Not by accident has every president since Reagan been a graduate of these fine institutions. Mirabile Dictu Dartmouth was the alma mater of Hank Paulson and Timmy Geithner, a one two punch that knocked the American economy down for the count.

    A more rational, or perhaps informed, society would shut down these school as being breeding grounds of corruption, vice and criminality. An honest government would look upon a degree from Harvard or Yale law school as a stain not a pedigree!


    May we assume Ilargi, that Obama has forfeited his last chance to become a great president with the appointment of Lew?

    Yes, he sealed his own fate. It will bring him down, and the country.


    Isn’t it possible that this ‘extend and pretend’ game could continue for Obama’s second term? It seems unlikely for four more years, but how many thought things would have continued this long.


    The banking meltdown was primarily due to energy expenditure overhang.
    The massive energy glut of the 1990’s ended abruptly in 2005…it took three years for Peak oil to impact the financial markets.

    The substitution of massive debt and QE for energy is obviously unsustainable. It was however predictable. Just as a household will, if its main income earners are laid off or incapacitated, try to sustain its standard of living by credit cards, so in the sudden absence of continually growing energy reserves, we start borrowing.

    Perhaps it is wrong to blame Giethner and Bernanke for this. Would not any of us, faced with the same choice, wish to delay the day of reckoning as long as we could?


    Control is out of my hands.

    (I would like to have the day of reckoning delayed for another 30 years.)


    What I see happening, is that the cost of necessities of life going up faster than wages.
    All of that money printing is making everyone want some of it to line their nest.

    Right now most of the money is flowing into “student loans”, (+ $1T, which will end up being forgiven since it cannot be repaid). Secondly, into bankers hands to cover the cashflow short falls from their bad investments, (Now being held by F&F), to avoid recognizing deflation of those assets.
    Thirdly, its going for lots and lots of “PORK”.

    I’m shaving off all my hair if my barber raises prices for the second time this year. I’ll need the money saved to buy a can of beans.

    Noel bodie

    Well, we always have Aristophanes to remind us of our folly!



    My simple-minded view of things says, as long as the USG can spend its trillion per year of “extra cash” (i.e. 1T in treasury notes sold to the banks, and immediately recycled to the Fed who prints the money to buy them) neither the economy nor the stock market will drop appreciably. Deflation will be kept at bay.

    That’s 30-40% of USG spending that is being borrowed each year, for anyone keeping score.

    Attempts to reduce said spending and the Fed Chairman will start muttering darkly about Fiscal Cliffs again.

    Risks to this simple-minded view is a precipitous european collapse. If the Spanish bad-debt chickens come home to roost even the extra trillion per year we print & spend might not be enough. However all is quiet over there, for now. See the spanish equity market rebound after the double-bottom in June/July 2012.



    Thank you for laying some of the blame for a collapse which in retrospect is multifactorial and which has been a long time coming. The rogues gallery is a lot bigger than the finance and banking elites who have dominated the political system for many decades and without any doubt are proximal causes of this debacle but the banking cartel of the Federal Reserve certainly merits mention as well as the flawed and outdated economic assumptions which characterize the dogma under girding a globalized economy hell bent on a meeting with a brick wall. There are limits to growth as was pointed out in the oft ridiculed book of the same name and we have hit those limits. I suppose laying the blame and naming names serves some function. It would seem to be like the deck passengers of the Titanic screaming at the clueless corporate ship owners, the skipper, the ship designers, the lousy structural steel, the lack of a better iceberg patrol and even the berg itself for destroying their travel plans. As Jorge the magnificent once said, “This sucker is going down!” Of course Obama is a disaster but we could have gotten his evil twin, the robot romney. Our future is baked into this cake and pretending we can avoid that wall may help those who feel they must keep an optimistic outlook on life, but wont change the outcome. The good news is that we might soon be rid of some devils, the ones we know.


    Preserving a destructive status quo can only be justified if that time is being used (and is needed) to implement Plan B. If it is only to delay, and especially if a delayed reckoning will be worse, then it is criminal – at the very least lying by omission.

    My cynical suspicion is that “they” see the cliff approaching, but are able to squeeze a little more profit from the status quo, so are doing so – even though their delay will make things worse for the rest of us.

    Hangin’s too good for’em..


    So, it is stated this is the worst economic crisis the world has ever seen, right? We all remember the wheelbarrows full of cash to buy a loaf of bread in Germany following WW1. So, what is in store for the US will exceed this? Am I understanding this correctly? This is the prediction being made by TAE? And, if so, how will this manifest itself, what does TAE envision? We all know no one has a crystal ball. So, it is understood time frame and magnitude can not be accurately predicted, but can you give us an idea as to what you envision? Thank you.

    Viscount St. Albans


    It would seem to be like the deck passengers of the Titanic screaming at the clueless corporate ship owners, the skipper, the ship designers, the lousy structural steel, the lack of a better iceberg patrol and even the berg itself for destroying their travel plans.

    That’s very good. Thank you for sharing.
    Gallows humor is always welcome.


    Its not giantly complicated. Its just that the US is following the way of Britain. Lets note how civilizations of the past had long long reigns. Egypt, China, even Rome. But today powers are bigger and fade out faster mainly due to the speed they use up resources. If you are a power and spare capacity will be effected you think twice before acting. More and more there are less and less options till things come to a stall.

    Its notable flawed thinking in some of allied practices where China and Russia have won. They have nuclear weapons with a longer shelf life and practices that use less resources. Actual concepts like oil in the ground being a storage of wealth and pumping it out a cost which is so foreign to us.

    Now back to the money issue. So we produce lots and lots of debt with little backing and no productivity. We do so by the threat of war. The US will go to war with any nation that does not accept their dollar as the international currency of trade. When this fails, which it will, inflation must kick in. You can’t pump trillions of dollars into the economy produce nothing and not create a tonne of inflation unless you have a trick.

    What is the trick – the international currency of trade. Since the world trades in these funds few realize the affects of the enormous dumping of funds. Without this trick the US would be no different than Zimbabwe in its ability to print/create debt/create fraud (when commodity prices are ‘manipulated’ for the good of the people).

    Since China announced 6 years ago that the Pacific Trade Pac would not accept the US as the international currency of trade in 10 years time few took notice. Since this trade pac includes primarily Asia, Russia, and India and most of the worlds resource countries as its secondaries it would effectively shut down the US being the currency of trade.

    This would cause the devaluing of US dollars as they would start coming back home and flood the market. Inflation would be devastating. Some talk of a plan of the US to, at this point, have a bank holiday, shut down the money system and reissue a new currency only to American citizens.

    Now a new problem would seize power. Even if successful it would be at a cost – deflation. The only way to create stability is to not take on debt in this system. The restrained money supply would have to be exaggerated to convince the world of the US’s credibility. Really that is what all the drama around the world is about – the US is losing credibility as a global manufacturer and innovator.

    You will find the US has already placed battle ships and weapons in range and pointed at China for the very purpose of threatening it. If you remember Iraq and remember the threats you might remember the threat to only accept Euros in trade for oil. This was what was really meant when Bush talked about our enemies would hold resources captive and become powerful by refusing trade with countries that didn’t accept their beliefs. So yet another invasion to force countries to trade when they don’t want to. Capitalism is failing so Imperialism is being used to force compliance. This will work as long as resources last.


    Hi Folks,

    …the zealotry component of the belief in neoclassical economics: their capacity to believe in this approach is as firm as the capacity of a Doomsday Cult to believe that the world will come to an end on a particular day. When each time the given day passes, a new one is constructed. The irony for neoclassical economics of course is that it’s the opposite of a Doomsday Cult: it preaches that nothing bad will ever happen (so long as governments are kept under a leash and unions are cowed). Then something really bad does happen given nearly unregulated markets. They can’t deny that it has happened, but already they’re starting to interpret it as the result of government policy!

    Read more here

    Says it all really – reverse doomsday cult, guess that would be a ‘Happy Days’ Club. Go the Fonze dude…



    I don’t know if this has been discussed but I have yet to see it….
    If your take out government spending what would the real GDP look like? Maybe that is why they are dragging their feet on government cuts..you could have a real panic if they pulled back the curtain so to speak.. So maybe the plan is to stall for two more years so they can win more Senate and House seats and then let the fall happen..with two years to restructure society. It is like a virus…it just wants to live..


    @ Ilargi

    Obama said this about Tim Geithner recently: “When the history books are written, Tim Geithner is going to go down as one of our finest Secretaries of the Treasury…”

    Would that be this Timmy G.?


    But then, “O” is, after all, responsible for the appointment of the “greatest” Attorney General in the history of the US…no? OK, in the eyes of a banker, maybe.

    My take? In the end, no Rule of Law, no trust. No justice, no peace.

    A couple questions were asked here somewhere. What will cause the equity market to face reality, and what would happen if the PTB stopped spending? When the monetization stops, the music stops.

    The Austrians are right. There is no way out of a credit induced bust, other than stop deficit spending, allowing deflation to “adjust” the excesses through default. Or death to the currency by printing press, thereby negating the debt.

    The Federal Reserve (the financier of the corporatocracy) has chosen the latter, moral hazzard be damned. But. Management of perception (We’re in the money…) can only continue until a child finally steps forward and declares the emperor, indeed, has no clothes. Not many adults seem to have the panache, other than on a few sites like this and ZH and Mish.

    I posit that the oil price spike was caused by excess printing (credit) as is the food price spike at present. As was the house price bubble. OK, add the S&P to that as well. Gold price is a given.

    These psycho’s have generated the biggest bond bubble in the galaxy, in a misguided effort to ignite another borrowing binge, by a broke public, before they hit the corner they now find themselves in. Age old reaction (human action?). Too many bucks chasing a static resource pool. This is “O’s, and his enabler Ben’s worst nightmare. Keynes’ as well.

    When the child steps forward and makes the aforementioned declaration, I plan on being as far out of sight of the bond and equity markets as I can get. I’ve ridden out a 7 on the richter, but this one is going to be off the chart, and I don’t want to get any on me, thanks.

    I would also venture that some CB players in China, Russia, Japan etc might be twitchy fingered here as well. Not to mention a whole bushel basket of Insurance Co. pension actuaries.

    Interesting memory just flipped a switch in my head, regarding that last category of speculator. As I recall, Mish stated some years back, before this all snowballed, and I paraphrase ‘We’ll know this is all over when the Pension Benefit Guarantee Corporation is bankrupt.

    As my economist kid says, as she constantly pulls me back to center, upon my asking why inflation can’t just go on forever, in a controlled fashion…” You can print money, but you can’t print resources and productivity.”

    How? The above ‘splains that. When? If I knew that I wouldn’t be writing this. No need to, from Nirvana.


    @ Ilargi

    (in fact, the best anti-gun law would be to ban paying for them with credit)

    But I thought a gun put to the head was a necessary incentive for taking on credit in the first place? Horse/cart, maybe. Dunno 😉

    ps. Thanks for the prompt heads up on the email breach!


    I hope someday TAE has a forum for discussion of reader subjects rather than only being able to respond to articles, but since this article is under the Finance section I guess it would be the place to talk about precious metals.

    I wonder if anyone has read he recent ZeroHedge post “visualizing silver”

    I believe in the tenants here at TAE and have followed them. Totally out of debt, and into cash and equivalents. I believe there will be a period where cash will be hard to come by and it will be good to have. Yet holding cash is pretty nerve wracking knowing it is not backed by anything substantial. Precious Metals make some sense because it is something substantial but I guess I have some contrarian in me because when so many people are so rabid expounding how this is the only “safe haven” and how stupid you are if you don’t get in now it makes me question it. To me the volume of people believing in something does not necessitate the truth of it.

    I imagine a situation a year from now where credit has collapsed, there isn’t much money moving or to be had. So there you are with gold and silver worth two or three times what you paid for it and you want to use it to buy something. Unless the government has made into currency you would still have to exchange it for dollars. If hardly anyone has money who would buy it and why would they want to?

    Maybe this a simplistic view and I would like to hear what anyone else thinks about holding precious metals.


    I don’t know if this has been discussed but I have yet to see it….If your take out government spending what would the real GDP look like?

    That is simple and fundamental. In the US government borrowing and spending peaked at 12% of GDP and is now around 8% Since nobody else could, or wanted to borrow in those amounts it figures that GDP would be lower by comparable amounts.

    It is the growth of debt, credit taken and spent, which causes economic growth or contraction. Period. Doug Nolands guess it takes about $2 trillion a year just to keep GDP from falling. At any rate if you pay attention that is why we went from panic about the debt to panic about the fiscal cliff. Of course most commentators don’t quite realize or can’t admit to themselves that government borrowing and spending is an existential necessity for the economy.

    Now in other times it was private credit growth which drove the business cycle but now and for the forseeable future that will never be enough. The old countercyclical government, Keynesian, spending used to peak at maybe 6% of GDP. Maybe we get there again with low sub 2% growth and muddle through. Or maybe not. Eliminate the deficit? No way.


    muddle through at less than 2 percent growth? Can we do that without the wheels falling off? It seems like below 2 percent will create a crash. I hear some people say 6 months some say 2 years what say you? Why is Europe so quiet?


    Seems to me;

    On spending and gdp…some believe government can substitute for a shortfall in real wealth creation, by burning more wealth in the form of new debt.

    Here’s the problem with exponential (by necessity) increases in government spending to shore up “GDP”.


    Seems we get less and less “growth” per printed buck spent (borrowed), and as Ilargi asks, where is all the debt being hidden?

    Positive GDP is no more a reliable indicator of anything at this point, but increasing debt. Nothing real is being produced. Au Contraire, real productivity (wealth creation) is being destroyed by carrying costs and dilution of currency value.

    If this worked over the long run, we could simply add to our own net worth by maxing out the credit cards, as long as we didn’t deduct the debt we took on from the cash advance. Then, just throw the bill away each month, or sell it to the Fed/Public. But then what would they do with it?

    Charles Ponzi would be fascinated!



    I think Europe seems so quiet because the corporate media prefers it that way. They are busy with royalty today.

    Not everyone is under administration orders though…



    RE muddle through at less than 2 percent growth? Can we do that without the wheels falling off? It seems like below 2 percent will create a crash. I hear some people say 6 months some say 2 years what say you?

    Well first as someone else said just below GDP is a poor measure of things. i would say it is worse than poor. GDP is a sickness, a pathology. We in the US are stupendously wealthy but of course that wealth is poorly distributed. Expectations are out of wack. And finally as Ghandi said, approximately, the earth can provide for all our needs but not all our greed.

    That said any GDP growth above population growth in the US should not be expected. Hell it shouldn’t be desired. The thing we need are mostly outside GDP measures. Thus our sickness.

    Can we muddle through with 2% growth? I have no clue. Well sure we could economically, it is socially, culturally, politically where the issues are which are of main concern to me, and dare I say us. But GDP growth is growth, no crash. Crash enters the picture any time GDP is negative. Which of course means if total systematic credit falls. Same same.

    Viscount St. Albans

    @ Rapier…..Nice commentary. I like the emphasis on the importance on GDP growth rates vs. debt growth rates. Regardless of whether or not GDP is an insane measurement, the disconnect between borrowing and growth can’t be sustained. 6 months, 2 years, 5 years. Who knows? In 2008, we thought we had a year. Now we know we had 5. How much fuse remains?

    @ I&S. I come regardless of whether you post.

    But, in this internet age, I don’t think this site can survive much longer with such infrequent updates. For good or for bad, the web demands new news. Like the economy, you grow or you die. There’s no such thing as treading water. Ash found religion and I haven’t heard from him in months. What are your thoughts and plans? Should I keep myself busy saving the archives before you two vanish in the night?


    No worries, Viscount, we’re not going to vanish into the night. It’s just that there are times when you can’t do 14 hours a day 7 days a week, simply because life happens. Obviously, it would be good to have more writers, and barring that, it’s inevitable that we can’t always do 3-4 posts a week. Nicole is set to go on another large Oz tour in March, and it’ll be just me again for a while as things stand. We’ll switch platform first soon and take it from there.

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