The Geithner Saga Continues

[Corlyss_D]

Fighting Geithnerism

"If companies fail, you need to let them fail," former SEC Chairman Richard Breeden told the Senate Banking Committee yesterday. Mr. Breeden went on to trash almost every premise behind Treasury Secretary Timothy Geithner's year of bailouts. "We seem to have policymakers who either don't understand it or are afraid to use it," he said of Chapter 11 of the bankruptcy code.

Turning to Mr. Geithner's latest idea of an overall regulator of systemic risk, Mr. Breeden said: "It won't work to try to assign planning for every potential risk in the economy to a single agency unless we want a centrally planned economy like the old Soviet Union. . . . It is particularly hard for me to see a case that any single group of regulators did such a good job [in anticipating the current crisis] that they deserve becoming the Uber Regulator of the country."

As the regulator who declined to rescue investment bank Drexel Burnham Lambert in 1990 and a leading architect of the response to the S&L crisis of the late 1980s, Mr. Breeden spoke from experience. As SEC chief in the early 1990s, he tried to make it crystal clear that no securities firm would be considered "too big to fail." That way, the firms' creditors would have to make their own careful judgments and then live with the results, even if it meant Chapter 11. In the event of a failure, judges, not Cabinet secretaries, would orchestrate a workout. "The rule of law is a very valuable thing," said Mr. Breeden, especially when compared to the ad hoc rescues of the past year. Mr. Breeden added that the Federal Reserve "should be a central bank, not the world's largest hedge fund."

Mr. Breeden proposed a simple reform in which courts would be given the resources to quickly process an AIG-sized bankruptcy. He recommended "a special 'systemic bankruptcy' court composed of federal District or Circuit Court judges with prior experience in large bankruptcy or receivership cases," much as the Foreign Intelligence Surveillance Court specializes in weighing warrant requests related to foreign spying in the U.S.

Mr. Breeden's presentation was so persuasive that even committee chairman Christopher Dodd lauded his approach for resolving failed institutions. The Geithner plan has met a formidable opponent.

-- James Freeman


Populism and the Political Class

Team Obama seemed to understand and capture well the populism in the American psyche in the last campaign, but may already have gone astray and forgotten that lesson in office.

Spurred by the AIG bonus furor, pollster Scott Rasmussen asked voters three questions: Do they generally trust the judgment of America's people or the judgment of its political leaders? Do they view the federal government as its own special interest group? Do they see big government and big business often working together against the interests of consumers and investors?

The results were striking. Some 55% of Americans, whom Mr. Rasmussen calls the "Mainstream," fell on the populist side of the three questions. They largely disagreed with the 7% of the electorate that Mr. Rasmussen calls the "Political Class," who expressed confidence in government on all three questions. When leaners are included, 75% of Americans lean in the Mainstream direction and 14% lean towards the Political Class.

The pollster notes that populists come from all ideological directions. Republicans make up 37% of populists, while 35% identify with the Democratic Party and 27% are independent. Where you work tells a lot about your view of government -- a full 22% of government employees line up with the Political Class while only 4% of private sector workers do.

The world view of the two groups is shockingly diametrical. Two thirds of Mainstream voters think the economy is getting worse, while more than half of the Political Class believe it is getting better.

The two groups are also far apart on whether the country would be better off if AIG were allowed to go out of business rather than kept alive with subsidies. Republican and Democratic populists are remarkably similar on AIG's fate, with 77% of those who are Republicans saying it's best to let AIG go out of business, 70% of Democrats, and 72% of independents.

One of the most striking divisions is on whether Treasury Secretary Tim Geithner is doing a good job. "Most Populists (53%) rate Geithner's performance as poor, but not a single Political Class survey respondent said the Treasury secretary is doing a poor job," reports Mr. Rasmussen. "Those in the Political Class tend to have more confidence in political leaders and less trust in the wisdom of the American people," is how he sums up his findings.

And no wonder there is such cynicism about both major political parties in this country. Many Americans view both of them as firmly aligned with the Political Class.

-- John Fund