Timothy Geithner, President Barack Obama’s first Treasury Secretary and chief architect of many of the various and sundry bank bailouts and associated programs carried out during Mr. Obama’s first term in office, recently wrote a book telling his side of ‘the story.’ To be clear, I haven’t read the book and have no intention of doing so. Life is short and the relevant side of the story, the economic consequences of Mr. Geithner’s policies, is the one of interest here. The prevailing storyline in the banker’s ghettoes of New York and London is of an indispensable and functioning financial system saved and a second Great Depression averted through Mr. Geithner’s necessary but unpopular programs to transfer public resources to nominally private corporations— Wall Street banks, in order to save them.
Implied is that the travails Wall Street faced in 2008 – 2009 were the result of ‘natural’ forces and that its restoration is substantially related to restoration of ‘the economy.’ Mainstream economists have put forward variations on this latter claim through repeated assertion that ‘the economy,’ as measured by GDP (Gross Domestic Product) and the official unemployment rate, has ‘recovered’ to pre-recession levels.
Graph (1): Contrary to the view on Wall Street and within the Western economic establishment restoration of Wall Street has not ‘fixed’ the economy. The policies of Mr. Geithner, the Obama administration and the Federal Reserve have ‘fixed’ profits, compensation and bonuses for Wall Street. The drop in median income is evidence of ongoing economic Depression for most citizens of the West. Assertions to the contrary by Mr. Geithner, the Obama administration and the ‘eternal sunshine of the spotless mind’ crowd of Western economists are evidence of whose interests they represent. Apparent in the recovery of financial profits without a recovery in household incomes is that Wall Street doesn’t need a functioning economy to earn ‘profits.’
The other side of ‘the story’ repeatedly put forward as evidence of the success of Obama administration programs to save the banks is the ‘stabilization’ of asset values, mainly financial and housing ‘markets.’ With the recovery in financial asset prices responsible for the recovery in the incomes and wealth of the very rich, a recovery in the fortunes of the poor and middle class, or at least ‘stabilization,’ might seem in order. However, to the point made so eloquently by the late Huey Newton with respect to police existing to protect ‘property,’ the poor don’t own any property. Much of the increase in black wealth of the 1990s and early 2000s came through house prices inflated by predatory loans. Predatory lending has been understood for centuries to be a form of economic looting, hence occasional laws prohibiting it. The entirety of black wealth went up in a puff of smoke with the housing bust that began in 2006. For those who love a good mystery, $6 trillion in housing wealth ‘disappeared’ but the houses remain. So does most of the debt incurred to buy them. That is, housing ‘wealth’ as measured by the stock of houses remains substantially unchanged but somehow $6 trillion of housing ‘wealth’ is no more. On the one hand, this makes intuitive sense— house prices went up in the housing bubble and came down in the bust. On the other, if the houses still exist then the ‘wealth’ still exists. The question then is: where did the $6 trillion go?
Graph (2): Mortgage debt rose with house prices until late 2006. An increasing number of mortgage loans made from 2003 forward were ‘affordability’ products, loans that could only be repaid through rising incomes. These loans began to default en masse within months of being made by 2006. When the Obama administration and economists talk about housing ‘stabilization’ they mean at levels far below the mortgage debt owed against housing for a substantial proportion of the housing ‘market.’ With Mr. Obama’s blessing Timothy Geithner created numerous programs to buy bad assets from the banks at inflated prices while creating phony mortgage ‘relief’ programs designed to tie up desperate homeowners facing foreclosure for years with no intention of providing them with actual relief.
The easy, and misleading, answer to where the money went is the intuitive one— prices rose and then they fell. In an analogy favored by the thoughtful economic mainstream, stock prices also rose and fell by about $6 trillion in the dot-com boom and bust. The difference is that bank loans create a liability, the requirement that loans be repaid whereas (un-leveraged) stocks can rise and fall without incurring a liability. History is full of debt ‘holidays’ where debts were wiped out en masse because they couldn’t be repaid. Debt forgiveness has been a fundamental part of social reconciliation for centuries and indebted corporations regularly use it in loan ‘workouts.’ But Mr. Geithner, again with President Obama’s knowledge of the specifics of the programs he was creating and awareness of alternatives including this history of debt forgiveness, resisted all efforts to force the banks to bear the consequences of their predatory lending or to use public funds— the bailout money, to extinguish these odious debts. In fact, billions of dollars of government funds dedicated to providing modest mortgage ‘relief’ went unspent by Mr. Geithner. So, to the question of where the $6 trillion went— the banks, or rather government agencies at this point, have on their books un-extinguished debts owed against the houses the money was borrowed to purchase. The houses remain substantially as they were, over nine million people have lost ‘their’ houses to foreclosure and only the tiniest minority, the one-half of one percent, of the West’s richest have seen economic ‘recovery.’
Graph (3): Due largely to the rise in financial asset prices engineered through government guarantees of Wall Street banks and Federal Reserve policies designed to inflate them, total net worth in the U.S. is today at all time highs. This compares with the decline in house prices and their ‘stabilization’ at lower prices. Stated differently, incomes and net wealth fell off the proverbial cliff for the overwhelming majority of the citizens of the West in the last six years. The ‘recovery’ in both incomes and wealth has been confined to tiny minority of the already rich. Given the high concentration of equity (stock market) ownership, money owed to the banks resulting from their predatory lending practices is largely owed to this tiny minority of the super-wealthy. To be clear, this is a direct result of Obama administration policies, not the residual effect of ‘the economy’ that Mr. Obama inherited.
The generally made assertion that Mr. Obama made the best of the economic mess that he inherited ignores both the genesis of ‘the mess’ and the different paths that his administration could have taken to address it. ‘The mess’ is of bipartisan origin but the Democrat Party starting with Bill Clinton and the DLC (Democratic Leadership Council) were its prime motivators. For those with only vague recollection of whom Mr. Geithner is, he and ex-Obama chief economic advisor Larry Summers came from the (Bill) Clinton White House. As acolytes of former Goldman Sachs banker turned Clinton Treasury Secretary Robert Rubin Messrs. Geithner and Summers were instrumental in pushing bank deregulation and in keeping the financial derivatives used by Wall Street to loot municipal, state and national governments around the globe unregulated. After his stint as head of the New York Federal Reserve, including during the run up to and through the Wall Street unpleasantness of 2008 – 2009, one could reasonably conclude that Mr. Geithner had proven himself incapable of competently doing anything, anywhere, ever. And before concluding that Mr. Obama is blameless in Mr. Geithner’s reign of financial terror against ordinary citizens with his sequential programs designed to ‘foam the runway’ with their economic misery for the benefit of Wall Street, Mr. Obama repeatedly sided with Mr. Geithner in internal battles where better ideas were offered and the well-being of the citizenry would not have been needlessly put at risk.
The point about the missing $6 trillion finds easy answers from mainstream economists where it shouldn’t. The answer that housing market value ‘disappeared’ while housing debt remains requires dissociating the rise in housing prices due to predatory lending from the housing ‘bust’ that followed. In other words, as the rise in financial profits (Graph (1) above) suggests, the banking ‘system’ has suffered few if any negative effects from the loss of $6 trillion that it made predatory loans against while the borrowers remain on the hook for the entire fiasco. In the last year or so banks have been offering to ‘refinance’ underwater mortgages up to 150% of the value of a house under yet one more Obama administration ‘mortgage relief’ program. To be clear, the offer is only up to the amount that people already owe on their houses. In other words, the Obama administration continues to guarantee that banks will be repaid the value of the predatory loans that they made on the backs of the people who took the loans. This is an incredibly, stunningly, irredeemably bad deal for those taking the new loans. Thanks to Clinton / Bush / Obama administration programs financial profits are as high as they ever have been and thanks to Obama administration programs alone people owe essentially what they did in 2006 on houses worth $6 trillion less. Much of the housing ‘recovery’ to date has come through hedge funds using free money from the Federal Reserve— monetized inflated financial asset values, to buy foreclosed houses from the banks that took them for pennies on the dollar. By posing this as a ‘market’ outcome Western economists attribute to nature the specific actions of specific people, most notably prominent Democrats in the Obama and Clinton administrations.
Rob Urie is an artist and political economist. His book Zen Economics is forthcoming.