Home > economics profession, The Economy > Timothy Geithner saved Wall Street, not the economy

Timothy Geithner saved Wall Street, not the economy

from Dean Baker

The accolades for Timothy Geithner came on so thick and heavy in the last week that it’s necessary for those of us in the reality-based community to bring the discussion back to earth. The basic facts of the matter are very straightforward. Timothy Geithner and the bailout he helped engineer saved the Wall Street banks. He did not save the economy.

We can’t know exactly what would have happened if we did not have the TARP in October of 2008. We do know there was a major effort at the time to exaggerate the dangers to the financial system in order to pressure Congress to pass the TARP.

For example, Federal Reserve Board Chairman Ben Bernacke highlighted the claim that the commercial paper market was shutting down. Since most major companies finance their ongoing operations by issuing commercial paper, this raised the threat of a full-fledged economic collapse because even healthy companies would not be able to get the cash needed to pay their bills.

What Bernanke neglected to mention was that he personally had the ability to sustain the commercial paper market through direct lending from the Fed. He opted to go this route by announcing the creation of a Fed special lending facility to support the commercial paper market the weekend after Congress voted to approve the TARP.

It is quite likely that Bernanke could have taken whatever steps were necessary himself to keep the financial system from collapsing even without the TARP. The amount of money dispersed through the Fed was many times larger than the TARP, much of which was never even lent out. The TARP was primarily about providing political cover and saying that the government stood behind the big banks.

Of course we can never know the right counterfactual had the TARP and related Treasury efforts not been put in place, but even if we assume the worst, the idea that we would have seen a second Great Depression was always absurd on its face.  The example of Argentina proves otherwise.

In December of 2001 Argentina did have a full-fledged financial collapse. In other words, all the horrible things that we feared could happen in the United States in 2008 actually did happen in Argentina. Banks shut down. People could not use their ATMs or get access to their bank accounts.

This led to a three-month period in which the economy was in free fall. It stabilized over the next three months. Then it began growing rapidly in the second half of 2002. By the middle of 2003 it had made up all the ground lost in financial crisis. Its economy continued to grow strongly until the world economic crisis brought it to a standstill in 2009.

Even if Obama’s economic team may not have been quite as competent as the folks in Argentina, they would have to be an awful lot worse to leave us with a decade of double-digit unemployment, the sort of story that would be associated with a second Great Depression. In short, the second Great Depression line was just a bogeyman used to justify the government bailout of the Wall Street banks.

As it is, the economy has already lost more than $7 trillion in output ($20,000 per person) compared with what the Congressional Budget Office projected in January of 2008. We will probably lose at least another $4 trillion before the economy gets back to anything resembling full employment. And, millions of people have seen their lives turned upside down by their inability to get jobs, being thrown out of their homes, or their parents’ inability to get a job. And this is all because of the folks in Washington’s inability to manage the economy.

But the Wall Street banks are bigger and fatter than ever. As a result of the crisis, many mergers were rushed through that might have otherwise been subject to serious regulatory scrutiny. For example, J.P. Morgan was allowed to take over Bear Stearns and Washington Mutual, two huge banks that both faced collapse in the crisis. Bank of America took over Merrill Lynch and Countrywide. By contrast, there can be little doubt that without the helping hand of Timothy Geithner, most or all of the Wall Street banks would have been sunk by their own recklessness.

There is one other hoary myth that needs to be put to rest as Timothy Geithner heads off to greener pastures. The claim that we made money on the bailout is one of those lines that should immediately discredit the teller. We made money on the loans in the same way that if the government issued mortgages at 1 percent interest it would make money, since the vast majority of the mortgages would be repaid.

The TARP money and other bailout loans were given to banks at way below market interest rates at a time when liquidity carried an enormous premium. Serious people know this, and the people who don’t are not worth listening to. It was a massive giveaway as the Congressional Oversight Panel determined at the time.

It’s impossible to know whether the economy would have bounced back more quickly and we would be closer to full employment now without the bailouts, since none of us know what other policies would have been pursued. We do know that we would have been freed of the albatross of a horribly bloated financial sector that sucks the life out of the economy and redistributes income upward to the very rich. For that fact, Timothy Geithner bears considerable responsibility.

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  1. Stan Katz
    January 30, 2013 at 3:58 pm

    Very persuasive. But, to be fair, it’s easier to look back than to look forward.

  2. BC
    January 30, 2013 at 4:51 pm

    Bernanke works for the owners of the Fed, the largest Fed member primary dealer banks, which are institutions owned by the top 0.1%, who also own the US gov’t, i.e., the best gov’t money can buy. Bernanke should be given no praise nor scorn for anything but what he was hired to do for his benefactors.

    The first responsibility of any US President, Fed Chairman, or US Treasury Secretary is to satisfy the desires of his bankster capos, who are accountable to the top 0.1% owners of the criminal bankster syndicate with a gov’t-sponsored license to steal the labor product of the masses in perpetuity.

    Most, if not all, economists with a mainstream voice lack the courage to describe accurately the system for what it is: a criminal financial syndicate run by ruthless, rapacious, parasitic banksters with a license to steal that is enabled and protected by the US gov’t and affirmed by the highest court.

    There will be no “reform” or “progress” until economists, economics professors, CEOs, politicians, public intellectuals, and influential financial media pundits turn the spotlight on the activities of the owners and operators of the criminal syndicate and endeavor to expose their criminality and to overthrow the ruthless criminals and their stranglehold on financial wealth, the means of production of goods and services, the distribution of income and purchasing power, and their unaccountability to anyone but their own ruthless desires.

    Americans need income and purchasing power, but they are given debt and forced to compete with Chinese, Indians, and Vietnamese for “jobs” at the lowest bid.

    Americans need medical services, but they and their employers are offered unaffordable “health care insurance” and out-of-pocket costs.

    Americans need education and professional skills, but they are forced into student debt servitude to the federal gov’t to obtain a credential that might, or might not, secure them living-wage employment.

    Americans want good gov’t and justice, but they are given “austerity” and a winner-take-all game they must by definition lose.

    Americans are not a nation of hucksters worshiping the god of money; they have been forced by the rapacious rentier top 0.1% into conforming to a system of relations and exchange that commoditizes and dehumanizes every aspect of existence.

    Occupy is not the answer. Overthrow is required. But no overthrow will occur until the professional middle-class (“Outer Party”) next 9% below the top 0.1-1% (“Inner Party”) are made sufficiently uncomfortable and cease to internalize and act upon the rapacious values conditioned from above by the top 0.1-1%.

    Anything short of the call for a complete overthrow of the bankster syndicate is intellectual cowardice and unworthy of public intellectuals’ privileged position that permits them to speak truth to power and to the people.

  3. Lucy Honeychurch
    January 30, 2013 at 5:13 pm

    ‘To be fair’ would have been giving the bailout to the people – not banks. It doesn’t take a genius with hindsight to know that Consumers – not banks – are the engine of the US economy. EVERYONE knows it. ESPECIALLY the banks.

    Had the Congressmen in that fateful meeting with Hank asked a single question (let alone the kind of level 1-5 questioning that it’s their JOB to do!), even they would have made that connection.

    A $40K per capita Main St. handout would have averted economic meltdown. What will eventually be an ~$7T handout to banks, hasn’t.

    Sure, a consumerist society founded on credit is still a house of cards, but the finger in the dike a Main St. bailout would have bought us against the certainty of the Great Flood Geithner/Paulson were predicting, would have given us the time – and the will – to enact real reforms like re-instituting Glass-Steagall.

    That would have been ‘fair’. But I’m sure you know ‘fairness’ had nothing to do with this. Unless you happen to run a bank.

    … and many, many smart people were shouting the Main St. suggestion at the top of their lungs at the time – that’s why our own Icarus Geithner had to create the ‘burning platform’.

    In that respect, he did a great job, Brownie.

  4. February 5, 2013 at 7:10 pm

    Glass-Stegall should be reenacted. This would greatly assist the federal government in oversight of something they know little about. If Wall Street wouldn’t have been bailed out the US would have had a financial system that looked like the one at the start of the Republic in 1789. What was and still needed is ultra-strict civil/criminal enforcement of the “mistakes” made that lead to the meltdown.

  5. February 8, 2013 at 3:13 pm

    I am very sympathetic to Baker and to the general argument he makes here. However, his assertion that “the The example of Argentina proves otherwise” is deplorable reasoning. First of all is the general fallacy of assuming that what happens to a small economy, still highly dependent on agricultural exports in an era of high commodity prices has any implications for the world’s largest economy and one in which exports of primary products play a much smaller role.

    Argentina benefitted from the pull of Chinese import demand for all sorts of natural resource products, including the soybeans, corn and wheat Argentina exports. The U.S. could not in a similar manner.

    Argentina repudiated its sovereign debt in a very arbitrary manner . The U.S. could not do the same without causing havoc in the world economy. Argentina was able to cover large deficits in its federal finances by imposing confiscatory export taxes on agricultural commodities. One can argue that this is a legitimate way to capture the transitory rents from an Asian-demand-driven commodities boom, but it is not sustainable public policy over the longer run.

    More recently. Argentina appropriated private pension funds and the reserves of the central bank to cover its federal budget deficits. And for some five years now it has been cooking the books in tabulating the CPI and other economic indicators.

    To say that “Obama’s economic team may not have been quite as competent as the folks in Argentina” is to ignore the enormity of bad economic policy-making in Argentina since the crisis a decade ago. Neighbors like Chile, Uruguay and Brazil have all done a much better job of crafting sustainable macro policies.

    In re-nationalizing an airline, imposing price controls on oil and gas and so forth, Argentina has cut bridge after bridge with the international business community and with otherwisevery sympathetic countries like Spain. Gas and oil production are stagnant as is investment in agriculture. Don’t hold this policy basket case out as an ideal just because GDP grew following a financial crisis. In virtually every way, Argentina’s apparent economic success is not sustainable.

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