• Sun
  • Dec 21, 2014
  • Updated: 7:29am

The US financial cavalry or captains of confusion?

PUBLISHED : Tuesday, 17 February, 2009, 12:00am
UPDATED : Tuesday, 17 February, 2009, 12:00am

Are you as confused as I am by what I read in the papers these days about the financial crisis? US President Barack Obama has called Wall Street compensation and bonuses 'shameful'. A great start. But he wants to put a pay cap of US$500,000 a year on senior executives of those firms receiving government money.

My question is: why do we need to keep them at all, let alone pay anything? For their 'experience'? The firms they manage imploded on their watch. 'Geniuses' at these companies borrowed short-term money 25-30 times their capital to expand. In a bubble, the gamble paid off. Any two-bit property speculator in Hong Kong knows how to do that. In the end, they crashed because they failed to manage the risks of taking on too much debt - just like the captains of Wall Street.

Timothy Geithner, the new US Treasury secretary, finally acknowledged in his maiden policy speech an elementary truth: 'There were systematic failures in the checks and balances in the system, by boards of directors, credit rating agencies, and by government regulators ...'

Yet we see no mass resignations on those Wall Street boards. Not even a handful.

And has anyone been keeping tabs on how much is needed to pull the world's largest economy out of its freefall? Former Treasury secretary Henry Paulson said his US$700 billion was absolutely necessary, lest chaos ensued. We now find that US$300 billion is yet to be spent.

Mr Geithner all but admitted the absence of proper governance. 'Our work begins with a new framework of oversight and governance of all aspects of our financial stability plan,' he said.

This new plan is to replace the one that lacks transparency and competence. But what is it? Before we even get into the details, I am already befuddled by its size.

Will Mr Obama's rescue package be enough? He keeps hinting that the road ahead will be long and hard. So, does that mean he might need a third stimulus package?

Right now, Mr Geithner is going to create a Financial Stability Trust fund, plus a Public-Private Investment Fund, to 'help get private markets working again'.

What exactly are they going to do, and with whom? The same Wall Street folks saved by public money while paying themselves bonuses? The same titans who insisted that their bonuses came from a 'separate' pool of money?

We may not all have been the best and brightest in our schools, but we do know that money is 'fungible'. You can't separate 'new' soup poured into a pot of 'old' soup. Soup is soup. And horse manure is horse manure.

So, how much is the new rescue really going to cost? I see figures ranging from US$1.2 trillion all the way up to US$10 trillion. We still don't even know exactly why Mr Paulson's plan is not working out and why these two ventures would.

Yet none of this basic information was forthcoming from the new Treasury secretary's maiden speech. The already jittery financial markets hate uncertainty. So, they tanked.

How are we to think of all this? Are we clueless? If so, that would be the good news, since we could comfort ourselves knowing that the world is in capable hands. But what if our confusion reflects the reality of economic thinking at Team Obama?

Mr Geithner is the former head of the New York Federal Reserve Bank, on whose watch Wall Street imploded. Arguably, he is part of the problem. Are we now to expect him to become the solution?

Mr Obama promised to clean up Washington. No more politics as usual. No more incompetence. He has an enormous stock of goodwill from all corners of the world. Global economic stability is highly dependent on a US economic recovery. Yet Mr Obama's economic team is filled with veterans of failed battles. All we have seen so far is a lot of confusion.

Sin-ming Shaw is a private investor and a former visiting scholar at Princeton University

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