“To avert panic, central banks should lend early and freely, to solvent firms, against good collateral, and at ‘high rates.’ ” -Walter Bagehot, Lombard Street

 

Former U.S. Treasury Secretary Timothy Geithner has been promoting his new book, “Stress Test: Reflections on Financial Crises.” I haven’t read it, and based on what I have heard him say, I won’t. Geithner doesn’t seem to understand how the crisis came about, what alternatives existed to the bank bailouts, or the impact they had. Indeed, Geithner makes multiple claims about the bailouts, none of which survive scrutiny.

Geithner argues that the bailouts were the best response to the financial panic. The financial system needed to be protected from collapse, he says, and there were no true alternatives. If part of the rescue worked to the benefits of the “arsonists who set the original fire,” that was merely an unfortunate side effect.

Those arguments stand in stark contrast to what many critics, me included, have written about the crisis. Rather than talk my own book, “Bailout Nation,” I want to respond directly to the Geithner claims. Continues here

Category: Bailout Nation, Bailouts, Books, Really, really bad calls, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “How to Build a Better Bailout”

  1. rd says:

    Two additional points related to Gethner’s lack of recognition of htei mplications of his actions:

    1. Complexity – Complex things are complex with all sorts of misunderstood aspects with potential non-linear reactions to events. A primary thing that has historically dissuaded people from making financial instruments too complex is that their market is small and illiquid. Geithner and Co. have now turned that on its head. By announcing that the financial system is too complex to resolve, a bug has become a feature for the financial firms. They just have to keep things complex so the regulators are confused and scared and they can act virtually with impunity while backstopped by the full faith and credit of the Federal Reserve and the US Government. Allowing the complex instruments to fail in the market would have sent a clear message across the desk of every CEO that complex risk is a disaster waiting to happen for his company. Now it is just another tool to get government financing.

    2. Criminality – there was a lot of negligent incompetence that did not rise to criminality, but there was also clearly an undercurrent of ignoring laws when they were inconvenient. It extended from the bowels of the engine room where notary public stamps were illegally abused in huge quantities to the boardroom where decisions were made to effectively cook the books. For the US Treasury to be unable to even conceive of this in the financial crisis aftermath is the ultimate indication that the Treasury – Financial complex has overtaken the Military-Industrial complex for graft and corruption in the US. The absolute insistence to not prosecute a single individual for financial crisis crimes is mind-boggling.

    • Frilton Miedman says:

      Agree on all counts.

      Not to sound like a broken record, but it comes back to money in politics.

      With the bulk of incentive falling on making campaign donors happy for the fact that 95% of all elections are won by the guy with the most money,

      Regulators & politicians are far less concerned with appeasing voters by doing what’s right, and more concerned with appeasing superPAC’s, billionaires and lobbyists, who are far better at influencing voters via propaganda – In 2010, a large fraction of Americans were convinced the best thing to do was cut upper class taxes and cut spending to the lower end in the midst of the worst recession in 80 years. (though that did seem to fail in 2012)

      As long as Justice Scalia’s “bribery is speech” mantra remains intact, Democracy is guaranteed to continue to degrade, we continue devolving to 3rd world status, forcing us to re-fight all the battles won over the last 240 years, but most likely lose them this time around.

  2. bigsteve says:

    I have read Bailout Nation. I am in the process of reading Stress Test. My overall sense is that we deregulated finance too far allowing shadow banking to evade what safe guards we had. I looked at building a house in 2001 and already at that time I saw truth stretching being used by loan originators. Many of the loans in this time period were I understand falsely rated as good and bungled up to sale to some one else. There was fraud from the buyer to the loan originator to the rating agency to Wall Street that bungle up these loans to sell as securitize debt bonds. Trust busting should be used to break up too large to fail banking and other finance institutions. Then bankruptcy can safely be allowed to clean up greedy stupid run businesses. With out government oversight free enterprise devolves into oligarchies and in the case of banking taking on too much risk. I am a pragmatist not an ideologue. And BTW this subject is not new. Adam Smith wrote about such things centuries ago. I took a hit like most in my wealth because of these shenanigans but have largely fully recovered. But many people have not and it is a shame so few went to jail that cause this major screw up and even profited off of it.

  3. LeftCoastIndependent says:

    The financial crash was a long time in the making. Decades of bad decisions. Government debt, off-shoring, job losses, lower wages, illegitimate wars, devaluation of the dollar, higher oil prices, inflation, deregulated financial laws (thanks Clinton), not to mention greed and corruption. The sub-prime debacle was just the straw that broke the camels back. If it wasn’t that, it would have been something else eventually. The bailouts were necessary, but the banks should have been busted up and split up in the process. Unfortunately, Obama turned into just another sell out like the rest of them.

    • Frilton Miedman says:

      At the point regulators & politicians were convinced that revenues could be less than outlays, because either “trickle down” or “supply side” benefits would offset the difference, is when it began.

      The problem, assuming concentrated wealth benefits everyone without question and treating it all as “job creating” or “cost saving”, regardless whether it does or not.

  4. DeDude says:

    I disagree with the idea of lending to the banks at higher interest rates – that would not have solved the confidence problem. The problem in a financial crisis is that the people who have capital are fearful of letting the banks have it because they think the banks may be insolvent. This leads the banks to hoard cash and stop lending, inducing a steep economic downturn. To stop that you have to get the capital owners confidence in financial institutions restored. If people who have deposited or lend money to banks fear that they may lose that money then you get a bank run. The FDIC dealt with the fear by “guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount” (Wikipedia). In other words anybody with deposits in a bank had their money guaranteed by the government, and anybody who issued NEW unsecured senior debt also were covered. To me that is about as much as government can do about the panic. Why would they do anything more than that? If depositors and issuers of NEW debt were not confident with a full government guarantee, why would anything else have them take their cash out from under the mattress? Saving the a$$es of those with OLD debt or equity in the banks, was not going to make those people (with new government guaranteed funds) any more confident (if anything it may scare them that the government could become so weakened that it could not honor its guarantees). They should have simply taken over and liquidated those companies that could not dig themselves out even after the FDIC expansion. All that money should have gone to the FDIC not to the banks. Save the banking system and banks but not the banksters and speculators.