Change on Economy?

TIMOTHY CANOVA
Canova is professor of international economic law at the Chapman University School of Law in Orange, California.

He said today: "The selections of Larry Summers as chair of the
National Economic Council and Timothy Geithner as Treasury Secretary
are disappointing. Although President-elect Obama has referred to their
'sound judgment and fresh thinking,' when it came to the issue of
deregulating banks and derivatives, both Summers and Geithner have
shown very poor judgment and old thinking. Summers, as Treasury
Secretary in 1999, was shoulder to shoulder with Robert Rubin and Alan
Greenspan in sweeping aside the Glass-Steagall Act provisions from 1933
which had kept commercial banking and insurance separate from
securities and the casino economy. A year later, Summers was behind the
legislation that was signed by Bill Clinton to shield derivatives from
federal regulation. What made the deregulation of derivatives
particularly outrageous was that it came on the heels of the meltdown
of the Long-Term Capital Management hedge fund because of its
speculation in the derivatives markets.

"As a result of such deregulation, the market for derivatives has
exploded in size and volatility. Credit default swaps, with a notional
value of more than $50 trillion, helped bring down AIG, an insurance
giant that has required more than $150 billion in taxpayer support. The
market for exchange rate and interest derivatives is even bigger, at
least $500 trillion in face value. What's needed is a central clearing
exchange with the authority to set capital requirements and margin
requirements for credit derivatives. Geithner, as president of the New
York Federal Reserve Bank, has been talking about such a clearinghouse
for the past two years. Six months ago, Geithner promised to have such
a clearinghouse in place by the end of this year. But there is no
evidence that there has been much action, even though Geithner has used
this time to negotiate multibillion-dollar bailouts and deals
associated with the collapse of Bear Stearns, Lehman Brothers, AIG, and
now Citigroup. Even with the kind of leverage the New York Fed has
enjoyed, Geithner has been unable, or unwilling, to impose a central
clearinghouse on derivatives. No wonder the stock market reacted
favorably to the initial news of his nomination. Perhaps Wall Street is
hoping that little will change with Geithner at Treasury.

"At a time when the pleas of General Motors and other carmakers for a
$25 billion federal bridge loan are being closely scrutinized, Wall
Street continues to enjoy the endless financial support of the New York
Federal Reserve Bank, and with no strings attached. For Wall Street
firms, there have been no limits on executive compensation or dividend
payments, no commitments by the banks to maintain their lending levels
to industry and homeowners, and unlike in Britain and elsewhere, no
public officials have been appointed to their oversight boards. Hedge
funds and derivatives remain unregulated, and many billions (perhaps
trillions) of dollars in toxic assets remain hidden in
off-balance-sheet accounting shells.

"Supporters of President-elect Obama will be tempted to embrace the
experience argument, and it is true that Geithner and Summers have lots
of experience at crisis management and doling out bailout funds to
their Wall Street clientele. However, there are others with plenty of
experience who have actually showed sound judgment and fresh thinking,
including economists like Joseph Stiglitz, Paul Krugman, James
Galbraith, and Dean Baker, and financiers like George Soros. The
selection of Geithner and Summers to top administrative posts rewards
past failure and protects special interests. It also sends the wrong
message to those who thought they were voting for change."

Canova's articles related to the current crisis include the piece " The Legacy of the Clinton Bubble," and the recent "Massive Stimulus May Be Needed to Stem Crisis" for the Wall Street Journal.

A recent video interview is available online.
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