is nearly universal agreement that the opening salvo of the Obama
Administration’s campaign to restore health to the financial
system, delivered this week by new Treasury Secretary Geithner,
fell with a loud and ugly thud. The most common criticism is that
the announcement was short on detail. What is abundantly clear,
however, is that the new Administration intends to push spending
back up to pre-crash levels and to fill the entire credit void that
has disappeared into the black hole of the American financial system.
Whether or not the prior levels of spending and lending were justified
by market conditions then, or now, appears to be largely unexamined.
In the worldview of Geithner and like-minded economists,
credit, rather than savings, is the central figure in the economic
equation. Therefore, he sees anything that eases the process of
lending to be an effective economic policy. With such a view in
mind, the centerpiece of Geithner’s plan is the commitment
of up to $1 trillion to revive the collapsed market for securitized
debt. In the lead-up to the Crash of 2008 securitization, more than
anything else, permitted Americans to borrow more than they had
ever borrowed before.
Developed primarily over the last 10 years, securitization
permitted loans of all shapes and sizes to be packaged into investment-ready
securities. The system worked, fueling unprecedented levels of lending
in the home, auto, student, and credit card sectors. But in the
last few years as the collateral underpinning these securities has
collapsed in value, the trillions of dollars of securitized debt
now in circulation has become the toxic sludge at the bottom of
our financial pit. Geithner is making the false assumption that
cleaning up and rebuilding the securitization market is a prerequisite
for a healthy economy.
Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets and Crash
Proof: How to Profit from the Coming Economic Collapse.