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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Geithner's Advice Dismissed in Europe 6 comments
    Sep 17, 2011 7:06 AM

    Thinking about the EU situation, I've been trying to understand their thinking as a group, and wondering if as an American living in a culture of Wild West Financialism I can fully understand how they are thinking about the Greek debt issue and how it might play out. I'm used to a system that goes from crisis to crisis, driven by financialism, with ad hoc solutions provided by emissaries of the financial/government elite.

    Geithner's Act Bombs in Wroclaw

    European finmins at Wroclaw responded poorly to Geithner riding into town with a silver bullet in the form of advice. He took a limo alone, they rode the bus together, per Felix. Most Euroean countries have multi-party governments, subscribe to socialism in the sense they are more prepared to accept greater income equality and the cost of safety nets, and are subscribing to concepts of austerity and monetary stability as a resolution to the GFC. A bureaucrat may be willing to remain a bureaucrat, and leave the pinnacles of finance to others.

    Investing in the Creation of a Greater Whole

    Germans have developed a concept of investing in the development of an important role in a greater whole, as a means of advancing their own welfare, and that of those with whom they co-operate. The cost of German reunification, pulling East Germany out of what the Russians created there. Of course they have nationalists, the same as anywhere else. Very possibly other EU nations subscribe to these ideas, with cultural differences arising from the extent to which they have permitted the excesses of taking more out of government systems in the form of benefits than is put in in the form of taxes.

    Greece is culturally adapted to shaky government finances. The normal form of wealth accumulation is property, since it retains its value (as rents) with currency crashes or changes. Taxes for a majority of citizens are deducted at source and can only be evaded by operating under the table. Professionals and corporations evade taxes as a routine matter.

    Socialism - the Antithesis of Individuality

    Collectively the Europeans are not going to pursue socialism until they run out of other people's money. They will apply ample pressure and patience in an attempt to bring Greece into this framework. If at some point Greek debt has to be restructured, it will be done when sufficient assurances are in place that the Greeks will thereafter balance their budget.

    There was the bit with the transaction tax as a litmus test for co-operation. The transaction tax is pointed at financialism of which the Europeans have an understanding, whether they label it as such or not. So Geithner raises his hand and says nyet.

    An Aside on Financialism

    Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments. Financial instruments – loans, mortgages, stocks, bonds, etc. - are in their original form firmly linked to economic reality: the mortgage finances home ownership; the stock certificate represents ownership of a company that owns physical assets, the bond secures debt incurred to build a factory.

    However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own, a weird shadow dimension, a hall of mirrors, a distorted alternate reality that intersects and reacts with the real economy in unpredictable and destructive ways. George Soros described this phenomenon as “reflexivity.” Derivatives have a lot to do with it. Leverage and the abuse of easy credit are contributing causes. The shadow banking system is a symptom.
     
    Back to the EU

    As an American I have difficulty getting it. Geithner the ambassodor of Wild West Financialism rides into Wroclaw, Europe with a silver bullet, and the citizens dismiss him. Their goal, or project as they might term it, can be met or succeed with or without Greece. Greek citizens collectively have a decision to make, when it is made, the EU will continue with their project.

    When this becomes clear, markets will decompress.

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Comments (6)
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  • Rookie IRA Investor
    , contributor
    Comments (2537) | Send Message
     
    It doesn't sound like Geitner has done a whole lot to make friends and influence people, especially with his quick slap down of the transaction tax idea which is not a bad one and which would probably affect the viability of high speed trading and bot trading.

     

    On the other hand, I always tend to believe that so much of politics is theater, and what is fed to the public bears no resemblance to what goes on behind the scenes. Surely Geitner and his aides can stay at home and pick up the phone any time to speak to Merkel or any of the EU finance ministers and he is not going to say anything off the top of his head for the first time in public. And he must be involved in plenty of discussions behind the scenes.

     

    So why did Geitner ride into town in a coach and horses and all his finery while the others rode on a farm cart pulled by an ass? Maybe just something to do with US security regulations. If the bus had been blown up by a vodka Molotov cocktail thrown by an Pole inflamed by the demise of the zloty, he would have been on the right side of history. It is not so long ago that the entire Polish cabinet was killed in a plane crash thanks to a collective decision to save money and travel together.
    17 Sep 2011, 08:50 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    Author’s reply » Geithner is puzzling me lately. When he announced his scheme to recapitalize the banks, he had done an awful lot of work talking to everyone who had a stake to work out the details and get it right the first time. The result was very good, in terms of making the bank solvency issue go away.

     

    Then with the European crisis, it doesn't seem like he has talked to everybody and developed a full understanding of everybody's stake.

     

    The transaction tax is a natural. To the extent that market problems are created by HFT and algos it would calm things down pretty quick. When Geithner rejects the idea out of hand it shows where he's coming from. He just can't comprehend a system in which government has goals and purposes that are inimical to financial manipulation and speculation. He has spent his entire life working himself into a position of being where it's at.

     

    Don't know if Felix was reading too much into the bus thing.

     

    Like anywhere else, things work best if each member of a group contributes by doing what he does best and providing whatever resources he has that other don't have. One thing the US has right now is liquidity - the Fed is seeing to that. Also credibility, the implied taxing power of the USG has made US currency credible, since we have room to raise taxes if all else fails.

     

    So the US might to well to contribute liquidity and credible firepower in reserve, and let Europe resolve the issue in the proper way. I suspect Tim hasn't been talking to the right people over there.
    17 Sep 2011, 09:08 AM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2537) | Send Message
     
    Maybe not. Phil Davis has met Geitner and on his site described him as very affable, very smart, but not very politically savvy. Incidentally, Geitner's father is known to have been acquainted with Obama's mother in Indonesia, and there is a possibility that the two boys also met at an early age.
    17 Sep 2011, 09:16 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    Author’s reply » Politics is a weak point with me, so posting this instablog is mostly an effort to reality test my observations after spending some time reading French and German newspapers (in English) to try and look at it from their point of view.

     

    You mention Obama, he's a capable politician at a certain level, but I wonder if it reaches as far as the international scene. Rahm Emmanuel, never waste a good crisis, was one to hang up on prospective political donors who didn't mention a big enough number. So Obama coming to power with the assistance of that type of politics may be less capable in a more nuanced environment.

     

    I guess the US has a seat at the table, but maybe a little humility would be in order, the GFC was made in the US, and exported to the rest of the world.
    17 Sep 2011, 09:47 AM Reply Like
  • FrankBn
    , contributor
    Comments (30) | Send Message
     
    Just wanted to tell you, that you passed your reality test - so thanks for a very balanced and thoughtful article.
    Opinions here were quite adverse to Geithner coming over like the elder brother from the big town and telling us what to do, given latest US "achievements"; but this already seems to be yesterday news - now back to day-to-day debt crisis survival mode.

     

    One small note: most europeans wouldn't see their politics as socialism, but as social market economy, which goes back to Bismarck, who was not the first to recognize but the first to establish means required to maintain social harmony in a highly industrialized country. Calling this system socialism is calling it names.
    18 Sep 2011, 09:11 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    Author’s reply » FrankBn,

     

    Thanks for your comment. I wasn't aware of the idea of a social market economy; that is something I can research and try to understand.

     

    Certainly in the US, or at least on Seeking Alpha, we get a lot of extremely polarized discussions of the issues raised by the word socialism, any of these isms are loaded with preconceptions.
    18 Sep 2011, 09:20 AM Reply Like
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