Saturday, March 13, 2010

Geithner Files

. Saturday, March 13, 2010

Things I learned from Joshua Green's very long (but excellent) profile of Timothy Geithner:

1. Contrary to popular belief, Geithner was not only aware of the dangers of derivatives and off-balance sheet transactions, but he spoke out about them repeatedly over a number of years. His talk about "fat tails" sounds like it came straight from Nassim Taleb.

2. Bush was routinely lambasted for not properly vetting administration officials, as was McCain during the campaign, but Obama seems to have chosen Geithner based primarily on one hour-long interview. True, Geithner had great references, but given the context -- the height of the financial crisis and administration of the new TARP program -- it still is a bit odd.

3. The Geithner financial crisis plan was forged in the Tequila and Asian crises in the 1990s. The plan: get the muscle of the government involved early and often, or deeper and more costly intervention will be necessary later. No surprise there. But the price of government involvement might be: "shut down weak banks, bust up oligarchies, and clean up corruption. Then withdraw." This is not the popular view of the government bailouts, but I think it expresses the pattern of government involvement pretty well.

4. The entire orientation of the Geithner plan was to minimize government involvement. That's why the stress tests happened, why the banks weren't nationalized, why TARP was structured the way it was. The goal was to recapitalize the banking sector by maximizing private sector input, and thus save taxpayers hundreds of billions, if not trillions, in the process. It was a big gamble, but it seems to have paid off pretty well.

5. Criticisms of Geithner as being too friendly to Wall Street are spot on: he has systematically resisted punitive measures against banks, and has even argued against tight monitoring of how TARP funds are used. The interesting thing? Unlike almost anyone else in senior levels of any recent presidential administration, he's a career bureaucrat. He's never worked on Wall Street, and recently turned down the presidency of Citigroup.

6. Geithner is a pragmatist above all else: “In a crisis, you have to choose: Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.” This is not good horse-race politics, but if it leads to better outcomes it may be the best political strategy possible.

7. As I've mentioned before, TARP is turning out to be an exceptional bargain. Here's some figures:

Geithner likes to point out that after a year on the job, he’s spent $7 billion recapitalizing financial firms while private investors have put up $140 billion. TARP money is being repaid faster than anyone imagined, and if Obama gets the $90 billion tax on big banks he proposed in January, it could eventually be recouped. It’s likely that the cost to taxpayers will be much less than the 5 to 10 percent of GDP that the Cleveland Fed says is typical for a crisis, and possibly as little as 2 to 4 percent—about the cost of the much smaller savings-and-loan crisis of the 1980s. A recent Treasury study indicates that it could be less than 1 percent. By any reasonable standard, this would be an impressive achievement, and it would owe a great deal to Geithner’s strategy.

Green has some criticisms too, but they are pretty boilerplate: regulatory reform hasn't been strict enough, etc. Still, the overall picture that emerges is that Geithner has helped saved US taxpayers quite a lot of pain, and quite a lot of money, by taking the actions he did.


Geithner Files
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