Now Fire Geithner and Summers

The new restraints on bank lending for speculation proposed yesterday by President Barack Obama follow the advice of former Fed Chairman Paul Volcker but will be much more credible if the president now fires Secretary of the Treasury Timothy Geithner and National Economic Council director Lawrence Summers.

What President Obama is calling the “Volcker Rule” would take us back in the direction of the 1932 Glass-Steagall Act which kept commercial and investment banking separate for 67 years, until 1999 when it was foolishly repealed by President Bill Clinton. Then-Treasury Secretary Summers strongly supported the repeal.

It was the demise of Glass-Steagall that allowed commercial banks to create the vast amounts of unbacked credit which fueled the gigantic financial bubbles in housing, commercial real estate, hedge funds, equities, and derivatives during the catastrophic years of the George W. Bush presidency. It was the blowing up of these bubbles that brought the financial crash of 2008-9, the multi-trillion dollar bailouts of the financial industry by the Treasury and Federal Reserve, and the worst recession since the Great Depression.

American financiers became filthy rich in the meantime. Timothy Geithner, as president of the Federal Reserve Bank of New York from 2003-2009, worked closely with Bush’s Treasury Secretary Henry Paulson in overseeing the bailouts of Bear Stearns and AIG. He also favored reducing the capital required to operate a bank which would have exposed the financial system to even greater risk of failure.

Since becoming charter members of the Obama administration, both Geithner and Summers favored a much milder approach to bank reform. According to the Washington Post, industry executives were “startled and disheartened that Geithner was overruled” in favor of Volcker’s approach. Under Geithner’s watch, though, the banks have been using taxpayers’ money not to restart lending but to take over smaller banks, invest in the stock market, and continue to pay their executives obscene bonuses.

The poor bankers, now standing like deer in the headlights, are breaking our hearts. Their flight from the stock market, which began yesterday, caused an immediate drop in the Dow Jones Industrial Average of over 200 points. It shows the stranglehold the banks have had on the nation’s wealth. But in reality, the proposed “Volcker Rule” should be only the first step in the nation’s recovery from the worst financial crime spree in history.

Think about it for a minute. Banks are allowed to create credit “out of thin air” only under a public charter. It is a fiduciary trust that should be regarded as sacrosanct. One way this trust has been abused has been for banks to use this created credit to buy companies whose employees are then fired and assets stripped before the company is sold at a profit to pay off the loans and the bankers’ brokerage fees. If this isn’t a crime against the national interest, what is?

This type of scenario has been repeated in endless permutations since the long wave of financial industry deregulation began with the “Reagan Revolution” a generation ago. It continued under President Clinton and reached a nadir with the vast amounts of credit that pumped up the housing bubble through “liar’s loans” and subprime mortgages while regulatory agencies looked the other way. The banks packaged these loans and sold them as asset-backed securities worldwide, knowing they were worthless.

Geithner and Summers were part of this sordid history and must go. But this should only be a start. There are rumors that the Justice Department may soon release indictments against a number of Wall Street crooks involved in the abuses of the era. One only hopes it were so. The road back from financial hell will be a rocky one and will take a long time to travel. But the alternative is too grim to contemplate.

Richard C. Cook is the author of We Hold These Truths: The Hope of Monetary Reform, scheduled to appear by September 2007. A retired federal analyst, his career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. He is also author of Challenger Revealed: An Insider’s Account of How the Reagan AdministrationCaused the Greatest Tragedy of the Space Age. Read other articles by Richard, or visit Richard's website.

4 comments on this article so far ...

Comments RSS feed

  1. Don Hawkins said on January 23rd, 2010 at 12:53pm #

    But the alternative is too grim to contemplate. Come on Richard contemplate it and remember the present system with what we now know is quite literary crazy.

  2. Mulga Mumblebrain said on January 25th, 2010 at 2:07am #

    I’m afraid that this is all ‘smoke and mirrors’. Obama, who is owned by the finance industry and the Zionists (two nearly congruent categories) will treat ‘financial reform’ in the same manner he treated health-care reform. The high-water mark of reform will be this speech,and the back-sliding and selling-out will begin immediately. The US system is absolutely impervious to reform towards a more just, egalitarian, society. The owners of the country, the financial tsars and the Zionists in particular, run the country, as John Jay stated would be the eternal truth,although he probably did not envisage the Zionist takeover. Within months a watered-down proposal will emerge, no doubt with that Jack-of-all-Trades Joe Lieberman’s finger-prints all over it. FoxNews and the evil psychopaths of the far Right will paint this as Communism, the whole thing will excite the Tea Party homunculi to further ecstasies of hatred and auto-intoxication and suddenly the mainstream media, owned by the same corrupt and morally insane elite as the finance industry, will declare it a grand mistake, and the Democrats will lose their Congressional majorities in November, as ‘Plan Obama’ envisaged all along. In fact by November the second-leg of the Depression brought on by massive debt de-leveraging will probably be on us. The mainstream media will have the difficult, but by no means impossible, task,of painting it as all Obama’sfault and arguing that our only hope is further deregulation and letting the Holy Market have its way. There seems a misconception abroad that the ruling elites fear economic collapse and massive immiseration,lest it provoke revolt from the proles. Nothing is further from the truth. The US and global elites are secure in their confidence that the masses of losers can always be distracted with hate campaigns and wars of mass murder and terror waged in perpetuity against ‘camel-jockeys’ or ‘Chinks’ and with ruthless and fratricidal competition for the scraps amongst the Western working class. The tiny fraction who know what’s really going on can simply be marginalised and ignored, as ever, and crushed if they make nuisances of themselves. The system is fixed and immutable, and headed right over the precipice of ecological collapse and world war,and there is nothing that can avert the debacle.

  3. Don Hawkins said on January 25th, 2010 at 3:32am #

    Mulga I watched a few people yesterday talk on CNN and MSNBC and billed as the smart ones. All seeking agreement on answers to all the wrong questions. It does look like to tell the truth in a time of Universal deceit well no more air time for you. Yes those electrons must be moved in a certain way and the truth and knowledge only in very small dose’s to make the illusion seem more real. On the little road of life I wonder where they learned to think in this way?

  4. Don Hawkins said on January 25th, 2010 at 3:55am #

    Maybe some of these talkers we see on msm once worked at a law firm. You know the law offices of blank and blank and blank. Did anybody ever see the movie changing lanes. It’s just the way the World work’s, oh really for how much longer? How much does a new Mercedes cost these day’s? I still think a new way of thinking could be helpful.