Wednesday, March 25, 2009

Extraordinary Measures

"We have an extraordinary crisis which calls for extraordinary measures." That was the basic theme of Treasury Secretary Timothy Geithner's remarks during his appearance today before the Council on Foreign Relations in New York. The appearance came just before he and President Barack Obama travel to London for the G-20 meeting of the world's leading finance ministers, which begins April 2.

In his remarks, Geithner called for Congress to act quickly on legislation that would give the U.S. Treasury sweeping new powers to seize financial firms whose collapse could jeopardize the American economy. The legislation, which will be sent to Congress this week, is intended to head off another A.I.G. crisis. “One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions beyond banks, but our current regulatory system provides few ways to deal with these risks,” Geithner said.

Secretary Geithner gave a curious set of responses to a question about the role of the U.S. dollar as the world's dominant currency. The issue was first raised earlier this week by a Chinese central banker who seemed to suggest that another currency should be created to replace the dollar. "We are actually quite open to that suggestion," was the essence of Geithner's initial response. But the moderator, recognizing a problem, rephrased the question at the end of the session. Geithner was then more direct, "The dollar remains the world's dominant reserve currency. I think that's likely to continue for a long period of time," adding, "as a country we will do what is necessary to make sure we are sustaining confidence."

Secretary Geithner is much different in person than he seems to be on television. He exudes charm, a quiet confidence, he speaks articulately about complicated financial details and he makes good use of humor. One questioner wanted to know what the total dollar amount was for all the debt facing the banking and financial system. Tilting his head slightly to the side, Geithner gave a deadpan response, "For lots of reasons, that's like a really hard question to answer." As the audience laughed, he went on, "If we knew that number with precision we wouldn't have a financial crisis."

Secretary Geithner claimed there has already been "significant progress" in the markets. He repeated that it will take a long time to restore our economy, and he praised the G-20 for its coordinated efforts to address this crisis.

Remarkably, there was no mention of bonuses at the Council on Foreign Relations session. Yet our nation has been whipped into a populist frenzy over Wall Street bonuses by outraged politicians from both sides of the aisle. In many cases, the rage comes from hypocrites who have consistently benefited from Wall Street's campaign largess. To revise the old adage, "don't bite the hand that feeds you, unless you are a politician!" It is time for calmer heads to prevail.

There are plenty of greedy bankers to blame for our current travails, many having already pocketed large payoffs. They should be made to pay for their misdeeds!

But the overwhelming majority of bankers work enormously long hours building value and fueling the economy. One Wall Street wife said to me, "I have been a single parent for a dozen years; he seldom sees the kids." Yet many bankers are paid a relatively modest salary, typically one that does not cover all their family expenses, with the understanding that they will receive a bonus. Many received stock rewards in their own firm, stock that is now worth a fraction of its value a year ago.

To assess a 90% tax on these bonuses retroactively is grossly unfair as well as unconstitutional. The consequences of such a tax would be catastrophic. It would serve as a deterrent to healthy bank activity. It would force many bankers to file for personal bankruptcy. It would likely drive investment banking overseas. Already most investment bankers spend a good portion of their time polishing up their resumes and looking for work.

These are truly extraordinary times, but this is one extraordinary measure that should be killed. In Secretary Geithner's words, "let's take advantage of the moment for broader reform."

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