A Study on Crony Capitalism: How the Geithner Connection boosted Wall Street Stocks

Interesting study from distinguished mainstream economists.

From the Wall Street Journal Real Times Economic Blog

Want to boost your stock prices during a financial crisis? Build ties to the next Treasury secretary.

A research paper published by the National Bureau of Economic Research finds that investors bid up shares of a handful of financial firms after news leaked that Timothy Geithner would be nominated for the top post at Treasury in 2008.

“This return was about 6% after the first full day of trading and about 12% after 10 trading days,” Massachusetts Institute of Technology economists Daron Acemoglu and Simon Johnson, University of California at Berkley economist Amir Kermani,University of Connecticut professorJames Kwak and Brigham Young University professor Todd Mittonwrote.

The reason for outperforming shares was a unique set of circumstances — the financial crisis — coupled with the revolving door between Wall Street and Washington that investors expected would bring officials to Mr. Geithner’s side, the authors write.

“Excess returns for being connected to Geithner reflect the market’s expectation that, during a period of turbulence and unusually high policy discretion, the new Treasury secretary would need to rely on a core group of employees and a small social network for real-time advice — and that these employees were likely to be hired from financial institutions with which Geithner had connections,” the authors surmise.

Click on this link to the paper

I have noted in July 2012 how the New York Fed bragged about the influence of their policy in pushing up US Stocks, the GAO audit which found the Fed’s largesse of $16 trillion in bailouts have benefited Wall Street and foreign banks during the 2007-8 crisis and lately how QE 3.0 continues to bailout foreign banks (by $1 trillion in cash as of April 2013—according to the Zero Hedge)

In the meantime, former Treasury Secretary Tim Geithner today has been reported to have taken a job in one of Wall Street’s companies. The regulator is now the regulated. This is an example of the Wall Street-US government revolving door phenomenon in action.

The above serves as more proof of legalized insider trading by means of unilateral policies designed to boost the interest of special groups with deep political connections at the expense of society.

Let  us not forget that the US government’s vast tentacles influences mainstream ‘expert’ opinion indirectly via job contracts and career opportunities.

In terms of the US Federal Reserve’s clout, according to a Huffington Post article in 2008 (bold mine)

The Federal Reserve's Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a "visiting scholarship." A Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That's a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list "monetary policy, central banking, and the supply of money and credit," as either their primary or secondary specialty; 310 list "money and interest rates"; and 244 list "macroeconomic policy formation [and] aspects of public finance and general policy." The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their "Financial Roundtable," the closest way they can approximate a focus on monetary policy and central banking…

The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank's money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.

In short, the Wall Street-US Government ties run deep and have not been limited to revolving door political relationships, but likewise in the realm of dissemination of information.