Tim Geithner

Bad ones shouldn’t.

I recently read an embarrassingly naïve blog post by an economist criticizing the Obama administration and Tim Geithner of the Treasury for their export strategy of doubling strategy over the next 5 years. The blogger’s take was that you cannot increase exports without softening the dollar {making exports relatively cheaper}, at least in the short run, and that that makes no sense to him. Huh?

Well, I’m no fan of Geithner and his policies, but I’m also not a fan of handwaving economics that makes observations at the 50,000 foot level and ignore complexity and the role of organizations and strategy.

First off, I tend to agree with Fortune reporter Nin-Hai Tseng, who says that devaluing the dollar is a bad idea and that the problem with the dollar these days is its volatility. Travelling in Canada with an Visa card with a US-based bank, Wells Fargo, I got to see first hand how volatile the US dollar can be with respect to its northern counterpart. Such volatility makes business decisions riskier and much of my doctoral dissertation way back when demonstrated how at the organizational level, operational volatility has a negative effect on brands, accounting profits, and stock price.

This week, one of this big G20 concerns is currency wars, particularly in the wake of the “quantitative easing” plans by the US Federal Reserve that is pumping $600B into the economy over the next 8 months. Well, the idea is in the short run to stimulate exports, although with a “currency war”, other nations attempt to devalue their currencies to do the same. What’s the bottom line, in terms of what’s going on now? Tseng reports::

“Who knows how low the dollar might fall, but so far the drop of its value has accelerated with the second round of quantitative easing. After reaching a one-year high on June 7, the dollar weakened 7.5% against a basket of major currencies through the end October, and a whopping 18% against the euro.

All the while, the outlook for U.S. exports looks strong as household incomes grow in emerging economics including China, India and Brazil grow. In September, U.S. exports climbed to the highest level in two years, increasing by 0.3% to $154.1 billion, the US Commerce Department reported Wednesday. This helped narrow the trade deficit by 5.3% to $44 billion.

It’s true that exports only make up about 12% of the US economy, but with GDP growth so anemic, the trend in exports might actually add to growth in the short-run.”

A big issue is increased protectionism, although it should be noted that the “quantitative easing” is a form of trade barrier in that it devalues the US dollar, and increased tariffs and protectionist policies that inhibit trade could erase any export gains and cause the economy to slump further. A weakened dollar also makes imports more expensive, which could allow for increased import substitution, where buyers buy {and hire} domestically {as opposed to outsourcing}.

From an organizational point of view, a critical factor in an international business strategy is the delivery of value in global markets. Sure, currency devaluation helps, but it’s not the only factor, which is my beef with overly-generalized statements by economists. I feel that North American competitiveness, given relatively high wages and standard of living, is contingent on developing markets that leverage distinctive competencies and exports of new innovations and technologies. Rather that quibble with the South Koreans about allowing gas-guzzling US-manufactured vehicles to be exported, I’d much rather see increased focus and spending on the development and market development of US innovations. I’d like to see Canada do the same, increasingly shifting from natural resources towards increased value-added, technology, and innovation, using alliances and networks to jumpstart competitiveness, particularly in areas such as medical {red} biotech.

In the short-run, the “quantitative easing” might allow exports to pump some much-needed growth into the economy and at this point, anything helps. Does this make no sense? I think it actually does make sense, but I doubt if the Obama administration expects to fuel a doubling of exports with a weak dollar strategy for years and years.

Twitterversion:: [blog] Economist criticizes Obama/Geithner for export and dollar devaluation policies. Dismal science or dismal intellect? @Prof_K

There are two relatively recent articles on US Treasury secretary Tim Geithner. One is in The Atlantic, which is more critical, while the one in the New Yorker is more sanguine. The above video is from The Atlantic talking about Geithner’s svengali appeal and Jedi-mind-trick abilities—except with Wall Street and those in the public who know him and what he does. Inside the beltway, it sounds like he’s a veritable David Watts in many circles. This is pure Erving Goffman à la The Presentation of the Self in Everyday Life.

Ironically, he’s become a target of both conservatives who think he’s been too tough on the banking sector and the left who think he should have moved towards nationalizing the banks. He allegedly got the Treasury secretary job because of a good interview with Barack, despite being in the running with his old boss, Lawrence Summers, and the stalwart Paul Volcker, a Carter appointee who helped get the economy under control under Ronald Reagan’s watch.

The biggest problem I have with Geithner’s approach is that he’s operating under the assumption that there is nothing unsound about the capital markets and is seemingly ignoring the fact that there are structural issues with the US economy that can keep the nation in recession for years. Geithner is reluctant to do anything drastic, such as nationalizing the banks {a last-resort strategy}, because he’s afraid that this will effect a policy change that will have enduring consequences. So, while he’s content with a supply-side bailout with a jobless recovery—employers are working their employees harder, there’s a reluctance to get to the heart of the matter. The oligarchies of the banking sector ran aground with their policies and this needs to be addressed. The banks and the politicians have been systematically allowing for the concentration of power, which was accelerated in Clinton’s second term and continued W. MIT professor Simon Johnson, an IMF chief economist with experience with emerging market crises echoes the sentiment that the banking sector needs to be scrutinized to say the least. Geithner’s response is that the US economy is not an emerging one, but I say that all bets are off given the structural changes going on with permanent middle-class job losses and the productivity wave being over. His remarks may go down in history as the heights of arrogance, particularly if the US economy languished like Japan’s since 1990. There are parallels between Japan then and the US now, which should be examined.

A year ago, apparently Obama himself was playing pollyanna with Geithner in hoping the US would grow itself out of the recession. The economic sturm & drang and bailout drama played out over the course of the year and Obama has stood behind Tim, through thick and thin. A cautious, measured approach has been the code of the day with the aim of patching together the economy and nor falling prey to populist temptations to mete out justice, mediæval-style à la Marsellus Wallace.

While much of the framing of managing the economy has been couched in terms like vengeance against the greedy Wall Street robber barons and how that affords political capital, the reality is that he’s a centrist. Barack’s faith in Tim Geithner is somewhat telling. More telling is how the Obama administration has done so little to frame the Geithner agenda and to “sell” the policy and from a marketing and PR perspective, change this ain’t. More problematic is the fact that I don’t think these policies are going to help the US economy recover. Sure, the Geithner plan stemmed the hemorrhaging of public funds and served up a cosmetic recovery on the cheap, but is this so much window-dressing on an economy that still geared towards concentrating power and wealth AND subject to similar meltdowns without increased regulatory oversight? I feel there are structural issued that need to address failpoints in how financial intermediaries are managed, which need to be addressed in order to prevent future meltdowns and fully restore the faith in US capital markets.

Twitterversion:: No love for Treasury secretary Tim Geithner? PR #fail, but are policies fiddling while Rome burns? #ThickCulture @Prof_K

Song:: The Jam-‘David Watts’

Years ago, I once had a conversation with an economist who freely admitted that there was no unified macroeconomic theory.  What works versus what doesn’t work in a particular sociopolitical context is really just so much spitballing.  This never surprised me given the complex realities of global capitalism.

I’ve been genuinely perplexed by Barack Obama and Tim Geithners’ macroeconomic policies regarding managing the US through this Big Recession.  So, today’s news that the administration was extending the $700B financial bailout until next October came as no surprise.  I was reading a very interesting blog post on The North Star National, “As Obama and Geithner continue Bush’s too-big-to-fail fiasco, blue may turn red in 2010,” which contextualized Obamanomics.  The right is blasting the Obama Administration for Keynesian statist interventionism, while the left, including fellow Democrats in Congress, is getting increasingly impatient with the lack of Keynesian stimulus.  Who’s right?

Well, the fact of the matter that in terms of economic policy, precious little has changed since the heady deregulatory days of Bill Clinton when the economy was flying high.  What has changed is the economy itself.  Valuations of assets have often been distorted and instruments and markets were allowed to be developed in ways that underestimated or distorted the risks.  Of course, nobody expects the Spanish Inquisition, so many were caught off-guard when the house of cards fell and the asset bubble burst.  How did this happen?  Only a select few know that the house of cards of the economy was built with a stacked deck.  In the aftermath, the economy languished and unemployment rose.  All the while, the meter was running with Team America, World Police, with surge on the way.

So, while billions are being pushed towards the “too big to fail,” what’s being ignored are::

1. Job creation, as double-digit unemployment sweeps the nation
2. Consumer debt forgiveness/restructuring
3. A restoration of faith in financial intermediaries

While Wall Street got theirs, I’m concerned that “Main Street” is left high and dry.  The danger is a negative feedback loop, where unemployment not only leads to more consumer debt, bankruptcies, foreclosures, and lower consumption and savings {further tightening credit}, but less tax revenues.  Less tax revenues at the federal, state, and local levels.  Unless the economy turns around soon, the next crisis will be the local governments with the critical services they provide saying the well is dry.

Recently, I saw Joe Biden doing a song and dance on the Daily Show::

Readers in Canada can see the interview here in a link to the full episode on the Comedy Network.

Biden claimed that the bailouts were necessary to prevent a fully-blown depression.  I’m not convinced.  The NorthStarNational blog makes reference to a report that is very critical of the Obama/Geithner approach.  The preface starts out with this::

“The Obama administration has implemented several policies to “jump-start” the U.S. economy. Two core premises are thatmonetary measures are required to strengthen the financial system before the rest of the economy can recover, and that most major banks have a temporary liquidity problem induced by malfunctioning financialmarkets.The administration’s efforts have largely focused on preserving the financial interests of major banks. Research Associate Éric Tymoigne and Senior Scholar L. Randall Wray believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses—re-creating the financial conditions that led to disaster will set the stage for a recurrence of the Great Depression or a Japanese-style ‘lost decade.'”

What are the answers?  At the risk of sounding populist, there needs to be real job creation on a large scale and deficit be damned.  Oh, and about Afghanistan and its hefty pricetag…

Twitterversion:: #TimGeithner& #Obama extend fin.bailout, but w/unemp% in double-digits, what about consumer spending, savings, & tax rev? http://url.ie/3yv5 @Prof_K

Song:: The Hold Steady-“Stuck Between Stations”