How do we prevent the next Tim Geithner?
When you hate on certain people and things as long as I’ve hated on the banking system and Tim Geithner, you start to notice certain things. Patterns.
I read Tim Geithner’s book Stress Test last week, and instead of going through and sharing all the pains of reading it, which were many, I’m going to make one single point.
Namely, Tim was unqualified for his jobs and head of the NY Fed, during the crisis, and then as Obama’s Treasury Secretary. He says so a bunch of times and I believe him. You should too.
He even is forced at some point to admit he had no idea what banks really did, and since he needed someone or something to blame for his deep ignorance, he somehow manages to say that Brooksley Born was right, that derivatives should have been regulated, but that since she was at the CFTC everybody (read: Geithner’s heroes Larry Summers and Robert Rubin) dismissed her out of hand, and that as a result he had no ability to look into the proliferating shadow banking or stuff going on at all the investment banks and hedge funds. So it was kind of her fault that he wasn’t forced to understand stuff, even though she warned people, and when shit got real, all he could do was preserve the system because the alternative would be chaos. And people should fucking thank him. That’s his 600 page book in a nutshell.
Let’s put aside Tim Geithner’s mistakes and his narrow outlook on what could have been done better, and even what Dodd-Frank should accomplish, for a moment. It’s hard to resist complaining about those things, but I’ll do my best.
The truth is, Tim Geithner was a perfect product of the system. He was an effect, not a cause.
When I dwell on the fact that he got the NY Fed job with no in-the-weeds knowledge or experience on how banks operate, there’s no reason, not one single reason, to think it’s not going to happen again.
What’s going to prevent the next NY Fed bank head from being as unqualified as Tim Geithner?
Put it another way: how could we possibly expect the people running the regulators and the Treasury and the Fed to actually understand the system, when they are appointed the way they are? In case you missed it, the process currently is their ability to get along with Larry Summers and Robert Rubin and to look like a banker.
Before you go telling me I’m asking for a Goldman Sachs crony to take over all these positions, I’m not. It’s actually not impossible to understand this system for a curious, smart, skeptical, and patient person who asks good questions and has the power to make meetings with heads of trading floors. And you don’t have to become captured when you do that. You can remember that it’s your job to understand and regulate the system, that it’s actually a perfectly reasonable way to protect the country. From bankers.
Here’s a scary thought, which would be going in the exact wrong direction: we have Hillary Clinton as president and she brings in all the usual suspects to be in charge of this stuff, just like Obama did. Ugh.
I feel like a questionnaire is in order for anyone being considered for one of these jobs. Things like, how does overnight lending work, and what is being used for collateral, and what have other countries done in moments of financial crisis, and how did that work out for them, and what is a collateralized debt obligation and how does one assess the associated risks and who does that and why. Please suggest more.
mathbabe 
The trick is to set up systems that an idiot could run because some day (most days?) an idiot will.
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Yes, this is ultimately why complicated financial institutions with diverse and unrelated product lines or business areas cannot be allowed: they are simply too complex to regulate (and manage?)
I disagree with Cathy’s claim that the system isn’t so hard to understand. Even her short questionnaire would probably yield only 20 reasonable candidates globally.Throw in questions about ALM, other derivatives, clearing and settlement systems (to say nothing of insurance) and then there probably aren’t any candidates. Anyway, who would ask those questions and grade their answers?!
Any system that relies on heroic effort or finding exactly the right person for the job won’t be stable.
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Well, if we are all impacted by a system that no one truly understands — this raises an important question: HOW DO WE GET BACK IN CONTROL OF IT?
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Unfortunately, the system will not take care of itself and the electorate is, at the moment, neutered. I would suggest that the problem is unsolvable.
The only thing that I can see that could possibly be effective would be if consumers actually change their banking and investing relationships and divest from the large banks and diminish their concentration of power.
The industry would still have power but having more players would create more diverse interests anyway.
That is, our representatives do not represent us. And so it is incumbent upon the electorate to “vote” in a different way.
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One of the things that you learn as a mathematician is that there are such things as impossibility theorems. Certain goals cannot be achieved with only simple tools. Some people believe that if we just think harder, it’ll be possible to design a system that runs a modern society with mechanisms even an idiot could manage. I think it’s just as reasonable that trying to design such a system is akin to trying to trisect an angle with ruler and straightedge.
Let’s say we don’t allow banks that are too big to fail. That pretty much rules out other entities that are too big to fail as well, because there is no way for them to accumulate enough capital to get that big. There goes any entity capable of engineering or building an airplane with 150 passengers or a range of more than 2000 miles. Also, there goes any airline with more than a dozen planes. Your trip to a conference in Romania now takes eight flights on five different airlines, some of which you had better research carefully to make sure they have a decent safety record. At least the two airlines you connect between in Reykjavik have managed to coordinate their schedules. Obviously you’re not booking this without the help of a travel agent. Actually, you’re probably not taking the trip, because not only will the trip take 2 days each way with all the inconvenient layovers, the airfare is going to cost $5K.
You want to have your conference by Skype instead? Good luck getting it to all work on fifteen mutually incompatible flavors of Unix running on fifty different hardware configurations, some of which require really odd drivers which behave weirdly from time to time, not to mention an Internet run by tens of thousands of different ISPs who have trouble coordinating standards among all of them. If you look at the e-mail standards, they have lots and lots of redundancy built into them so that, even on an unreliable Internet with lots of ISPs that intermittently have trouble communicating with each other (as was the case 25 years ago), your e-mail will eventually get through even if it takes a few days. Skype can’t work that way.
I rather suspect that if we only allow systems that an idiot can run, we’d have to have a society at roughly the technological level of the Amish (with a few choice exceptions), and we’d have to carefully consider, as the Amish do, the introduction of each piece of technology into society.
Maybe living like the Amish is a good idea (and I mean this seriously), but I don’t think the world will go for it.
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Perhaps I was not clear. I do not mean to design the system. Nor do I want an idiot to run it. I am fine with market solutions as long as they are not asymmetric, as they are now. Investment can be as big as they want be must be allowed to fail. you cannot simply have the upside without the risk of failure.
Commercial banks, depository institutions, should be more utility like. I would recommend following the simple and elegant solution proposed by Dallas Fed President Richard Fisher. He described it on a recent Econtalk episode. It’s quite simple, really.
I would agree with you that it would be folly to try to design something. There are always unintended consequences and unforeseen results.
Quite simply, however, the incentives for behavior cannot remain as they are. Take all the risks you want investment banks, just don’t offload them on to us.
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Let’s say we don’t allow banks are too big to fail. That pretty much rules out other entities that are too big to fail as well, because there is no way for them to accumulate enough capital to get that big.
It doesn’t work that way. Limiting the quantity of financial assets a bank may hold will not impact the capacity of industrial firms to obtain financing, nor reduce the availability of investment capital. Not in a floating-rate monetary system.
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You beat me to it. The book “Inviting disaster” is about overly-complex systems and human error. The chapter on Concorde is very good. It was at the edge of what was possible. When small things go wrong everyone dies in a ball of flames. So they stopped doing it.
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There is no particular trick. And conditions change over time.
Ecology gives good clues. Like having a safe refuge for prey, which avoids or dampens the predator-prey cycle. (Think Post Office banks or boring banks with deposit insurance, and a wall between them and investment banks. Like we used to have. When we did not have a bank panic for 50 years.)
Ecology also tells us that we need predators. Like kick-ass regulators. Like Bill Black and Sheila Bair.
But even in the wake of the Great Depression we built a good system, one that kept the banksters in check and gave us both stability and prosperity. Then the children and grandchildren of those who built that system forgot its lessons and dismantled it, blinded by greed and hubris. I welcomed Reagan and deregulation, but when I saw the deregulation of the S&L’s, the moral hazard was obvious. The S&L scandal a few years later was not too surprising; something had to happen. That scandal was a warning shot across our bow, but we ignored it and continued on our reckless course, leading, eventually, to where we are now.
We can’t build a perfect system, but we had one that worked for five decades. I say next time let’s aim for a century.
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Agreed. Perhaps “trick” was the wrong word. I agree with you.
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Sheila Bair, kick-ass regulator? She oversaw FDIC when the WaMu-Chase debaucle was occurring and apparently hid a secret P&A Agreement from the public. Kick-ass? Hardly.
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Not so fast. WaMu was a thrift, and not a commercial bank, so, strictly speaking it was out of her scope. But because the OTS was such a feckless regulator, and WaMu was so large, she went after it.
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First of all, when there is a red flag, such as:
one should heed it.
Second, no one but a trader or a quant is capable of asking the right questions, much like trying to get an outsider to understand brain surgery. Domain expertise is needed, not just for the answers, but for formulating the questions themselves.
Larry Summers might not have the actual domain experience but he is infinitely brighter than the “deer in the headlights” Geithner. And as much as you don’t like Summers, he was probably best of the breed in his positions, and I understand you have problems with the whole breed or brood.
And I have not read the book, but I doubt you trust Geithner’s account.
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“And I have not read the book, but I doubt you trust Geithner’s account.” ->
And I have not read the book, but I doubt you could trust Geithner’s account.
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I don’t get much useful out of this assessment, unfortunately. It seems you think he was unqualified because CDOs were very important and he wasn’t a CDO expert? Or derivatives more broadly? I don’t agree with this point of view at all, and I think it reflects more your alternative focus.
I have seen some other unsatisfying criticisms, one basically that he made some snarky comment about Barofski, which in reality was tame. Again, more a view into the reviewer’s ideas and conceptions than into the book.
So it seems the memoir is not so bad, and haters are struggling to criticize it with substance?
Actually, Krugman today has some very good points. There should have been a much stronger push to improve employment and household debt, with a lot more creativity and advocacy even in the face of challenging political opposition. Though if I read right, even here Geithner takes the right side in his memoir but without enough conviction, without explanation of some known failings, and with a lot of excuses.
Guess I will have to dig to get some more helpful views.
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When you said “look like a banker”, did you really mean physically?
From what I can tell, Getihner’s only academic study of the subject was his MA in Economics and East Asian studies from JHU. It seems clear to me that he was grooming himself to be a diplomat or international policy bureaucrat not to understand private finance. His work experience pushed him towards the policy of international economics, but that would have in no way required him to learn much about the actual workings of the private financial sector.
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Yes I meant physically.
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“we have Hilary Clinton as president and she brings in all the usual suspects to be in charge of this stuff, just like Obama did” (snipP
Paging Robert Rubin!!!
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What on earth does “hate on…” mean?
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Jesus, you need to get out more.
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http://lmgtfy.com/?q=what+does+%22hate+on%22+mean%3F
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You assume the job is doable by human minds. Chess is the most complex game most of us can play and takes many years of work to get into the list of the world’s top 10,000 players. Chess has 16 pieces per side, 64 squares per board, alternating moves.
Nobody plays 3D or 3-way chess because you can’t play enough games in a lifetime to know whether you are getting better or not. Adding another 16 pieces and 32 squares to make 3-way chess moves the game far past human mental capability.
If you estimate that the banking system is more complex than chess, e.g. that multiple players (banks and CBs) each with dozens of pieces (roles and institutions) and many possible moves by each piece, moves being made simultaneously is more complex than chess, then human minds can’t do that.
In fact, any smalll part of the banking systems is so vastly more complex than chess that it makes 3-way chess look like tic-tac-toe.
Government can’t be allowed to attempt the impossible. End the fed.
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The Pretense of Knowledge. — Hayak
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sorry. that was the pretense of spelling. “Hayek.”
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Geithner’s job was to protect the bankers from the country, not the other way around. He did a great job and bankers should thank him. The country, not so much.
Whether Geithner personally understood or not doesn’t make much of a difference, though I think he’s smart enough to understand the basic principles of fraud–most people are. He just doesn’t care about the consequences for “the country” as long as bankers make money. It’s a feature, not a bug. And it’s a matter of political will, not intellectual acuity.
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“I feel like a questionnaire is in order for anyone being considered for one of these jobs…Please suggest more [questions]”. Since no one is answering your request, let me. First of all, I’ll say I love the idea, but think the questions need to be more specific and related to already instituted regulation and investigation. A smart young man like Timmy can get a good tutorial from his bright lackeys to answer the questions above.
*What is the most effective banking regulation you have instituted in the past 10 years?
*How have you prevented increasing concentration among financial players in the past 10 years?
*How many indictments have you issued for financial malfeasance in the past 10 years?
*For any indictments issued in the past 10 years, what is the amount (in $) for the alleged misconduct? –this one is to weed out the small fry BS
Or, *What is the recapture rate of the indictments? e.g. penalties collected
And some disqualifiers:
*How many times have you golfed with senior mgmt. of the biggest 5 banks in the past 5 years?
*Was your first job working for Henry Kissinger? (OK, that’s a Timmy specific one)
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How about *Did you help assassinate any person(s) with whom you did not agree in any position(s) formerly held?
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Geithner was not prepared for what happened on his watch. But one of the main architects of the disaster was Robert Rubin, was he not? How do we prevent the next Robert Rubin?
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For those who want a peak at the book, NY Times Magazine had an interview with Geithner:
(I always carry some light reading for when I travel.)
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peek, not peak.
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“Here’s a scary thought, which would be going in the exact wrong direction: we have Hillary Clinton as president and she brings in all the usual suspects to be in charge of this stuff, just like Obama did.”
There’s really no other thought — it has always been obvious that that will happen no matter who gets elected. The saving grace for an Obama or a Clinton is that certain things won’t be made worse than they are already (social programs, pollution, etc.). If you count human life as a reason to vote (and it is the only reason I vote), then the advantage to voting for Hillary Clinton would be that fewer lives would be lost under her than under any republican who’s going to be allowed to run. And when I say lives lost, I mean through various means (the defunding of social services, moneys denied to statewide medical care, etc.).
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