Saturday, June 7, 2014

Geithner Review

I found quite interesting Matt Stoller's review of Treasury Secretary Tim Geithner's book at vice.com.  Matt read between the lines of the personal part of the book, and the glimpse it offers into the lives and career paths of well-connected people in our Eastern finance-government-academia establishment. There still is such a thing.

I haven't read the book, as I find Geithner's all-bailout, all-the-time view of finance rather simplistic. And I don't endorse all the review's contrary economic ideas either. The review is also bit personal, a tone I don't endorse. Cronyism is a disease of a government and polity which elects it, not supposed moral failings of specific individuals. We will not build a better government by hoping that good-looking well-mannered Dartmouth grads will voluntarily turn down opportunities for power, priviledege and wealth that land in their laps through family and school connections.

The review points to a very nice multi-authored article, "The Value of Connections In Turbulent Times" by Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak, and Todd Mitton, using stock price reactions to measure the value of insider connections.
The announcement of Tim Geithner as President-elect Obama’s nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for …nancial …firms with which he had a personal connection. This return was around 15 percent from day 0 through day 10, relative to other comparable …financial fi…rms. ... Roughly in line with market expectations, the Obama administration hired people from Geithner-connected fi…rms into top level fi…nancial policy positions.... We argue that this value of connections refl‡ects the perceived impact of relying on the advice of a small network of …financial sector executives during a time of acute crisis and heightened policy discretion.

This tale has a strong lesson for how "resolution authority" will work out. Better keep your private cell phone contact list up to date.

This reinforces a larger point, which my colleagues Luigi Zingales and Raghu Rajan have been making for a while (here and here), among many other voices. The antagonist to free markets in our time is not state control or bureaucratic socialism. It is crony-capitalism, a system that relies on large private companies, but under detailed government control,  government favors dispensed in return for political support and buckets of money, arbitrary prosecutions and regulatory "crucifixion" (to borrow a term from an infamous EPA staffer) awaiting those who speak out or don't play along.

One last point on Tim Geithner's career. We lost a wonderful opportunity. If the Treasury Secretary can't fill out Turbo-Tax correctly, surely it is time to simplify our tax code. Alas, the crony state demands an absurd tax system, so that brief moment vanished.

6 comments:

  1. You reject the Founding Fathers, explicitly Washington and Hamilton, neither of whom profited by service. By your line of reasoning we would have never formed this Nation.

    ReplyDelete
  2. "Cronyism is a disease of a government and polity which elects it, not supposed moral failings of specific individuals. We will not build a better government by hoping that good-looking well-mannered Dartmouth grads will voluntarily turn down opportunities for power, priviledege and wealth that land in their laps through family and school connections."

    YES!!!

    The antagonist to free markets in our time is not state control or bureaucratic socialism. It is crony-capitalism, a system that relies on large private companies, but under detailed government control, government favors dispensed in return for political support and buckets of money, arbitrary prosecutions and regulatory "crucifiction" (to borrow a term from an infamous EPA staffer) awaiting those who speak out or don't play along.

    YES!!!

    OUTSTANDING ESSAY!!!

    ReplyDelete
  3. Agree with everything.
    Do not mean to nitpick, but the word is "crucifixion".
    http://dictionary.reference.com/browse/crucifixion

    ReplyDelete
  4. Actually, I slightly disagree with John Cochrane when he mentions the style of the journalist Matt Stoller is too "personal". I agree the personal tone is inappropriate for commenting a general text. However, in this case Stoller is commenting an auto-biography, which is a personal account of the events. Therefore in this case it makes some sense to make a few remarks about what the journalist views as a distorted or unfair personal account. If Stoller was making these personal remarks about the author of a general book on the financial crisis or the author of a paper, then I would agree it is unfair to be personal. But for commenting a biography or auto-biography, then I believe it is quite fair to emphasize that Geithner was a person of privilege, protecting friends of privilege, but forgetting about the poor who do not belong in his circle. It also seems fair to mention Geithner did not hold the Asian plutocrats in the same regard. Maybe here I am being slightly unfair too. I do believe a financial crisis is a tough time and no policy maker will ever be able to solve it in a way that pleases everyone. I understand Geithner's dilema and for sure 100 years from now this debate will still remain unsolved.

    ReplyDelete
  5. Good news: grumpy people tend to be good at their jobs. See:

    http://www.dailymail.co.uk/news/article-2664209/Why-good-GRUMPY-office-Moody-workers-productive-hone-skills-specific-tasks.html

    ReplyDelete

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