Friday, March 20, 2009
Discharge Incapable Commanders
Steve Forbes knows the situation and the fundamentals better than I do. And I agree with his findings. They tried and failed. Fire them. Discharge Incapable Commanders - Forbes.com: President Obama should take a cue from his hero, Abraham Lincoln. During the Civil War Lincoln never hesitated to fire generals he thought weren't up to the task. Obama should do the same thing with his economic commanders. Clearly Treasury Chief Timothy Geithner has been about as effective in fighting the credit crisis as George McClellan or Joe Hooker were in fighting Robert E. Lee's Army of Northern Virginia. Geithner has been in the midst of this crisis since it erupted in the summer of 2007. You would think he'd have been ready for decisive, bold action as soon as Obama took the oath of office. Instead, he has discouraged markets with his vague generalities. Why hasn't he persuaded the President to do away with the debilitating accounting principle of mark-to-market? Roosevelt suspended it in 1938, but it came back under the auspices of the Bush Administration. With that political pedigree, getting rid of it should be a no-brainer. More substantively, mark-to-market has been demolishing financial balance sheets with book losses. Banks have more cash than ever before, but their regulatory capital (the amount of capital required by regulators for industries like banks and life insurance) is continually being eviscerated by lawsuit-fearful auditors and stupidly aggressive bank regulators. As Brian Wesbury and Robert Stein said on Forbes.com, "The accounting rules force banks to take artificial hits to capital without reference to the actual performance of loans." Another high-ranking officer who should be reprimanded is the new SEC chairman, Mary Schapiro. Why hasn't she assertively sought the reimposition of the uptick rule concerning short-selling? And why hasn't she vigorously enforced the prohibition of naked short-selling? Previously short-sellers had to wait for a stock to go up in price before trying to hammer it. Now the uptick road bump is gone, thanks to the SEC's repeal (based on faulty research) in July 2007. It's no coincidence that since the repeal market volatility has gone berserk. Why is Schapiro reluctant to crack down on naked short-selling? After all, short-sellers, including exchange-traded funds, are supposed to borrow the shares before they sell them. Lincoln fired McClellan for "the slows," the same affliction besetting Bernanke. Another figure who should suffer a Lincoln-like termination is Federal Reserve Chairman Ben Bernanke. This seemingly quiet, unassuming man has made just about every mistake possible in both creating and dealing with the crisis. His latest blunder is astonishing: Contrary to impression, the Fed has been tightening, shrinking its balance sheet by nearly $400 billion since December. In the face of the most severe banking/insurance crisis since the 1930s, the squeeze absolutely defies belief. This would be like a fire department deciding to roll up some of its hoses when a big house is a flaming inferno. Bernanke says he fears future inflation, but that's like those firefighters being afraid to cause water damage to the furniture. Right now we're in a bone-crunching deflation. Bernanke's actions recall those of the Fed during the early years of the Depression, when our central bank wouldn't ease in the face of a catastrophic contraction for fear of igniting a German-style inflation.