Mellon vs. Geithner (Douglas French)
Tuesday November 27th, 2012
Most of America has suffered since the crash of 2007. Property values plummeted, unemployment soared and remained stubbornly high, the use of food stamps continues to set records. Pension plans are going broke and municipalities around the country are teetering on the edge of bankruptcy. All this five full years after the crash.
A federal government stimulus armada led by Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner hurled trillions of dollars at the meltdown. Instead of green shoots, main street seems to be in the middle of seven lean years while Wall Street's short memories inflate bubbles in junk bonds and government debt.
Left to its own devices, the economy's healing powers are extraordinary. For instance, the depression of 1920 was a doozy. Unemployment jumped that year from 4 percent to nearly 12 percent, and GNP declined 17 percent.
Had the likes of Tim Geithner taken over as Treasury Secretary, who knows for how long the pain would have dragged on. But it was not a career bureaucrat that took the job but instead a 66 year old industrialist, Andrew Mellon.
By the summer of 1921, recovery was already underway. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923. By 1926, Treasury Secretary Mellon was able to say, "We are now at a very high tide of prosperity."
Instead of bailouts, Mellow agitated for lower taxes and immediately went to work on peeling away America's bloated post WWI debt. Mellon had built industrial dynasties in oil, steel, shipbuilding, construction, and banking. To take the Treasury job he resigned directorships at 60 companies.
His first day, as Mellon biographer David Cannadine relates, Mellon arrived for work at 8am, an hour before the staff. "Such a thing had never happened in the memory of any of the Treasury's night watchmen."
Mellon knew that if tax rates were lowered on businesses and individuals that money would be reinvested in the economy, creating jobs and promoting economic recovery. But he didn't immediately get all he wanted. The farm bloc stood in the way of most of his tax agenda, but taxes were reduced and over time Mellon succeeded.
At the same time, Mellon was able to whittle down the federal debt that stood at $24 billion when he took office. By 1929 he had reduced it to $16 billion, saving the government millions a year in interest payments. He believed the domestic debt would be extinguished by 1942. A goal the Great Depression postponed.
The Pittsburgh industrialist believed countries like individuals should pay off their debts. To let debts linger was "a sign of debility and denoted an absence of the essential vigor and foresight which insure future success," Mellon said. "It was the policy of the thriftless, the ne'er do-well."
So while Mellon was a financial prodigy, Geithner, is a product of government. He began his career at Kissinger Associates, and then joined the Treasury Department in its International Affairs division. He worked under Larry Summers and Robert Rubin at Treasury and there is some dispute as to which man was the primary mentor to Geithner. Next it was on to the Council on Foreign Relations and then to the International Monetary Fund.
At age 42 he was made President of the Federal Reserve Bank of New York, and then he was nominated to be Secretary of the Treasury. In his public life, Geithner has developed a knack for being in the center of financial crisis, whether at the IMF, NY Fed, or at Treasury.
In March 2008, he arranged the rescue and sale of Bear Stearns. In the same year, he played a supporting role to Henry Paulson,Treasury Secretary and former CEO of Goldman Sachs, in the decision to bail out AIG just two days after deciding not to rescue Lehman Brothers from bankruptcy. Some Wall Street CEOs subsequently expressed the opinion that decisions in which Geithner participated, especially the failure to rescue Lehman, contributed to worsening the global financial crisis. As a Treasury official, he helped manage multiple international crises of the 1990s in Brazil, Mexico, Indonesia, South Korea, and Thailand. Having never worked in the real world of commerce, Geithner is able act out his inner-sociopath at government posts. In his book Bailout, TARP Special Inspector General Neil Barofsky explained that he could get Geithner to meet with him only by threatening to report the secretary's behavior to Congress. When they did meet, Geithner was hostile:
As we parried back and forth, Geithner repeatedly reached a pitch of anger, regaling me with detailed expletive-filled explanations that established my apparent idiocy. He would then calm himself down and give me a forced, almost demonic smile. Barofsky's psychiatrist wife told her husband Geithner might suffer from narcissism, "and therefore might be psychologically incapable of truly admitting that he made a mistake."
Geithner did all he could to shovel money to Wall Street in the wake of the crash in the form of TARP, TALF, PPIP, and who knows what all, and wanted taxpayers to step in to cover bondholders. In her book Bull By the Horns, ex-FDIC Chair Sheila Bair, writes, the Treasury Secretary, "did not want creditors, particularly bondholders, in those large, failing financial institutions to take losses."
Although Geithner circulated rumors to the press that he wanted Bair out as FDIC chair, he never said anything to Ms. Bair to her face. "Tim seldom engaged with me directly, she writes, "the main exceptions being when he was advocating for Citi and needed my help."
Bair admittedly is not a fan of Geithner. She describes the news that Geithner was appointed Treasury Secretary as "a punch in the gut." She "did not understand how someone who had campaigned on a 'change' agenda could appoint someone who had been so involved in contributing to the financial mess that had gotten Obama elected. Tim Geithner had been the bailouter in chief during the 2008 crisis."
If Geithner is the bailouter in chief, Andrew Mellon was just the opposite. As the country sank into depression, Treasury Secretary Mellon told President Herbert Hoover to,
liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate"¦ it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.
And while Mellon spent most of life in the banking business, he didn't want to prop up bankers, he advocated letting weak banks fail in order for the banking system to rebound and prosper.
While Geithner's bailout riot has gone a long way to weaken the dollar, when called on it he has the gall to say. “We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy,” Geithner told the press in 2010, toeing the government line. “It’s not an effective strategy for any country, and it’s not for the US. We’ll never do that.”
While the 59th Treasury Secretary advocated for the gold standard and balanced budgets the current version advocates unlimited government borrowing.
On Bloomberg TV, "Political Capital" host Al Hunt asked Geithner if he believes "we ought to just eliminate the debt ceiling."
"Oh, absolutely," Geithner said.
"You do? Will you propose that?" Hunt asked.
"Well, this is something only Congress can solve," Geithner said. "Congress put it on itself. We’ve had 100 years of experience with it, and I think only once–last summer–did people decide to use it to threaten default on the American credit for the first time in history as a tool for political advantage. And that's not a tenable strategy."
Hunt then asked: "Is now the time to eliminate it?"
"It would have been time a long time ago to eliminate it," Geithner said. "The sooner the better."
The good news is that Geithner is moving on and you might say, "the sooner the better." But, is there a Mellon-like candidate in the wings to champion sound money, lower taxes, and reducing the federal government's $16 trillion debt?
The current consensus pick, Jack Lew, is currently the White House Chief of Staff. Treasury employee Lael Brainard is supposed to be underconsideration. She's an ex-academic who once worked in the Clinton administration. Neal Wolin is also Treasury employee whose career has "mostly been spent in public service." Gary Gensler and Sheila Bair have both been regulators. Erskine Bowles and Roger Altman have worked in and out of Washington D.C. for decades.
Even Facebook's Sheryl Sandberg is an ex-Chief of Staff at Treasury. Larry Fink's resume looks to be unblemished by government service. However, The U.S. government contracted with his company BlackRock to help clean up after the financial meltdown of 2008 and according to Wikipedia, "Fink’s longstanding relationships with senior government officials have led to questions about potential conflict of interest regarding government contracts awarded without competitive bidding."
None of these prospects has the stuff of Andrew Mellon, a man who took the job reluctantly but perhaps stayed too long. While technology marches onward and upward, the value of the dollar and the character of Treasury Secretaries continues to digress apace.
Investors are getting no help for Washington and the "change" candidate isn't changing anything. The government doesn't provide instructions to build wealth in these troubled times.
Addison Wiggin saw all of this coming years ago, writing a New York Times bestseller, Demise of the Dollar and recently followed that up with The Little Book of the Shrinking Dollar. Inside, Addison suggests dozens of ways to protect your retirement from the shrinking dollar.
Both books are available for sale, here.
By now, you know the new Treasury Secretary will take care of Wall Street just as Geithner did. Make sure you take care of yourself, nobody in Washington is.
Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine. Write him.