Bailing Out the Bucket Shops
by William Quirk

President Obama’s policy of trying to reinflate the bubble—see TAIF (an effort to revive securitization) and Public Private Investment Group (an effort to make taxpayers finance purchases of rotten assets from banks)—is a bad idea. Remarkably, his administration has not even proposed dealing with the cause of the problem—the “naked” credit default swaps. Today, CDSs are traded as secretly as ever. Some standard types, if the parties choose, may pass through a nonguaranteeing clearinghouse—a pitiful half-step to appease critics.

The current system has a bad design. We need to simplify and separate the banks’ utility functions from casino activities that should be carried on elsewhere. In February MIT professor of economics Simon Johnson said, “Are you going in with the bankers or are you being tough with bankers? They [the administration] don’t want to upset the banking industry and that’s the heart of it.”

Presidents get to choose—they can pick conventional or unconventional advisors. Given the current financial crisis, when it comes to economic advisors, you would not think the President would appoint the guys who wrecked the train—Summers and Geithner—to fix it. President Obama picked Larry Summers, a former Harvard president, to be the head of his White House National Economic Council. The President says he meets with Summers every day. Is Summers likely to give unconventional advice? Well, on April 3, the White House reported that in 2008 Summers earned more than $5 million from a hedge fund and $2.7 million in speaking fees from Wall Street companies. The speaking fees included Goldman Sachs ($135,000), Citigroup ($45,000), J.P. Morgan ($67,500), and the now-defunct Lehman Brothers ($67,500). White House spokesman Ben LaBolt said the compensation did not represent a conflict of interest and really was not surprising since Summers is “widely recognized as one of the country’s most distinguished economists.” Maybe, although it is not unreasonable to suspect that he would naturally want to preserve a system that has richly rewarded him. Every President gets the advice he wants. President Obama’s problem is that his choice is conventional. Summers’ policy of reinflating the bubble won’t work; the public is past it.