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April 14, 2015


Almost all of George Bush the Younger’s appointments to high administrative office ranged from bad to disastrous save one. Such bad to disastrous appointments included a Treasury Secretary straight from a CEO stint at Goldman Sachs on Wall Street, attorneys general appointed on the basis of religion rather than experience, neocons and warhawks to the Defense Department, pro-polluters to the EPA etc. Two needless wars marked by deaths and destruction and trillions of dollars in unfunded liabilities (while giving a first-ever tax cut to the rich in a war) were added to our long term deficit due to such war and tax cut in another first-ever: war fought on a credit card followed by the Bush Great Recession due to lack of regulation of Wall Street greed where subprime mortgages were largely financed not by bank deposits but by securitizations (read collateralized debt obligations and credit default swaps – weapons of mass economic destruction – and fearsomely, in amounts today much larger in the derivatives market than before the 2008 debacle that almost led the world to international depression).

However, one of Bush’s appointees was a good one. I refer to Sheila Bair, who chaired the FDIC from 2006 to 2011 (note the overlap between Bush and Obama administrations). She was retained in her job after Obama took office because she was more devoted public servant than political animal. She was a technocrat interested in doing her job and in general left the political wars to the Congress to fight. She did a good job during her tenure under very trying circumstances of housing bubble, recession, bailout of Wall Street banks, their insurers and even their shareholders. She is now a senior adviser to the Pew Charitable Trusts and chairs the Systemic Risk Council. She is brilliant, pragmatic and relatively apolitical, a perfect combination.

When Hillary is elected (and she will be), I would be pleased to see Ms. Bair (even though nominally a Republican) coaxed back into government as Secretary of the Treasury or in some other high regulatory position to keep an eye on Wall Street bank excesses, distribution of risk, allocation of credit etc. (all big words and phrases economists use to define flash points in an economy that needs twenty four hour-a-day scrutiny and careful regulation in order to avoid future bubbles and bailouts from which we are still suffering due to the pandering and negligence of the Bush Administration in under-regulation of Wall Street banks).

Ms. Bair, freed from constraints she had when a public employee, now writes articles and book reviews which flesh out her thinking on matters of economic policy, and I am impressed with the depth and understanding she brings to the table, and all without political rumble. Several months ago she did a book review for The American Prospect on a book written by Martin Wolf, a regular columnist for the Financial Times. The book is called The Shifts and the Shocks.

She starts by noting that the book is must-read fodder for any serious student of financial markets. She notes that he notes that the economies of the U.S. and Britain are growing, albeit tepidly, because of their ability to control their own monetary destiny, whereas in the eurozone debtor nations are trapped in a monetary union that precludes currency devaluation and are struggling under austerity dictates of the region’s primary creditor, Germany (think debtor states like Greece, Italy, Spain, Portugal, who are bound and gagged with austerity policies).

I have often blogged the same tune; that the euro’s immunity to devaluation and German austerity modeling for budgets of other countries within the zone are stifling to the zone’s economies and that austerity budgets of such debtor nations are largely for the benefit of German bondholders. The answer, of course, is stimulus spending under the aegis of Keynesianism, but that is anathema to German bondholders and Merkel, their protector and German leader. They are as chief lenders to austerity-bound zone members having none of it. They refuse to take any responsibility for the conditions in Greece, for instance, and Germans on the street refer to the Greeks as lazy welfare bums. Wolf thinks such harsh treatment by the Germans of these borrowing eurozone states is uncalled for, and appropriately quotes Walter Bagehot in such connection, as follows: “Excess borrowing by fools would have been impossible without excess lending by fools.” Good point – lending is always at least two-sided, and risk of non-performance is implicit in any such understanding, a risk borne by both parties. Lenders have responsibilities as well as borrowers in assessing risk in lending-borrowing situations.

German  bondholders were eager to buy the debt of fellow eurozone members and the German political class thought that was a good idea since such fellow members used much of such borrowings to buy German exports, thus insuring a booming domestic German economy, but now that such borrowers have little or no money and are racked with unemployment and an inability to devalue their currency, all such continental members of the eurozone are either in or flirting with recession, even Germany, since such borrowers cannot buy its exports as before.

Wolf also voices some conclusions on what led up to our 2008 crisis and bailouts and recession, but they don’t all ring true to me. He doesn’t blame the Wall Street banks but rather ascribes the near-depression to “a failure of system, not of individuals.” I do not agree, nor does Sheila Bair. She correctly notes in her critique of Wolf’s position that “his exculpation of bankers is even harder to understand given continuing evidence of the kind of shortsightedness and greed so prevalent in the run-up to the crisis.” She goes on to properly disagree with Wolf’s view that the crisis was brought about by a “savings glut” as follows: “Surely, a savings glut cannot explain away the conflicts of interest, money laundering abuses, and attempted manipulation of everything from interest and foreign exchange rates to commodity prices that still dominate the financial news.” She is right. She has put her finger on the real causes for the still lingering results of that crisis. More than Wall Street big banks were involved, but they were the greedy ringleaders and primarily responsible for our Great Recession and tepid recovery. I will look at Wolf’s views on bailouts of shareholders, regulation etc. in Part II. Stay tuned.   GERALD    E


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