Geithner Review

I found quite interesting Matt Stoller's review of Treasury Secretary Tim Geithner's book at vice.com.  Matt read between the lines of the personal part of the book, and the glimpse it offers into the lives and career paths of well-connected people in our Eastern finance-government-academia establishment. There still is such a thing.

I haven't read the book, as I find Geithner's all-bailout, all-the-time view of finance rather simplistic. And I don't endorse all the review's contrary economic ideas either. The review is also bit personal, a tone I don't endorse. Cronyism is a disease of a government and polity which elects it, not supposed moral failings of specific individuals. We will not build a better government by hoping that good-looking well-mannered Dartmouth grads will voluntarily turn down opportunities for power, priviledege and wealth that land in their laps through family and school connections.

The review points to a very nice multi-authored article, "The Value of Connections In Turbulent Times" by Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak, and Todd Mitton, using stock price reactions to measure the value of insider connections.

The announcement of Tim Geithner as President-elect Obama’s nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for …nancial …firms with which he had a personal connection. This return was around 15 percent from day 0 through day 10, relative to other comparable …financial fi…rms. ... Roughly in line with market expectations, the Obama administration hired people from Geithner-connected fi…rms into top level fi…nancial policy positions.... We argue that this value of connections refl‡ects the perceived impact of relying on the advice of a small network of …financial sector executives during a time of acute crisis and heightened policy discretion.

This tale has a strong lesson for how "resolution authority" will work out. Better keep your private cell phone contact list up to date.

This reinforces a larger point, which my colleagues Luigi Zingales and Raghu Rajan have been making for a while (here and here), among many other voices. The antagonist to free markets in our time is not state control or bureaucratic socialism. It is crony-capitalism, a system that relies on large private companies, but under detailed government control,  government favors dispensed in return for political support and buckets of money, arbitrary prosecutions and regulatory "crucifixion" (to borrow a term from an infamous EPA staffer) awaiting those who speak out or don't play along.

One last point on Tim Geithner's career. We lost a wonderful opportunity. If the Treasury Secretary can't fill out Turbo-Tax correctly, surely it is time to simplify our tax code. Alas, the crony state demands an absurd tax system, so that brief moment vanished.