Geithner and Summers: Economic Disaster Deja Vu

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Timothy Geithner’s profanity-laced rant against Sheila Bair and Mary Shapiro for their rational, reality-based concerns about increasing the power of Federal Reserve Bank, as opposed to increasing oversight of the system, should elicit a kind of déjà vu because the scenario has been played before. (Note: Increasing oversight does not mean policy disclosure.)

In 1997-8, Brooksley Born, the head of the Commodities Futures Trading Commission, tried to open a discussion about introducing oversight measures into the OTC derivatives market by producing a memo because she could see that:

“There was no transparency of these markets at all. No market oversight. No regulator knew what was happening,” Born says. “There was no reporting to anybody.”

Summers, Rubin’s deputy (and now director of the National Economic Council), said the memo had “cast the shadow of regulatory uncertainty over an otherwise thriving market, raising risks for the stability and competitiveness of American derivative trading.”

History, in the form of the role these derivatives played in this economic disaster, has proven that she was right to undertake that initiative. Unfortunately, Greenspan, Leavitt, Rubin, and Summers, to name some major players, were effective in pushing legislation that ended the CFTC’s ability to undertake oversight.

Born assailed the legislation, calling it an unprecedented move to undermine the independence of a federal agency. In eerily prescient testimony, she warned of potentially disastrous and widespread consequences for the public. “Losses resulting from misuse of OTC derivatives instruments or from sales practice abuses in the OTC derivatives market can affect many Americans,” she testified that July. “Many of us have interests in the corporations, mutual funds, pension funds, insurance companies, municipalities and other entities trading in these instruments.”

Notwithstanding, her concerns were dismissed and her ominous predictions came to pass.

Geithner is a protégé of Summers.

Is it not an ironic twist of fate, and a testament to Geithner’s blind faith against oversight, that he, like his mentor before him, is assailing intelligent, moral, qualified women for pointing out the  folly of his ways.

{Note: I defer all economic inquiries to our resident expert, Dakinikat.  My interest in the situation is the social dynamic.}

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