Monday, December 31, 2012

The Geithner Doctrine and the Credibility Trap

For those of you who were wondering, the Geithner Doctrine is the classic example of the Credibility Trap.

Under the Geithner Doctrine as stated by Yves Smith on NakedCapitalism,
Nothing must be done that will hurt the profits or reputation of any big that is pretty big or well-connected.
This doctrine is simply a restatement of the imperative of the Japanese Model for handling a bank solvency led financial crisis to protect bank book capital levels and banker bonuses at all cost.

Both the doctrine and the Japanese Model fall squarely into the Credibility Trap defined on JESSE'S CAFÉ AMÉRICAIN 
A credibility trap is a condition wherein the financial, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform, or even honestly address, the problems ot that system without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves. 
The status quo tolerates the corruption and the fraud because they have profited at least indirectly from it, and would like to continue to do so. Even the impulse to reform within the power structure is susceptible to various forms of soft blackmail and coercion by the system that maintains and rewards. 
And so a failed policy and its support system become self-sustaining, long after it is seen by objective observers to have failed. In its failure it is counterproductive, and an impediment to recovery in the real economy. Admitting failure is not an option for the thought leaders who receive their power from that system. 
The continuity of the structural hierarchy must therefore be maintained at all costs, even to the point of becoming a painfully obvious hypocrisy. 
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery."
Even before the Geithner Doctrine and the Japanese Model were adopted, it was clear that they would fail.  All one had to do was look at Japan since its financial crisis began in the late 1980s.

The only reason for adopting and pursuing the Geithner Doctrine and the Japanese Model is leadership ensnared in a credibility trap.

The question is will 2013 be the year that leadership breaks free of the credibility trap.

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