Kotok’s Scathing Indictment

We recently expressed our misgivings about Treasury Secretary Geithner; David Kotok of Cumberland Advisors let him — and the new Administration — have it with both barrels. This is an important read, whether one agrees with him or not (we do):

…Geithner (on page 81 and again on page 95) answered: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices.”

“Manipulation?”  “Aggressively?“  This is strong language.  Geithner did not do this on his own authority.  These are prepared answers.  He is citing the new President, not once but twice.

…the dollar [is] likely to get stronger.  Right now it is the default choice of the world.  We have currency strength not because we are so desirable but because we are currently better than the others…

So what do we do within 72 hours of launching the Obama administration that says it is seeking “change?”  We fire the first public salvo in what could easily become a trade war or a threat to global financial integration.

What makes us so credible?  Is it our proven record of regulatory oversight of our financial markets, as demonstrated by the Madoff scandal and the SEC?  Is it the way our rating agencies work so diligently to place a coveted “AAA” on paper that was peddled to the rest of the world and was found out to be highly toxic?  Is it the way we honor the promises of federal agencies by having tier-one-eligible Fannie and Freddie preferred held in the US and abroad by institutions, and then essentially cause a structural default on that preferred (actually, dividend suspension)?  Or is it the way the actions of Treasury and the Federal Reserve allowed a primary dealer (Lehman) to fail, thus triggering a global contagion?

C’mon?  Where is the plan to restore confidence and credibility and transparency and consistent policy for the United States?  And how does the Obama administration believe that launching a fight with China is beneficial?

In the 1930s the severe recession of 1929-1931 was turned into the depression of 1931-1933 because of protectionism.  Every historian knows that.  Every economist learns it in school.  This is well-known by Geithner and even better-known by Larry Summers and Paul Volcker.  They are the three members of the Obama economic troika.

The statement Geithner repeated twice was certainly known to them in advance.  Why did they not temper it?  What is the plan?  Do they want to threaten and see if China backs down?  This, too, is dangerous.  Do they intend to pursue the Schumer tariff scheme?  There are more questions than answers.

Lastly, Larry Summers was going to attend the World Economic Forum in Davos, Switzerland.  He has cancelled.  Why?  Was it because he did not want to have to face the private conversations that would follow such statements as have been made by Geithner in the name of the President?

Watch Davos closely.  And remember that the absence of statements is as revealing, if not more so, than the presence of them.  Not one mention of trade openness appears in our reading of the 100 pages of answers to the Senate.  Maybe someone else can find an affirmation of free and open trade.  I cannot.

We fear protectionism.  It starts with rhetoric. We now have that threat.  If it is pursued, it ends badly for everyone.  No one wins.

Cumberland also posted Geithner’s written Q and A responses on its website.

http://www.symmetrycapital.net/newsandviews/newsandviews/2009012240.html

http://www.cumber.com/special/geithnerquestions2009.pdf