On Tim Geithner and my US bailout post-mortem

Yesterday, I wrote up a piece at the New York Times’ Room for Debate forum about the legacy that Tim Geithner left behind, given his recent memoir “Stress Test”. The question was : “Did the government miss a historic opportunity to reshape the financial system — or was its moderate approach correct?”

I recommend you read the other answers from people like Anat Admati and Amir Sufi as well as Sheila Bair’s take and why she recommends Tim Geithner’s book. But please read my answer here. I think the key part I would pull out to highlight is this:

bailouts are seductive because they can work even if the fundamentals in the real economy are suspect. If policymakers are able to kick the can far enough down the road and put enough time between the bailout and most of its inevitable consequences, they may be able to take credit for ending the first crisis and escape blame for the second crisis.

That’s what we have seen so far and will continue to see until the next crisis occurs. The question then will be how history gets re-written once that inevitable crisis does occur. If you recall, Robert Rubin, who escaped any blame for events leading up to the meltdown after the TMT bubble, was pilloried after the housing bubble. People decided that the institutional structure he helped erect during the Clinton Administration bore much of the blame for why we had a crisis in 2008.

Larry Summers escaped that kind of blame in part because he wasn’t a leading executive at one of the too-big-to-fail banks when the economy collapsed as Rubin was. But arguably, he had almost as much influence over policy as Rubin did.

Also, note that Tim Geithner was at the helm of the NY Fed as the regulatory lapses which led to the crisis mounted in his district. Famously he was quoted saying “I’ve never been a regulator, for better or worse” when asked about his role at the Fed. But that did not prevent him from becoming Treasury Secretary and leading the effort to prevent the crisis from deepening.

If you read the assessment of the bailout’s efficacy put forward by Lee Sachs, a former counselor to Larry Summers during his period as Treasury Secretary, you can see a pro-Geithner narrative that I think is sustainable as long as enough time elapses before the next crisis hits.

My assessment, however, is mostly negative. I think the Geithner world view is heavily skewed by his having been surrounded by self-interested elites in New York and Washington who were understandably pleading their case, a case that was banking-centric and less focused on the competing interests of homeowners, wage earners and the voting public. Unless we experienced a second Great Depression which made broader economic issues impossible to overlook, it was always likely that policy would end up with this banking-centric skew. That’s how our economic system works, folks.

Still, I think it’s a tragedy. But time is now marching on.