Monday, March 30, 2009

Indonesia's Geithner Experience

The G-20 meeting is coming up April 2nd where 44 will face a Chinese led reserve currency revolt, and some increasingly sceptical Euro leaders about his administration's plan for world financial salvation. Part of the reason for the scepticism may be the past track record of his Treasury Secretary, Tim Geithner.  Like a ghost from McGee's closet, Geithner's performance as a Treasury official who wrote the IMF's 1997-98 plan to rescue Indonesia from the Asian financial crises has come back to haunt him.  Australian Prime Minister Paul Keating trashed Geithner's handling of the problem at a public forum in Sydney this month.  According to Keating, Giethner fundamentally misdiagnosed the problem facing Indonesia.  The countries that went to the IMF for emergency loans--South Korea, Thailand, and Indonesia all had sound public financing.  Nevertheless Geithner applied the usual prescription for a current account crisis, emergency loans conditioned on drastically reduced government debt.  That prescription might have been appropriate for Mexico in 1994, but not Indonesia in 1997.  Indonesia was facing a credit squeeze caused by the wave of private capital moving out of the country as the Asian panic got underway.  Keating said the IMF's financial malpractice caused Soeharto's government to loose power:  "Soeharto's government delivered 21 years of 7% growth.  It takes a gigantic fool to mess that up.  But the IMF messed it up.  The end result was the biggest fall in [a nation's] GDP in the 20th century."  As a result of the mess up, no Asian government including China trusts the IMF.  Asian governments only have about a 16% voting share at the IMF, an artifact of the Bretton Woods international financial system.  In response China has decided to build the biggest war chest the world has ever seen to guarantee its solvency independent of the US or the West. 

Apparently not paying his taxes (despite being reminded) was only the opening act of the 'Geithner Experience'.  He is now essentially pushing a taxpayer subsidized (as much as 97%) inflation of toxic asset prices that was rejected by the previous Treasury Secretary Henry Paulson as unworkable.  The proposed auction mechanism is almost guaranteed to produce a price higher than what the secured sludge is worth, because that is what the zombie banks need-- a price close to what the book values are, otherwise they take an equity hit that will finish them at last.  Potential toxic asset bidders like PIMCO also have a vested interest in high auction values because they own the corporate bonds ($100B) of the zombie banks.  High auction prices are bad for taxpayers because it makes it even more unlikely that the securities will ever be sold by the proposed "investment partnerships" at a profit.   Bottom line: Uncle Sam is stuck buying an expensive bag of manure that gets more odoriferous the farther he digs hoping to find a widow's mite at the bottom.