Undernews For November 6, 2008

The news while there's still time
to do something about it

THE PROGRESSIVE REVIEW
611 Pennsylvania Ave SE #381
Washington DC 20003
202-423-7884
Editor: Sam Smith

6 November 2008

WORD

If you're seeking progress, all presidents are the opposition. You're just fighting different kinds of battles - Josiah Swampoodle

PAGE ONE MUST

GREAT MOMENTS WITH LARRY SUMMERS

In 1991, Larry Summers - now reputed to be high on Obama's appointment list - signed a memo when he was vice president and chief economist of the World Bank concerning the handling of pollution in less wealthy lands. When an excerpt of the memo was leaked, more than a few people became upset. Summers initially took responsibility for the memo but claimed it was satirical. Later, blame for writing the memo was taken by aide Lant Pritchett. Pritichett went on to lecture at the Harvard Kennedy School and Summers went on to be president of Harvard.

If the memo was in fact intended to be humorous, whoever wrote it didn't understand that humor used again the poor and defenseless is not satire but ridicule and bigotry. The fact that Summers thought it funny should disqualify him from any government position.

The excerpt:

|||| 'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons:

1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.

3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.

The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization. ||||

While Summers and Pritchett survived the memo incident, the Brazilian secretary of the environment was not as fortunate. He was fired after writing to Summers:

"Your reasoning is perfectly logical but totally insane. . . Your thoughts [provide] a concrete example of the unbelievable alienation, reductionist thinking, social ruthlessness and the arrogant ignorance of many conventional 'economists' concerning the nature of the world we live in. . . If the World Bank keeps you as vice president it will lose all credibility."

Composer John Halle has memorialized this seedy memo and the Brazilian official's reply with a musical number performed by the Sequitur Ensemble, Kristin Nordeval and Dora Ohrenstein, sopranos.

FOLLOW THE MONEY

Lawrence Summers, mentioned as a possible Treasury Secretary, is a managing director at the hedge fund D.E. Shaw Group.

Robert Rubin, mentioned as a possible Treasury Secretary, has been temporary chair of Citgroup (and a current director) and co chair of Goldman Sachs. He also was a founder of the conlib economic group, the Hamilton Project.

Top Obama advisor Valerie Jarrett was a member of the board of the Chicago Stock Exachange from 2000 to 2007 and was chair from 2004-2007

Top Obama advisor John Podesta has a lobbying firm that has represented BP, Lockheed Martin, National Association of Broadcasters, Novartis Vaccines and Diagnostics, Sunoco and Wal-Mart

Bill Daley, advisor to the transition team, is mid west chairman of JP Morgan Chase.

Rahm Emanuel, whom Obama selected to be chief of staff, earned, according to Fortune magazine, $18 million between 1999 and 20002 working as a managing director for the investment banks Dresdner Kleinwort Wasserstein

Tim Geithner, a possible Treasury Secretary, is head of the NY Federal Reserve. His first boss was Henry Kissinger and he has close ties to the Wall Street players.

John Corzine, now governor of New Jewrsey and possible Treasury Secretary and CEO of Goldman Sachs before Hank Paulsen staged a coup and got rid of him

Richard Holbrooke, mentioned for Secretary of State, is vice president of Perseus, a major private equity firm. He was a member of the board of AIG until July when he resigned. He has also been vice chair of Credit Suisse First Boston, and managing director of Lehman Brothers.

Other names dropped:

John W Rogers Jr runs a mutual fund company in Chicago where Obama spent much of the day after the election.

Otto Kramer is a financier at Boston Provident.

Robert Wolfe is an investment banker and CEO of UBS Americas

Mark Gallogly is a private equity expert who funded the firm Centerbridge after working at Blackstone.

Jim Torrey is a fund manager.

Brian Mathis works for the Provident Group

Frank Brosens runs Taconic Capital Advisors

Josh Gotbaum formerly with Lazard Freres

WHAT SORT OF ECONOMISTS DO WE GET?

Greg Mankiw's Blog - I was struck yesterday by an excerpt from an interview with economist James Galbraith:

But there are at least 15,000 professional economists in this country, and you're saying only two or three of them foresaw the mortgage crisis?

Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?

It's an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

Like his late father, Galbraith the younger is highly critical of mainstream economics. This is noteworthy in part because Galbraith is listed as an Obama economic adviser. One of the more telling things to look out for in the coming weeks (assuming the seemingly inevitable Obama victory) will be which economists get which jobs in the new adminstration. Will the important positions be filled with people like Austan Goolsbee and Jason Furman, who are essentially mainstream economists with slightly left of center political views, or with heterodox economists like Galbraith who are deeply skeptical of the economics found in most textbooks? If the administration is filled with prominent members of both groups, the internal battles over the heart and soul of the new administration's economic policy should prove fascinating to watch.

PALIN SPENDING SPREE WORSE THAN WE THOUGHT

Newsweek - Newsweek has learned that Palin's shopping spree at high-end department stores was more extensive than previously reported. While publicly supporting Palin, McCain's top advisers privately fumed at what they regarded as her outrageous profligacy. One senior aide said that Nicolle Wallace had told Palin to buy three suits for the convention and hire a stylist. But instead, the vice presidential nominee began buying for herself and her family - clothes and accessories from top stores such as Saks Fifth Avenue and Neiman Marcus. According to two knowledgeable sources, a vast majority of the clothes were bought by a wealthy donor, who was shocked when he got the bill. Palin also used low-level staffers to buy some of the clothes on their credit cards. The McCain campaign found out last week when the aides sought reimbursement. One aide estimated that she spent "tens of thousands" more than the reported $150,000, and that $20,000 to $40,000 went to buy clothes for her husband. Some articles of clothing have apparently been lost. An angry aide characterized the shopping spree as "Wasilla hillbillies looting Neiman Marcus from coast to coast," and said the truth will eventually come out when the Republican Party audits its books. . . McCain himself rarely spoke to Palin during the campaign, and aides kept him in the dark about the details of her spending on clothes because they were sure he would be offended. Palin asked to speak along with McCain at his Arizona concession speech Tuesday night, but campaign strategist Steve Schmidt vetoed the request.

NOTE: THIS IS NOT AN OLD STORY

New York Times - Tensions between American forces and the Afghan government over civilian casualties from coalition air strikes spiked again on Wednesday with a report by Afghan officials that a missile from a United States aircraft killed 40 civilians and wounded 28 others at a wedding party in the southern province of Kandahar. Afghan officials said casualties from the air strike on Monday included women and children. The United States military command said it was conducting an urgent investigation with the Afghan Interior Ministry. Although the command's statement made no mention of a missile strike or any death toll, it appeared to acknowledge the possibility that noncombatants had been killed. . .

The episode in Kandahar followed others this year in which American airstrikes in some of the war's most hotly contested battle zones killed civilians. The report of the missile strike, in Shah Wali Kot, a rural district north of the city of Kandahar, prompted a renewed protest from the Afghan president, Hamid Karzai, who referred to the episode at a news conference on Wednesday that was called to congratulate Senator Barack Obama on his election victory.

'The fight against terrorism cannot be won by bombardment of our villages,' Mr. Karzai said. 'My first demand from the U.S. president, when he takes office, would be to end civilian casualties in Afghanistan and take the war to places where there are terrorist nests and training centers.'

In one of the worst cases of civilian deaths by an American strike this year, an attack aimed at a meeting of Taliban insurgent leaders on Aug. 22 killed at least 33 civilians, according to a Pentagon inquiry. Other investigators said the numbers were much higher. According to an Afghan parliamentary investigation, an airstrike in July in the eastern province of Nangarhar also struck a wedding, killing 47 civilians, including the bride.

BARACK BAGGAGE: RAHM EMANUEL

Naftali Bendavid, Chicago Tribune - Rep. Rahm Emanuel might not appear at first glance to be the obvious choice to serve as White House chief of staff for a president-elect who has spoken eloquently of setting aside partisan differences and bringing the country together.

Emanuel, after all, is best known as something of a Democratic political assassin. From his days as a top aide to President Bill Clinton to his recent role leading the Democrats to a House majority, Emanuel has relentlessly attacked his foes and gone ruthlessly after anyone who stood in his way

Perhaps the possibility is not as jarring as it might seem. For one thing, precisely because Obama seems likely to adopt a unifying posture as president, he may need someone practiced in the art of political hardball.

Republican strategist John Feehery-who worked for former House Speaker Dennis Hastert and Minority Leader Bob Michel, as well as former House Majority Leader Tom DeLay-said Emanuel could help prevent House Democrats from overreaching.

"Rahm is really smart," Feehery said. "He understands that if Obama goes too far to the left, it's not going to be good for the Democrats. I think he's the kind of guy who can knock some heads and help Obama guide the Congress toward the middle. I think that will be the goal. You will need a bad cop to Obama's good cop, and Rahm will fill that role quite nicely."

Emanuel's policies, unlike his politics, have always been centrist, very much in the mold of Clinton. In addition, a different Emanuel has emerged in recent years, one who has forged friendships with Republicans and shown an ability to work with them on occasion. . .

Along the way, Emanuel earned a reputation for a colorful intensity unusual even in the hard-hitting world of politics. His profanity is legendary and seems designed in part to throw his interlocutors off-balance. As a young political operative, he once joined other youthful colleagues in mailing a dead fish to a Democratic pollster with whom he'd had a falling out. . .

After his White House stint, Emanuel returned to Chicago in 1998, making several million dollars as an investment banker. That gave him the financial freedom to mount a hard-fought race for Congress in 2002.

When Nancy Pelosi tapped Emanuel to lead the Democratic efforts to recapture control of the House in 2006, a certain mellowing and maturation became apparent. To be sure, Emanuel continued to browbeat anyone he considered an obstacle-steamrolling weaker Democratic candidates in favor of stronger ones, for example, or engaging in legendary battles with party Chairman Howard Dean, not to mention launching all-out war against GOP candidates.

But Emanuel also showed an ability to cajole, flatter and even stroke his stable of Democratic hopefuls, going so far as to send them Eli's cheesecake when they'd scored a political success. His rants became more selective, deployed as much for effect as out of true frustration. . .

Fox News - "It's just another indication that despite the attempts to imply that Obama would somehow appoint the wrong person or listen to the wrong people when it comes to the U.S.-Israel relationship . . . that was never true," said Ira Forman, executive director of the National Jewish Democratic Council. Forman said Obama's selection of Emanuel helps build confidence that the United States will be vigilant in responding to any threats to Israel posed by Iran. . .

Here and around the world, the selection brought swift reaction. The Web site for the Israeli newspaper Haaretz on Wednesday was filled with articles on what an Obama presidency would mean for Israel. The top story, on Emanuel, noted his deep Jewish roots.

Emanuel is the son of a Jerusalem-born doctor who worked for the Israeli underground before the nation's creation following World War II. The congressman belongs to an orthodox congregation in Chicago and worked as a volunteer in Israel during the first Gulf War.

Though Obama was accused of being conciliatory toward Iran and toward Palestinians during the presidential race, an Emanuel appointment could combat those perceptions. . .

At a 2003 pro-Israel rally in Chicago, Emanuel told the marchers Israel was ready for peace but would not get there until Palestinians "turn away from the path of terror," according to the Chicago Tribune.

Wikipedia - During his original 2002 campaign, Emanuel "indicated his support of President Bush's position on Iraq, but said he believed the president needed to better articulate his position to the American people."

Lynn Sweet, Chicago Sun Times - Emanuel has a rare resume: He knows the White House and congressional operations up close and understands the Hill, the White House and the press, and how they all fit together. He has another big attribute, said a source: "He knows how to kick ass and take names."

Ali Abunimah, Electronic Intifada - Emanuel is Obama's first high-level appointment and it's one likely to disappointment those who hoped the president-elect would break with the George W. Bush Administration's pro-Israel policies. . .

Rahm Emanuel was born in Chicago, Illinois in 1959, the son of Benjamin Emanuel, a pediatrician who helped smuggle weapons to the Irgun, the Zionist militia of former Israeli prime minister Menachem Begin, in the 1940s. The Irgun carried out numerous terrorist attacks on Palestinian civilians including the bombing of Jerusalem's King David Hotel in 1946.

Emanuel continued his father's tradition of active support for Israel; during the 1991 Gulf War he volunteered to help maintain Israeli army vehicles near the Lebanon border when southern Lebanon was still occupied by Israeli forces. . .

In Congress, Emanuel has been a consistent and vocal pro-Israel hardliner, sometimes more so than President Bush. In June 2003, for example, he signed a letter criticizing Bush for being insufficiently supportive of Israel. "We were deeply dismayed to hear your criticism of Israel for fighting acts of terror," Emanuel, along with 33 other Democrats wrote to Bush. The letter said that Israel's policy of assassinating Palestinian political leaders "was clearly justified as an application of Israel's right to self-defense."

In July 2006, Emanuel was one of several members who called for the cancellation of a speech to Congress by visiting Iraqi prime minister Nouri al-Maliki because al-Maliki had criticized Israel's bombing of Lebanon. Emanuel called the Lebanese and Palestinian governments "totalitarian entities with militias and terrorists acting as democracies" in a 19 July 2006 speech supporting a House resolution backing Israel's bombing of both countries that caused thousands of civilian victims.

Emanuel has sometimes posed as a defender of Palestinian lives, though never from the constant Israeli violence that is responsible for the vast majority of deaths and injuries. On 14 June 2007 he wrote to US Secretary of State Condoleezza Rice "on behalf of students in the Gaza Strip whose future is threatened by the ongoing fighting there" which he blamed on "the violence and militancy of their elders." In fact, the fighting between members of Hamas and Fatah, which claimed dozens of lives, was the result of a failed scheme by US-backed militias to violently overthrow the elected Hamas-led national unity government. .

Over the course of the campaign, Obama publicly distanced himself from friends and advisers suspected or accused of having "pro-Palestinian" sympathies. There are no early indications of a more balanced course.

Bits Blog - After a number of years of being Barack Obama's enforcer, and years before that working at the Clinton White House, Rahm Emanuel has been named WH Chief of staff, and we find that John Podesta has been running things for Obama for several months. . . The one thing, however, missing in all the articles on the topic is how this loading up of the usual Democrat suspects, represents 'change'. Its' a point the paper notes: "Mr. Emanuel's taste for bare-knuckle politics is a stark contrast to the next president's image as a conciliator, but an ability to bang heads can help maintain internal discipline."

"He is as smart as a fox and tough as nails, and is one of the savviest political minds that I have ever known," said Rep. Chet Edwards, D-Waco. "I have no doubt that he is smart enough to adjust to the culture of an Obama operation. . . "Rahm Emanuel stands for everything that Obama was saying is wrong with Washington, but he's very competent," said Mr. Edwards, the former congressman.

David Sirota, Huffington Post, September 16, 2008 - Emanuel -- one of the original architects of NAFTA -- wants congressional Democrats to pass controversial NAFTAs with Colombia, South Korea and Panama right now, so as to avoid inevitably stronger opposition from his own party in the next Congress.

To really fathom how incredible this is, understand that Emanuel -- the Democratic leader -- is effectively acting as the House Republican whip. He's saying that he wants these bills up for a vote because there are enough Republican votes right now in the House to pass it over current Democratic objections -- and there won't be enough GOP votes in the next Congress.

How many polls have to come out showing that the vast majority of Americans do not want their jobs and wages crushed by hacks like Emanuel? And how come Democrats are led by con artists who spent their White House career shilling for Wall Street, then cashed in as an investment banker, then bought a congressional race, only to go back to Washington to continue his corporate crusade over the dead body of his own caucus?

Naftali Bendavid, Chicago Tribune, November 2006 - Rahm Emanuel was seething. He was hurtling down an asphalt road in upstate New York on the 47th trip of his ferocious campaign to win back the House. A lecture, even from his friend James Carville, was the last thing he needed.

In just 12 days, Emanuel's quest would end in a historic victory--a triumph that almost no one believed possible when he accepted the challenge nearly two years ago--or in colossal failure.

And here were Carville and pollster Stan Greenberg telling him he had to make each of his handpicked candidates shift from attack mode and strike a conciliatory note in their final campaign ads.

"James. No James, YOU LISTEN," Emanuel barked into a cell phone, about to release a string of profane invectives more intense than usual. "Can you listen for one [expletive] minute? I'm working these campaigns all the time. The campaigns all have different textures."

His wiry body tensed, his voice breaking with stress. Emanuel shouted, "If you don't like what you see, I highly recommend you pick up the .. phone and do it yourself."

The moment captured Rahm in full, a portrait in power of a brutally effective taskmaster. . .

The Republicans always had killers on their side, ruthless closers like Karl Rove, Tom DeLay and Lee Atwater, the late mudslinging mastermind credited with getting the first President Bush elected. In Emanuel, Democrats had their counterpart, a tactician of a caliber the party had not seen since the young Lyndon Johnson converted the DCCC into a power base. . .

On a late-spring day in 2006, Emanuel and Charles Schumer, the New Yorker in charge of winning the Senate for the Democrats, walked into the office of party Chairman Howard Dean. Emanuel, once again, was ready for a fight.

For months, he and Schumer had been imploring the iconoclastic former presidential candidate to channel more money into congressional campaigns. Dean had been pushing a "50-state strategy" to build a Democratic operation in every part of the country.

The national party usually spent millions to help House candidates, but Dean was instead using the money to build this far-flung operation, to Emanuel's immense frustration. He felt Dean's strategy wasted money in unwinnable places. . .

Ridiculing the effort, Emanuel told Dean that he had seen no sign of it. "I know your field plan. It doesn't exist," he recalled saying. "I've gone around the country with these races. I've seen your people. There's no plan, Howard."

The tongue-lashing was another example of how Emanuel took a sledgehammer to intra-party niceties, making plenty of enemies along the way.

The gravitational center of Democratic antagonism toward Emanuel was the Congressional Black Caucus. Many of the caucus' 43 members complained that Emanuel had not hired enough African-American staffers. They also protested that when he harangued lawmakers to pay their DCCC dues, he did not recognize how hard it was for black politicians, many of whom represented poorer areas, to raise money. The protests often erupted into shouting matches. "If a person says, 'Danny Davis, where are your dues?' I may have a particular difficulty getting my dues that you don't know about or you don't relate to," Rep. Danny Davis, the West Side Democrat, said last summer. "Rahm don't take no prisoners."

Emanuel was privately contemptuous of such complaints. He saw the Black Caucus as one more party faction, like conservative Democrats, that would rather complain than work. Asked about the number of black staffers at the DCCC--two African-Americans were on his senior staff of about 10 people--he waved his hand dismissively. "You know that every [DCCC] chairman has faced the same criticism?" he said. "OK. So I don't give a [expletive]," he added, literally spitting. . .

NAMES ON THE LIST: TIM GEITHNER, POSSIBLE TREASURY SECRETARY

Gary Weiss, Portfolio, June 2008 - As president of the Federal Reserve Bank of New York, Geithner, at least at this point in early April, is the man of the moment. Credit-crunched investment bankers are calling to withdraw funds from the discount window, which the Fed uses to loan money directly to banks. Nosy politicians are trolling for scapegoats. Journalists are asking what will happen next. . .

Geithner was the central figure in that drama. It was Geithner's Federal Reserve bank, not the Treasury, that came up with the $29 billion loan that made the deal possible or, more precisely, acceptable to J.P. Morgan. Geithner brought the parties together, hashed out the details, and demanded answers when things got shaky. It was a heady role for a non-economist who has, to put it kindly, only on-the-job training in the financial markets and who relies on an A-list inner circle. Officially, his advisers include the board of the New York Fed, which counts several heads of financial institutions as members. Unofficially, he has built an impressive career with the help of a number of kingmakers, including some with a financial interest in the industry he oversees.

It was in this office, right here, where the Bear deal was done. During that time and in the weeks after, Geithner was getting two hours of sleep a night, and he still looks it. You might even say that this youthful 46-year-old is starting to look his age. The sudden fame clearly unnerves Geithner, a quiet sort who is described by people who know him as shy. "He does not try to blow you away, to overwhelm you," says Henry Kissinger, Geithner's first boss. . .

"We're going to need to change a whole bunch of aspects of our financial system," Geithner says, speaking quickly and leaning forward in his chair. "We should not have a system that's this fragile, that causes this much risk to the economy."

The reform process has started creaking forward, with a wide-ranging (and swiftly dismissed) series of proposals by Treasury Secretary Hank Paulson. Meanwhile, Geithner has begun sending teams of examiners to the major investment banks to pore over their books and risk-control policies. Since the Bear blowup, he has also been urging bankers to boost their capital levels.

It has become something of a Wall Street parlor game to try to figure out why Geithner got as involved as he did in the Bear mess and whether he was had by crafty bankers. Geithner insists that the Bear deal benefited the public and not just the other big banks, who stood to gain from their competitor's going out of business. (Granted, it did help the banks, assuaging fears of an industry wipeout.) The implicit message is, Weep not for Bear but for what could have happened to the rest of us if it hadn't been saved. Geithner is impatient with-and a bit teed off by-talk that he is pushing the Street's agenda. "The Fed's actions in this financial crisis will benefit Main Street more than they benefit Wall Street," he asserts. He is certain that calamity was averted and that the people who gain most from the deal are not bankers but "the family who needs to borrow money to finance a house or send their child to college, or the individual trying to build enough savings for retirement, or the worker worried about losing her job."

That sounds like campaign rhetoric, but Geithner is an avowedly apolitical independent-contrary to the assertion of one columnist that he was an adviser to John Kerry in 2004-and has served under both Republicans and Democrats. But he's going to have a hard time remaining above the political fray, certainly in this election year, when, given the weak federal response to the subprime-mortgage crisis, the Bear Stearns bailout may anger voters.

Questions linger as to whether Geithner, who's supposed to represent the public interest, ended up with the best possible deal. He's an experienced negotiator, having wrangled with foreign powers during his days at Treasury, but some critics contend that he may have been outmatched by Jamie Dimon, J.P. Morgan's chief executive, and Alan Schwartz, Bear's C.E.O. "He doesn't really have what you would describe as a banking or financial background. He's never taken risk, never worked as a trader or in credit, or even had operational responsibility in a bank," says Chris Whalen, a vocal critic of the Fed and a managing director of Institutional Risk Analytics, a consulting firm.

After the Bear deal, the Fed wound up with $30 billion in collateral, mostly in the form of subprime-mortgage securities. Even Paul Volcker, the former Fed chairman who served on the search committee that picked Geithner and who still holds him in high regard, has expressed queasiness about the way the deal was structured. In a speech to the Economic Club of New York, Volcker said the Fed took actions that "extend to the very edge of its lawful and implied powers, transcending certain long-embedded central-banking principles and practices." Volcker later leavened this harsh assessment a bit, telling me that the Fed's intervention "was a proper action, but it was extraordinary-something that's never been done before, in terms of calling upon that emergency power. It tells you how seriously they took it."

Still, misgivings about the deal are hard to ignore, no matter how catastrophic the consequences of not intervening might have been. It doesn't help that the deal is teeming with connections that are sure to raise questions. Dimon is one of the three class-A directors of the board of the New York Fed, and its head is Stephen Friedman, a former Goldman Sachs chairman, who still sits on the investment bank's board. The New York Fed's board also includes Richard Fuld of Lehman Brothers, a firm that is another oft-rumored potential candidate for a bailout. Fuld is a class-B director, meaning that he is elected by member banks, astoundingly, to represent the public. (Friedman is also supposed to be looking out for you: He was "appointed by the board of governors to represent the public.") Thus Geithner reports to a board that is composed of people who are not only under his purview but would also benefit from any potential bailouts. The structure of the New York Fed's board bears more than a passing resemblance to that of the New York Stock Exchange in the bad old days, when member firms, regulated by the N.Y.S.E., were heavily represented on its board.

Even more intriguing is Geithner's informal brain trust, loaded with Wall Street luminaries. Since coming to the Fed in November 2003-recruited by then-New York Fed chairman Pete Peterson, co-founder of the Blackstone Group-Geithner has learned the ways of the financial industry at the feet of some of its biggest legends. He was almost immediately taken under the wing of Gerald Corrigan, a gregarious former New York Fed chief who is now a managing director of Goldman Sachs. Corrigan describes his relationship with Geithner as close, and it has flourished since Geithner's first days at the Fed. Another frequent adviser-"you don't want those things to get too formal," Corrigan notes-is also a preeminent banker, Merrill Lynch C.E.O. John Thain, a Goldman alumnus and former head of the N.Y.S.E. Over the years, Thain has often talked to Geithner-"sometimes I talk to him multiple times a day," Thain says. Geithner's network also includes former Fed chairman Alan Greenspan, an old acquaintance, as well as the heads of the European central banks, hedge fund managers, academics, and his immediate predecessor, William McDonough, architect of the 1998 Long-Term Capital Management bailout and now a vice chairman of Merrill.

Geithner's link to Corrigan will be especially crucial in the months ahead. Corrigan was recently asked by a presidential policy group to form a panel charged with finding ways to protect the financial system. The group is expected to release its findings by the end of July-a rapid but necessary pace if the Street is to have an effective voice in whatever may be done to tamp down risk. . .

Corrigan says that they "talk about everything under the sun," except for monetary policy. "He brings in groups of people. That includes, at times, some of his old Treasury buddies," like former secretaries Larry Summers and Robert Rubin. "As I said, he has really worked at this networking thing I keep talking about."

Of course, these aren't exactly chitchats among people who meet casually at some South Street Seaport bar after work. This is networking between a central banker and the heads of the capital-hungry investment firms over which he holds sway. You might argue that Geithner's relationship to his charges is even closer than the typical regulator's. No other regulatory agency is in a position to loan crucial billions to the entities it monitors. . .

Naked Capitalism, April 2008 - Steve Waldman, who took the trouble to read and parse an attachment to Timothy Geithner's presentation that set forth the terms and conditions for the operation of the LLC that will [manage Bear Stearns assets]., focuses on the disclosure that some of these assets included related hedges, which are derivatives. More important, Waldman concludes that the Fed isn't on the hook for just $29 billion but could wind up stumping up more:

"It's official. The LLC that the Fed and J.P. Morgan recently formed to manage $30B Bear Stearns assets has taken over a portfolio of derivative positions along with those assets. Those positions involve both rights to receive and obligations to pay whose value may depend upon both circumstance and counterparty quality. Of course, if liabilities associated with those positions ever exceed the value of the LLCs assets, the limited liability company could declare bankruptcy, so in theory, the Fed's maximum exposure is $29B. But, if, out of reputational concern or to promote systemic stability, the Fed would inject capital rather than let the LLC default, then the Fed has indeed become a counterparty of last resort."

Looking simply at the behavior of the main actors, Michael Shedlock concludes these instruments can't be all that hot. From Shedlock:

"This is galling. Everyone is praising the quality of the assets offered to the Fed as collateral, but JPMorgan would not take them outright. Why not? And while the Fed is on the hook for fallout from those assets, what about the other assets JPMorgan picked up for next to nothing? What are those worth? Was JPMorgan acting like a 'responsible corporate citizen' or a vulture financing corporation?"

Geithner is generally very well regarded, yet I have come to the view that as head of the New York Fed, he was in a position to have seen what was going awry, yet remained blind alternative courses of action.

He gave a very long speech, parts of which seemed designed to run out the clock so as to reduce the time available for questions (does the panel really need a discussion of the history of the Fed?). Read this section, which came at the beginning:

"This was a period of rapid financial innovation-particularly in credit risk transfer instruments such as credit derivatives and securitized and structured products. There was considerable growth in leverage, greater reliance on ratings on structured credit products and a marked deterioration in underwriting standards.

"The innovation in financial products was accompanied by a dramatic increase in the amount of financial intermediation occurring outside the core banking system. The importance of securities broker-dealers, hedge funds, and mutual funds in the financial system rose steadily. Off-balance-sheet vehicles of various forms proliferated, and increased concentrations of longer-dated assets were held in funding vehicles with substantial liquidity risk."

In a speech he gave a bit more than a year ago, Geithner covered much the same ground (without the road kill details we now have) framed more positively, and pointed out that only 15% of the non-farm credit extension was via banks. We noted at the time:

"Geithner has no objective foundation for his rosy view. He has essentially admitted the Fed and other regulators lack a complete, or even good, picture of what is happening. We've had money supply growth well in excess of GDP growth, and loose monetary conditions can obscure underlying weaknesses. His argument boils down to, 'Our current structure and distribution of risks is outside the bounds of anything in financial history. We can muster some arguments as to why this should be OK, and so far, it has been OK.' I don't find that terribly convincing."

And in that speech, he in effect said it was OK for regulators to supervise only in the most minimal way: We cannot turn back the clock on innovation or reverse the increase in complexity around risk management. We do not have the capacity to monitor or control concentrations of leverage or risk outside the banking system. We cannot identify the likely sources of future stress to the system, and act preemptively to diffuse them. . .

How can you "encourage" behavior changes among parties you don't regulate? Where you don't have enough of a view of what they are doing to even suggest where they might need to trim their sails? Yet today, the Fed's and Treasury's message to Congress was: we withstood this test, the system works, butt out. They should consider the warning of General Phyrrus: "One more such victory, and we are lost."

READER COMMENTS

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CAN WE TALK ABOUT THE REAL OBAMA NOW?

You couldn't even wait one day could you? It must have been a real joy for you to find so many negative things about Obama. You must be so proud having dirt on everyone in politics. What a guy. - David Morton Phoenix

Don't burst my bubble just yet, Sam. I am basking in the fact the Bush era is over. - Love, Beth

Sounds good to me. I'd vote for him. - Steve

He called the late Paul Wellstone "something of a gadfly." Well, he was. And I'm from Minnesota.

Hence the enormous emphasis on meaningless phrases like hope and change.

Hope is never meaningless. In fact, a lot of the times it is all I have on my side. When you can win an election espousing a supposedly empty idea like hope, what does that say about the state of hope?

Maybe the real question that we ought to be looking at is, does this election ending with our first black president give a large group of people reason to hope again? And more importantly, will this motivate them to agitate for change? And of the utmost importance, why do we continue to ignore the idea that we must not simply cast our ballots and leave our hope and motivation at the ballot box?

Agitate for others to change, to be sure, but make certain that you change yourself first. No one likes a hypocrite. Gandhi accomplished so much in his life. Why do we ignore the philosophy Obama was espousing, albeit most likely unbeknownst to him? "You must be the change you want in the world."

This is the opportunity to show that we have better ideas, better solutions, things that will work for everybody, not just a few. Obama did get one thing wrong in his speech last night, it isn't "Yes, we can", rather, "Yes we will because we must!"

Live together as brothers or perish together as fools. Be the change you want in the world. Don't let our moment pass us by because we are too busy squabbling over details. - Dave

Obama sold out on nearly all issues of principle, but he had to sell out to beat the other evil guy. The lesser of two evils won. Another victory for lesser evilism.

As Chris Floyd so eloquently put it, when Obama decides to nuke Iran, attack Pakistan, or enter a full-blown world war with Russia, his supporters will suck it up and say "You can trust Obama; he's too cool and rational to go off half-cocked the way Bush would. If he says we need to do this, then you know that it's been well thought-out and the right thing to do."

Progressive Review is my favorite online news source. I check it every day. But I have to disagree with you on the potential impact of this campaign.

In 2000 I voted for Nader. I touched the screen for Kerry in 2004, but couldn't bring myself to donate or put a sticker on my car.

This time I got caught up in the Obama campaign because: Bush has been ruinous; Hillary would have lost to McCain; and I was impressed with Obama's books and his campaign organization. McCain's choice of Palin spurred my wife and I to donate as much as we could to Obama and to put our shoulders to the wheel for his election. The thought of Caribou Barbie at the helm was quite motivational.

My wife spent a month as a full time volunteer in rural Virginia while I pitched in on weekends and for the final 4 days. While no shots were fired or crosses burned, there is certainly a parallel to the success of the Obama campaign in Virginia with the brave work of those who went south for Freedom Summer over four decades ago.

We helped turn Virginia blue. In a conservative town where the Confederacy is still celebrated and members of a reactionary Catholic colony repeatedly taped pictures of aborted fetuses on our office door, a diverse coalition came together to work for Obama. After calling, leafleting, entering data and emptying the trash, I was proud to be with a group of Americans, black and white, gay and straight, old and young, rich and poor, to celebrate that together we can make a difference. When word came that Obama had won we shook the old beauty shop that was our hq with our cheers and tears.

Sam, your cynicism surprises me. I agree that that, at best, the political impact of the Democratic shift remains to be seen. But you underestimate the effect on our political culture that Obama's victory represents. Yes, he has kowtowed to Israel and the Clintons, embraced nuclear power and rejected gun control. Could he have won if he had done differently? Yes, he has friends on Wall Street. Could he hold office if he didn't? Are his politics revolutionary? No, because there is no market for such a revolution. Is he a successful brand? Yes, and that is how our politics work, whether you and I like it or not.

Your comment on boomers being motivated by the spirit of Baez and King misses the point. People did try to get King to run - he couldn't because J. Edgar Hoover had tapes of him having sex with women to whom he was not married. But it was the boomers who focused on culture and left the field open to the reactionary politics that have dominated our country since Reagan. To elect a pragmatic progressive who wants to be an effective politician isn't postmodern in a negative sense. It's simply realistic.

This election is one positive step toward incremental change. Being inspired and charged up and committed to change is one important step to making change happen. Were you, as a young man, as skeptical of Kennedy's potential as you are of Obama's? He too used his life narrative and books he (claimed to have) authored as stepping stones to power. Obama actually wrote books that people actually bought and read, a positive change for political authors and readers alike.

Like Michelle Obama, who is my age, I for the first time in my adult life have real hope for my country. I know that we will all have to pitch in to make it happen, but I am ready. After all, it was Kennedy's call to ask what we can do for our country that helped legitimize the boomer demands for change which, in turn, opened the doors for what Obama's campaign has wrought.

Have we changed the world, just a little? Yes we did. Get with the program, Sam. Let's work to make the Obama Administration one of which we can be proud.

Gosh, Sam, now you tell me. Thanks for that!

"Can we talk about the real Obama now?" Yes we can.

Politics in the USA is functioning perfectly. Once again, the energies of dissent have been successfully steered into that dead-end known as the Democrat Party. Just as Clinton's sanctions and daily bombings in Iraq's "no-fly zones" resulted in a million civilian deaths on eight years, any similar genocide on behalf of Obama will have the support of most of his supposedly antiwar cult.

Bless you all! I would have voted for Cynthia McKinney myself - don't see how you can get anywhere without breaking the two-party bind. But it's not my problem, I am not a citizen of your amazing country. - Axel

I agree Obama was an anomaly because he wasn't pandering to his base. This was only possible because McCain was (thankfully) so inept and because (horrifically) Bush was just so so so bad.
But that is what I want. I want a prudent man who will be conservative when that works best and liberal when that works best. I'm one of those guys who thinks that there are no real answers to government -- just situations that need to be fought out always in a dynamic balance. Obama is my guy. . . The fact that he's extremely intelligent and a scholar of the constitution and federalist papers, even better. - Gary B

In 2012 when we're faced with Obama vs. Palin, none of us are going to vote for Palin regardless of what Obama does in the next four years. And he knows it.

Write on! We need see our leaders as they are. If he had not put himself first and promoted himself to the top - he would never have been nominated. Unfortunately, only politicians make it to the White House. It is possible when he clears the "blank screen," he will reshape some of his positions if the grassroots that worked so hard for him starts making noise now, and makes it clear that support for a second term will depend on how well he listens. - Steve D

This country is not "liberal" (or progressive or what ever.) A real liberal would never get elected. Look what happened to McGovern. What happens to Kucinich when he tries to run. Even FDR wasn't all the liberal.

I used to consider myself very conservative. But the rest of the country has sprinted past me to the right so far that I am now a leftist.

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