The Sydney Morning Herald
March 7, 2009
Obama's Economic Saviour Savaged As Keating Lets Rip
by Peter Hartcher
When Barack Obama announced his champion to rescue the world
from economic ruin, it was the first time most Americans had
ever heard the name Tim Geithner.
The initial impression was good. The stockmarket surged and the
pundits swooned. "Exactly a decade ago, he was Uncle Sam's
golden-boy emissary sent into the stormy centre of what was then
the world's worst financial crisis [the Asian crisis]," reported
The New York Post.
The paper gushed: "Just 36 at the time, he'd been raised in Asia
and knew the culture so intimately he scored successes and won
confidences that other diplomats couldn't match. Geithner earned
widespread plaudits for pulling together quarrelling Asian
finance ministers into a $US200 billion rescue of their
"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst,
Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of
Obama's political rivals, the hard-bitten Republican senator
Richard Shelby, agreed Geithner was "up to the challenge".
If anyone in the US media had thought to ask a former Australian
prime minister for his assessment, they would have heard a
different view. And they would not have been so surprised at
Geithner's performance since.
In a speech to a closed gathering at the Lowy Institute in
Sydney on Thursday, Paul Keating gave a starkly different
account of Geithner's record in handling the Asian crisis: "Tim
Geithner was the Treasury line officer who wrote the IMF
[International Monetary Fund] program for Indonesia in 1997-98,
which was to apply current account solutions to a capital
In other words, Geithner fundamentally misdiagnosed the problem.
And his misdiagnosis led to a dreadfully wrong prescription.
Geithner thought Asia's problem was the same as the ones that
had shattered Latin America in the 1980s and Mexico in 1994, a
classic current account crisis. In this kind of crisis, the
central cause is that the government has run impossibly big
The solution? The IMF, the Washington-based emergency lender of
last resort, will make loans to keep the country solvent, but on
condition the government hacks back its spending. The cure
addresses the ailment.
But the Asian crisis was completely different. The Asian
governments that went to the IMF for emergency loans - Thailand,
South Korea and Indonesia - all had sound public finances.
The problem was not government debt. It was great tsunamis of
hot money in the private capital markets. When the wave rushed
out, it left a credit drought behind.
But Geithner, through his influence on the IMF, imposed the same
cure the IMF had imposed on Latin America and Mexico. It was the
wrong cure. Indeed, it only aggravated the problem.
Keating continued: "Soeharto's government delivered 21 years of
7 per cent compound growth. It takes a gigantic fool to mess
that up. But the IMF messed it up. The end result was the
biggest fall in GDP in the 20th century. That dubious
distinction went to Indonesia. And, of course, Soeharto lost
Exactly who was the "gigantic fool"? It was, obviously, the man
who wrote the program, Geithner, although Keating is prepared to
put the then managing director of the IMF, the Frenchman Michel
Camdessus, in the same category.
Worse, Keating argued, Geithner's misjudgment had done terminal
damage to the credibility of the IMF, with seismic geoeconomic
consequences: "The IMF is the gun that can't shoot straight.
They've been making a mess of things for the last 20-odd years,
and the greatest mess they made was in east Asia in 1997-98, so
much so that no east Asian state will put its head in the IMF
China, in particular, drew hard conclusions from the IMF's
mishandling of the Asian crisis. It decided that it would never
allow itself to be dependent on the IMF, or the US, or the West
generally, for its international solvency. Instead, it would
build the biggest war chest the world had ever seen.
Keating continued: "This has all been noted inside the State
Council of China and by the Politburo. And it's one of the
reasons, perhaps the principal reason, why convertibility of the
renminbi remains off the agenda for China, and it's why through
a series of exchange-rate interventions each day that they've
built these massive reserves.
"These reserves are so large at $US2 trillion as to equal
$US2000 for every Chinese person, and when your consider that
the average income of Chinese people is $US4000 to $US5000, it's
50 per cent of their annual income. It's a huge thing for a
developing country to not spend its wealth on its own
Is this some flight of Keatingesque fancy? The former deputy
governor of the Reserve Bank of Australia, Stephen Grenville,
doesn't think so: "After the Asian crisis, the countries of east
Asia decided that they would never go to the IMF again. The IMF
is taboo in east Asia. Look at the evidence. The revealed
preference of the region is that no one has gone to the IMF
since, even when they needed the money."
And Asian capitals know that they have no real influence over
the IMF - while European governments enjoy 40 per cent of the
voting power on the IMF, Japan, China and the rest of east Asia
put together have only about 16 per cent. This is an artefact of
the immediate postwar power structure, when the IMF was set up.
Keating urges that the fund should be decapitated, with control
passing to the governments of the Group of 20 countries whose
leaders are to meet in London on April 2. The summit, which is
to include China, India and Indonesia as well as Australia, is
meeting to consider solutions to the global crisis.
As for The New York Post's claim that Geithner was the hero who
cajoled those quarrelsome Asians into agreeing to a $US200
billion rescue, the key fact burned into the minds of Asian
elites is that the US was deaf to requests for funds. Washington
did not contribute a cent of its own money to any of the
emergency packages. Japan and Australia were the only nations
that made loans to all three of the stricken Asian countries.
Keating went on to argue that, by frightening the Chinese into
building their vast $US2 trillion foreign reserves, Geithner was
responsible for the build-up of tremendous imbalance in the
world financial system. This imbalance, in turn, according to
Keating, contributed to the global financial crisis which has
since devastated the world economy.
China invested most of its reserves in US debt markets. Keating
again: "So we have this massive recycling of funds into the
system by [the former US Federal Reserve chairman Alan]
Greenspan's monetary policy so even if you are greedy Dick Fuld
[the former head of the collapsed investment bank Lehman
Brothers] or you are hopeless Charles Prince at Citibank, you're
being told there's an endless supply of money at a low interest
rate and no inflation. So of course the system geared up to
"That is the fundamental cause of the problem - the imbalance is
the fundamental cause."
If Keating's opinion of Geithner had circulated in the US, the
Americans would not have been so surprised and disappointed with
their new Treasury Secretary. They quickly learned that he had
failed to pay $43,000 in taxes owing.
Then, when he announced his much-anticipated plan to rescue the
US banking system, share prices slumped by 4 per cent
immediately and a new round of weakness in the financial sector
began. The pundits turned savagely against him: "So much for the
saviour-based economy," wrote Maureen Dowd of The New York
Times. Senator Shelby changed his mind: "Aggravating economic
problems by contributing to marketplace uncertainty about what
steps the Government will take - is that what this is?" he fumed.
US bank stocks weakened so much that nationalisation seems to be
the only remaining option to put them quickly out of their
Australia's banks, by contrast, are strong, said Keating,
because of his decision as Treasurer to create the "Four
Pillars" policy. This requires that the four big banks remain
separate, barred from taking each other over. This prevented
them "cannibalising each other", in Keating's words. As
protected species, they had no need to mount risky takeovers to
bulk themselves up defensively.
Their strength certainly wasn't due to the brilliance of their
managers, whom Keating described as "counterhopping clerks" who
had managed to work their way up the bank hierarchies. A further
source of the soundness of the Australian banks, he said, was
that they had learned well the lessons of risky speculative
lending as a result of "the recession we truly did have to have".
In sum, Tim Geithner is a gigantic fool, the IMF the gun that
can't shoot straight, Alan Greenspan a bungler. The big US banks
were run by the greedy and the hopeless, the Australian banks by
counterhopping clerks. It's a world of many villains. And only