originally PUB 12/1/13
Former Treasury Secretary Timothy Geithner, a protege of Treasury
Secretaries Rubin and Summers, has received his reward for continuing
the Rubin-Summers-Paulson policy of supporting the “banks too big to
fail” at the expense of the economy and American people. For his service
to the handful of gigantic banks, whose existence attests to the fact
that the Anti-Trust Act is a dead-letter law, Geithner has been
appointed president and managing director of the private equity firm,
Warburg Pincus and is on his way to his fortune.
A Warburg in-law financed Woodrow Wilson’s presidential campaign.
Part of the reward was Wilson’s appointment of Paul Warburg to the first
Federal Reserve Board. The symbiotic relationship between presidents
and bankers has continued ever since. The same small clique continues to
wield financial power.
Geithner’s career is illustrative. In the 1980s, Geithner worked for
Kissinger Associates. In the mid to late 1990s, Geithner served as a
deputy assistant Treasury secretary. Under Rubin and Summers he moved up
to undersecretary of the Treasury.
From the Treasury he went to the Council on Foreign Relations and
from there to the International Monetary Fund (IMF). From there he was
appointed president of the Federal Reserve Bank of New York, where he
worked to make banks more profitable by allowing higher ratios of debt
to capital, thus contributing to the financial crisis.
Geithner arranged the sale of the failed Wall Street firm of Bear
Stearns, helped with the taxpayer bailout of AIG, and rejected saving
Lehman Brothers from bankruptcy in order to create the crisis atmosphere
needed to more fully subordinate US economic policy to the needs of the
few large banks.
Rubin, a 26-year veteran of Goldman Sachs, was rewarded by Citibank
for his service to the banks while Treasury Secretary with a $50 million
compensation package in 2008 and $126,000,000 between 1999 and 2009.
When a person becomes a Treasury official it is made clear that the
choice is between serving the banks and becoming rich or trying to serve
the public and becoming poor. Few make the latter choice.
As MIchael Hudson has informed us, the goal of the financial sector
has always been to convert all income, from corporate profits to
government tax revenues, to the service of debt. From the bankers
standpoint, the more debt the richer the bankers. Rubin, Summers,
Paulson, Geithner, and now banker Treasury Secretary Jack Lew faithfully
serve this goal.
The Federal Reserve describes its policy of Quantitative Easing — the
creation of new money with which the Fed purchases Treasury debt and
mortgage backed securities — as a low interest rate policy in order to
stimulate employment and economic growth. Economists and the financial
media have parroted this cover story.
In contrast, I have exposed QE as a scheme for pumping profits into
the banks and boosting their balance sheets. The real purpose of QE is
to drive up the prices of the debt-related derivatives on the banks’
books, thus keeping the banks with solvent balance sheets.
Writing in the Wall Street Journal (“Confessions of a Quantitative
Easer,” November 11, 2013), Andrew Huszar confirms my explanation to be
the correct one. Huszar is the Federal Reserve official who implemented
the policy of QE. He resigned when he realized that the real purposes of
QE was to drive up the prices of the banks’ holdings of debt
instruments, to provide the banks with trillions of dollars at zero cost
with which to lend and speculate, and to provide the banks with “fat
commissions from brokering most of the Fed’s QE transactions.”
This vast con game remains unrecognized by Congress and the public.
At the IMF Research Conference on November 8, 2013, former Treasury
Secretary Larry Summers presented a plan to expand the con game.
Summers says that it is not enough merely to give the banks interest
free money. More should be done for the banks. Instead of being paid
interest on their bank deposits, people should be penalized for keeping
their money in banks instead of spending it.
To sell this new rip-off scheme, Summers has conjured up an
explanation based on the crude and discredited Keynesianism of the 1940s
that explained the Great Depression as a problem caused by too much
savings. Instead of spending their money, people hoarded it, thus
causing aggregate demand and employment to fall.
Summers says that today the problem of too much saving has
reappeared. The centerpiece of his argument is “the natural interest
rate,” defined as the interest rate at which full employment is
established by the equality of saving with investment. If people save
more than investors invest, the saved money will not find its way back
into the economy, and output and employment will fall.
Summers notes that despite a zero real rate of interest, there is
still substantial unemployment. In other words, not even a zero rate of
interest can reduce saving to the level of investment, thus frustrating a
full employment recovery. Summers concludes that the natural rate of
interest has become negative and is stuck below zero.
How to fix this? The way to fix it, Summers says, is to charge people
for saving money. To avoid the charges, people would spend the money,
thus reducing savings to the level of investment and restoring full
employment.
Summers acknowledges that the problem with his solution is that
people would take their money out of banks and hoard it in cash
holdings. In other words, the cash form of money provides consumers with
a freedom to save that holds down consumption and prevents full
employment.
Summers has a fix for this: eliminate the freedom by imposing a
cashless society where the only money is electronic. As electronic money
cannot be hoarded except in bank deposits, penalties can be imposed
that force unproductive savings into consumption.
Summers’ scheme, of course, is a harebrained one. With governments
running huge deficits, who would purchase bonds at negative interest
rates? How would pension and retirement funds operate? Would they also
be subject to an annual percentage confiscation?
We know that the response of consumers to the long term decline in
real median family income, to the loss of jobs from labor arbitrage
across national borders (jobs offshoring), to rising homelessness, to
cuts in the social safety net, to the transformation of their full time
jobs to part time jobs (employers’ response to Obamacare), has been to
reduce their savings rate. Indeed, few have any savings at all. The US
personal saving rate is currently 2 percentage points, about 30%, below
the long term average. Retired people, unable to earn any interest on
their savings from the Fed’s zero interest rate policy, are being forced
to draw down their savings in order to pay their bills.
Moreover, it is unclear whether the savings rate is an accurate
measure or merely a residual of other calculations. With so many people
having to draw down their savings, I wouldn’t be surprised if an
accurate measure showed the personal savings rate to be negative.
But for Summers the plight of the consumer is not the problem. The
problem is the profits of the banks. Summers has the solution, and the
establishment, including Paul Krugman, is applauding it. Once the
economy officially turns down again, watch out.
Paul Craig Roberts was Assistant Secretary of the Treasury for
Economic Policy and associate editor of the Wall Street Journal. He was
columnist for Business Week, Scripps Howard News Service, and Creators
Syndicate. He has had many university appointments. His internet columns
have attracted a worldwide following. His latest book,
The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.
www.paulcraigroberts.org
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