Geithner: “The End of Capitalism as We Know It”

By William K. Black
Bloomington, MN: February 10, 2015

Timothy Geithner’s penchant for speaking about things he does not care enough about to get right has led to him uttering many of the most cringe-worthy phrases about the economic crisis. The latest example is in David Axelrod’s new book about the Obama administration’s response to the financial crisis. This column was prompted by Sam Stein’s piece in the Huffington Post about Axelrod’s key points.

“Axelrod was ‘livid’ when he found out that Geithner and [Larry] Summers ‘had quietly lobbied’ against an amendment to the stimulus that would have restricted the payment of bonuses at firms that received bailout funds. Those bonuses had become a huge political sore point for the administration, but the finance guys argued that retroactive steps to claw back the money would have violated existing contracts.

‘This would be the end of capitalism as we know it’ Geithner told Axelrod, to which Axelrod says he responded: ‘I hate to break the news, Mr. Secretary, but capitalism isn’t trading very high right now.’”

This story confirms two pathologies that are well-known about the Obama administration. First, Geithner was a faithful servant of his Wall Street masters when he was Treasury Secretary, just as he was when he was the President of the Federal Reserve Bank of New York. Notice that there is a contradiction in the description of the issue. Preventing banks that received bailouts from paying future bonuses is not “clawing back” bonuses. Clawing back bonuses means recovering bonuses that were improperly paid based on false accounting statements that massively overstated bank income. Neither of the practices I have described would have “violated existing contracts.” The people that “violated existing contracts” were the bankers who massively inflated reported net income in order to collect massive bonuses while the bank suffered huge losses and the bankers that made massive bonuses by leading frauds that ripped off customers. Both forms of fraud invalidate any contractual claim by the managers to bonuses. Bankers should not get paid in full under normal bankruptcy provisions when they run the bank into insolvency (including a liquidity crisis).

The perverse incentives of the compensation systems were a major contributor to the three financial fraud epidemics that bankers led that caused the greatest financial losses of any property crimes in history. It was grotesquely improper and immoral to pay the bonuses. It literally made crime pay. It was (and is today) vital that those perverse compensation incentives (which include the deliberate generation of the “Gresham’s” dynamics that suborn supposed “controls” such as the loan officers and brokers, credit rating agencies, auditors, and appraisers) be ended to make the financial world far less criminogenic. The “sure thing” of “accounting control fraud” (aka “looting”) makes “capitalism” as we know it a disgraceful oxymoron. What “we know” bears no resemblance to “capitalism.” Our largest banks became criminal enterprises virulently opposed to markets, competition, democracy, and customer service. At best, we suffered from crony capitalism, a variant of plutocracy.

Anyone that wants to save “capitalism” must destroy the current corrupt system “we know” that is posing as “capitalism.” To sum it up, there was no greater service that the Obama administration could have done for (real) capitalism than to produce “the end of capitalism as we know it.” Geithner was absolutely right in his diagnosis and absolutely wrong in his response. Wall Street hates “capitalism” – Geithner and Summers acted to save, rather than exorcize, its corrupt doppelgänger.

Geithner and Summers were so wedded to serving the interests of Wall Street – and crony capitalism – that they secretly sabotaged the efforts of progressives (supported in this unusual case by President Obama) to enact a legislative reform of compensation that was (1) legal, (2) economically efficient, (3) essential to restore “capitalism,” (4) essential to justice, and (5) politically popular. Obama discovered that he, and more importantly the American people, had been betrayed by Summers and Geithner – and did nothing. His administration died that day when he failed the most elemental test of leadership and integrity.

7 responses to “Geithner: “The End of Capitalism as We Know It”

  1. Alice Thomas, J.D,

    My old econ teacher used to preach during each class multiple times:
    “Price competition is the essence of the free enterprise capitalistic system.” Without price competition, you don’t have capitalism.

  2. Malcolm MacLeod, MD

    As an older American, who well remembers WWII and the marvelous post war times, it makes
    me ill in several ways to have to watch this present national disaster. It seems almost as though
    everyone able is willing to be on the take, no matter what their station in life. It’s rather unpleasant
    to contemplate this nation’s downward fall from within, with no real regret from the soulless
    jerks that are still in business and still unchecked. There are great crimes on both sides, and we
    chalk it up to too much money. Rather, it’s too little character.

  3. Dear Mr. Black,

    What you write is correct. Now, several years down the way what is to be done, considered, or avoided so that I -one of the ‘little people’ can best protect my relatively meager savings from a lifetime of work? Yes, I hold broad stock market investments in a portfolio of stock funds, and bond funds at apron 60/40% mix. I do my own investing through Vanguard having learned no one will ever care for my money better than I will.
    My wife and I live debt free today at 63 with about 750K in investable assets. No 1%er here, but doing OK.
    I avoided the 2008 melt down having exited a stocks in Feb of 2008. I see the U.S. having learned little to nothing since then starting to strangle again on rising inventories and stagnant wages. Where to run this time?
    Sing me a worried retired geezer!

  4. J P Frogbottom

    Dear Mr. Black,

    Turbo Tax Timmy who can’t do his taxes correctly, and Larry Summers the guy who would stare down Brookksly Borne (and perhaps goats) over derivative legislation. These TWO making ‘policy’ at the FED level? Ever wonder where we are headed? Only those from Banking, or approved civil service lessors approved by the Banksters need apply. No one else is supervising or writing about the chosen, and no one questions why the future looks so desperate. Simple, we are desperate.

  5. holy scum bags

  6. justin synnestvedt

    Prof. Black,
    Thanks for this beautiful summary of what you have been saying for years.
    It names important policy makers of the Wall Street – Washington corridor, and shows how they illustrate widespread false views about too-big-to-fail banks, and their supposed benefit to capitalism.
    I’m glad you can still blog at NEP, despite an unbelievably full professional schedule.
    Yours truly,
    Justin Synnestvedt
    Retired philosophy professor, Chicago.

  7. Alice Thomas, J.D,

    Would someone please explain to me why the Federal Reserve has a strangle-hold over our entire economy? They are not a government agency and are not accountable to the electorate, but hold the power over whether we workers can find employment and prosper or whether we are on unemployment insurance (if we were lucky and had a job at one time) and suffering financially. They determine our standard of living and even though we don’t like it, we can’t even vote them out of office. Up until relatively recently, we had high interest and high unemployment – even though (except for gasoline and food) there is very little inflation. Are we all playing poker against an entity that holds a marked deck?