Sunday, June 13, 2010

Geithner Hero

According to a profile in the April Atlantic, Tim Geithner was sitting on a beach in Mexico in December 2008 when he came up with the key components of his idea for saving the US financial system from possible collapse.  That idea included the stress tests applied to the banking system, combined with an attempt to rely primarily on private capital to keep the banks solvent.  According to the Treasury's later calculations, Geithner's plan may have saved the taxpayers hundreds of billions of dollars, and turned the economy around at far less cost than recoveries from comparable financial crises in history. The economy has rebounded more quickly than most people predicted, and the cost of the bailouts is likely to be much less than expected.  Yet statues are not yet being erected to honor Timothy Geithner.

The financial rescue, begun under President Bush under the leadership of then Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke (and Geithner in his capacity as head of the New York Fed), and continued under the Obama administration under the leadership of Treasury Secretary Geithner and Bernanke and Larry Summers, is still so poorly understood that the Obama economic team is viewed by many as villains rather than heroes.  Geithner understands the political costs of the Treasury's and the Fed's actions. As he explained to the Atlantic reporter:
“We’re getting killed from the right and from the left on the basic strategy.  The right argues that we unnecessarily socialized the entire financial system. The left says we wasted money on things they’d have rather used to help real people directly. As you might understand, I have no sympathy with either. Neither critique is right. To the right, I would say: ‘No, the strategy we adopted was overwhelmingly designed to try to make sure that private markets came and took us out of this as quickly as possible. That was a conscious choice, a shift in strategy, and a more pro-market approach that will help us deal with our fiscal challenges.’ And to the left, I would say: ‘And that saved the taxpayer hundreds of billions of dollars that you can use to meet the main challenges we face as a country—health care, education, infrastructure, and our long-term deficit.’”

Both right and left also seem angry that Wall Street bankers seem to have been rewarded instead of being punished more severely.   Geithner doesn't have much sympathy for that criticism either.   And it is hard to see how a more vindictive policy toward the financial fat cats who contributed so much to the financial meltdown would have worked better to restore a functioning financial system.  But to the extent the Obama economic team failed, it seems their greatest failure was to satisfy the public's urge to blame and punish some of the culprits responsible for the crash of 2008.  

Of course there are knowledgeable and intelligent critics of the administration's policies on both the right and the left who would have done things differently.  And there is always room for second guessing.  The administration should be given more credit, however, for doing what they thought would be most effective regardless of the political risks of their strategy.  The fact that the administration is still suffering politically for its economic decisions should cause even more admiration for their fortitude. 

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