When Bankers Collide

Tim Geithner is seated at Charlie Rose’s exclusive Table Ronde, his fashionable curly locks carefully askew on his lofty forehead, his hands expressively illustrating his financial competence. He has published a book destined for stardom, Stress Test, and he confronts Charlie who loves to flog best sellers before they are. Tim has been here before – annually, on average – but tonight we are treated to the official word, the inside story on what we’ve accomplished since TARP, how much better the banking system is now, largely because of the astuteness of Tim Geithner himself, former Treasury Secretary.

From the Department of The Treasury it’s a short arabesque to his personal treasure; he has now been pastured out to a leading private equity firm, following the fine White House tradition of advise, consent and be pieced out by a grateful Administration and its cohort Wall Street, achieving his just reward in the distinguished wake of such former White House luminaries as Robert Rubin, Hank Paulson and Larry Summers.

Geithner and Charlie touch all the familiar bases: why Lehman was allowed to fold, how the good guys — Goldman, Sachs and JPMorgan Chase — weren’t, the shortcomings of monetary policy since, and all the improvements we’ve made.

Never once – not once – is mention made of the fall-out from TARP, or later Ben Bernanke’s helicopter drop of Quantitative Easing: the deluge of fed money rained on Wall Street supposedly to remove the toxic assets (crap mortgage-backed securities bundled into saleable bite-sized chunks and sold as prime merchandise by financial houses on the Street that call themselves banks). This, Bernanke’s dream child, was intended to expand loans to small and medium business, but in fact it only eventuated in the topless towers of Wall Street’s using the dough to play the market, and screw small business over. Large business, not so much, in fact driving the Dow to an all-time high.

And then we have our fairly recent Fed Chairperson, Janet Yellen. A nice Jewish girl who has it all over Lewis Black, who, playing Carnegie Hall, said his conventional Jewish mother told him if he couldn’t become a doctor, he could at least get a bachelor’s degree in Health Science. Yellen, whose father was already a doctor, herself earned a doctorate in economics.

But that isn’t the item. Yellen was Obama’s appointee a year or so ago to head what, these days, is almost the fourth branch of government, the Federal Reserve System. Our Central Bank. As a result, she took on a three dimensional menu of problems.

It’s the economy, stupid. Or should we say the stupid economy.

The Federal Reserve System, last December 23 marked its 101st anniversary, and you know how steady 101-year-olds can be. It serves as the Central Bank of the United States. Central banks the world over operate variously as a steward of interest rates and money supply, as fiscal agent for the governments they serve and often monitoring general economic conditions and the business cycle. A central bank is essential for any modern nation; or, in some cases, such as in Cyprus or Greece, presides over that nation’s dead body. Even less frequently, as in frozen Iceland, they get their assets frozen by an angry, parka-clad public, which also manages — amid loud cheers — to throw a few commercial bankers in jail.

Who or what does a central bank serve, essentially? In America in recent years, the Fed has done quite well by the commercial banking system, i.e. the topless towers of Wall Street, although that wasn’t the original intention when it was created. What it SHOULD be doing is the subject of far too little debate, perhaps because most of the debaters don’t know the Fed’s assets from a hole in the ground, which may or may not be under Fort Knox.

Janet Yellen at least has forsaken the usual Street route and has labored in the vineyard for 36 years with the Federal Reserve System. She’s married to a Nobel Laureate in economics (George Akerlof) and her Ph.D. at Yale was earned under the eye of Joseph Stiglitz, another Nobel winner and arguably the most distinguished Keynesian economist in the world. Equally impressive, perhaps, long ago, Yellen co-authored a paper at Harvard which analogized Jack Nicholson’s lunch order in Five Easy Pieces: You remember the scene? He (Nicholson) asks for toast along with his lunch, but informed that it didn’t come with his entree, he orders a chicken sandwich on toast, “and hold the chicken.” Don’t ask me what that had to do with Yellen’s paper, but the latter produced raves in academia.

In other central banking news, Mohamed El-Erian, another regular knight of Charlie’s Round Table has as many credentials as Paulson has money. Born with a bronze spoon in his mouth of Egyptian parents, he earned a PhD in Economics at Cambridge, taught at MIT, ran Harvard’s zillion-dollar endowment fund, worked at the IMF, partnered with Bill Gross at Pimco, only the world’s largest bond fund, and latterly retired, he says, to spend more time with his daughter (11, and probably as smart as he is). Still, he manages to eke out the time to be Chief Economic Advisor at Allianz, a multinational financial services company, Chairman of the President’s Global Development Council (charged with developing the world, I suppose), a columnist for Bloomberg View, contributing editor to the Financial Times, and a regular contributor to Business Insider, Fortune, and CNN. He also found time to write a book called When Markets Collide, which sold a million and was Financial Book of The Year in 2008. Alan Greenspan (who spanned our nation’s green under two Presidents) was irrationally exuberant over it, saying it was the best book on finance and investment he’d ever seen.

You think I’m going to argue with this guy El-Erian? Charlie says he knows all about central banking, and I’ll accept that without even looking.

And then there’s Mario Draghi, head of the European Central Bank, who delivered a speech to the IMF recently that outlined at great length why running a single central bank for a bunch of different governments is about like ordering a chicken sandwich on toast and holding the chicken. Explaining how he reacted to America’s recent exiting from an expansive monetary policy, he said:

“This included strengthening our forward guidance and introducing a negative interest rate on our deposit facility, which combined to measurably increase the traction of our policy rates over the shape of the yield curve.”

I could have told you that. But getting back to my favorite subject, Wall Street, the topless towers have favored our Central Bank in recent years, mostly because of the Quantitative Easing (begun by Ben Bernanke and recently shaved by Yellen) which has helicopter-dropped new money into the banks, as we’ve already noted, like pennies from Heaven, or more accurately like honey-bee chips from Las Vegas.

But all the rage these days, at least with the sulky sector of financial dissidents, is the notion of creating public banks, central and otherwise, where State and perhaps Federal governments would own the thing (rather than it’s being a fiscal agency of the government) and thereby save zillions in interest and fees. A small dedicated group of financial writers, public finance experts, and former bankers have formed a Public Bank Institute, led by its President, Ellen Brown, a Los Angeles attorney who writes more common sense about money and banking than anybody in sight, including the above litany of experts. The Institute is holding a conference as we speak in San Rafael, California. Featured are Matt Taibbi, Gar Alperowitz, an import — significantly, Brigitte Jonsdottir, a member of the Icelandic parliament — and Ellen Brown herself.

The prime and only example of a public bank in America is the Bank of North Dakota which – wait for it – sounds a bit like socialism, enough for Wall Street to hate it. In addition to the fact that it’s more profitable. This in a state noted for its ruby red political complexion redolent of all those sunburned farmers. But it works.

According to Les Leopold of the Labor Institute in New York and author of How To Make A Million Dollars An Hour, “it also delivers a handsome profit to its owners — the 700,000 residents of North Dakota. In 2011, the BND provided more than $70 million to the state’s coffers. Extrapolate that profit-per-person to a big state like California and you’re looking at an extra $3.8 billion a year in state revenues that could be used to fund education and infrastructure.”

The only other approximation is in the far-off province of Alberta, Canada, usually called Texas North, and which has had fat-assed conservative governments for almost 80 years. But just recently Alberta elected a social democratic government (the NDP) which like most other things Canadian is half-assed in its left-wing tendencies.

But there, in 1935 was born a right-wing concept known as Social Credit, led by a radio evangelist nutcase called Bible Bill Aberhart. And one of the things his government — which was swept into power by a depression-pent populace — founded was what would have been a public bank except that under federal stature, the Canadian government wouldn’t let him call it that.

But it remains today, known as the Alberta Treasury Branch, with 53 branches and a few billion in assets and a successful operation – just like the Bank of North Dakota.

So go figure. Do you suppose …? Naw – never in America. We’d rather die than have socialistic banks, let alone a socialistic central bank, (where the people own the bank instead of it being a government fiscal agency) wouldn’t we?

And sure enough, that’s exactly what we are doing.

Bill Annett writes four newsletters: The Canadian Shield, American Logo, Beating the Street, and The Oyster World. He can be reached at: hoople84@gmail.com. Read other articles by Bill.