Monthly Archives: March 2012

Financial Crisis Amnesiac

Yesterday Treasury Secretary Tim Geithner wrote an editorial in the Wall Street Journal taking to task critics of the administration’s response to the financial crisis.

I confess I never got past Geithner’s decision not to pay all of his payroll taxes on income from the International Monetary Fund from 2001-2004.  Right now the IRS under Geithner’s watch is probably hounding some poor guy for a far lesser sum.  Am I the only one who believes there should be a high ethical standard for holding public office?

It also bugs me that Geithner, along with Chairman of the Federal Reserve Ben Bernanke and then-Secretary of Treasury Hank Paulson was one of the principal architects of the Bush Administration’s incompetent handling of the crisis. Mark Calabria of Cato has written a blog reviewing part of Geithner’s role in the leadup to the crisis.

I would like to focus on a different theme: the Administration’s adamant insistence on two things.  First, that the nation and even the world faced the imminent threat of another Great Depression unless strong action was taken.  And second, that there were no other reasonable alternatives: that in fact the response was, if anything, too weak due to opposition by Congress, hence the delayed recovery.

Geithner never could have avoided adopting this narrative.  He was too closely involved in both the regulation of the financial sector prior to the crash and the Bush Administration’s response after it.  If better alternatives were possible, why didn’t he take them?

Obama, however need not have adopted this course.  Everyone know he inherited a huge problem not of his making.  Yet, having adopted both Geithner and Bernanke, having benefited from enormous fiscal and monetary stimulus, and having supported Dodd-Frank’s increased government involvement in the financial markets, his reelection now depends upon it.

This insistence is vital to the Administration’s reelection prospects, for if the economy would have recovered largely on its own, then what did we get for the approximately $4 trillion that we added to the national debt?  And if there were better responses to deal with foreclosures, unemployment, auto bankruptcies, and weak financial institutions, then why weren’t they tried?  Finally, if unprecedented bailouts of the nation’s richest financial firms was avoidable, then why is the government now trying to double down on the hopeless task of micro-managing the nation’s financial markets?

Eventually, other histories of the crisis will be written.  John Taylor has already explained why the market’s initial panic after the Lehman collapse may have been due to the Bush Administration’s public panic and unrealistic plan to purchase assets.  And Amity Shlaes has cast doubt on the traditional belief that the prolonged nature of the Great Depression was inevitable. Similar doubts are likely to arise about government policy during the last four years.

Over-investment in the housing markets, rising debt levels, and poor financial management were bound to lead to a prolonged economic slowdown.  But these antecedents were then accompanied by the following policies:

  • Large, and largely uncontingent, bailouts of the financial institution’s whose mismanagement  contributed to the crisis, allowing some of the nation’s richest citizens to keep their wealth;
  • Annual deficits of over $1 trillion continuing four years after the crisis and a refusal to pay for them with future entitlement reforms;
  • Political intervention in the bankruptcy of General Motors and Chrysler to transfer money from the companies’ general creditors to its unions.
  • The decision to delay rather than accelerate inevitable foreclosures, thereby delaying any recovery in the housing markets by several years.
  • Continued insistence on low interest rates, which creates artificial demand for Treasury debt and worsens already acute pension problems.
  • A continued emphasis on consumer spending to improve the near-term picture rather than savings and investment to secure the future.

All of these policies can only be justified if the economy is unable to recover on its own within a reasonable time.  Similarly, if government intervention is needed, then Dodd-Frank’s quixotic attempt to heavily regulate one of the most complex, fast-moving, powerful sectors of the economy is the only route open to us.  It will not work, but what choice to we have?  Given the magnitude of the consequences these policies have had, you might feel entitled to something more than assertions in Geithner’s article: some explanation or study that would explain why there was no other choice.  You will not get them.


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