Treasury Secretary Timothy Geithner discusses the burdens of his position, why he felt it was necessary to bailout the financial system and the paternal role taken by the federal government:
Ultimately, I believe the economy would have been in an awful, terrible state for 6-12 months had insolvent financial institutions been allowed to fail. As former Treasury Secretary Hank Paulson suggested, unemployment may have reached 25%. (1) The Federal Deposit Insurance Corporation (FDIC) would have only been able to repay a portion of lost bank account balances. With a void in the financial system of that magnitude, businesses wouldn’t have received loans to meet short-term obligations, expand or fund start-ups. (But it should be noted that banks were not making loans anyway, even after receiving bailout funds. I would’ve done the same thing if I owned a bank.) Life would have been rough, to say the least.
But when a paternal government wishes to quell the people’s pain, do they simply prolong it? Geithner acknowledges in the video that taxpayers should be outraged by the bailouts, as well as banks pushing the system to collapse, but given all other alternatives, he says it was best for us:
“We looked at all alternatives and there was no alternative, except default and collapse, [a] much greater cost and expense to the taxpayer to the one we chose, and we think we did what was in the best interest of the public and the taxpayer, and have an outcome today which is much less damaging because of what we did there.”
It’s easy to see why Geithner and the brain trust behind the government intervention of Henry Paulson, Ben Bernanke, George Bush, Barack Obama and company, would feel this way. The scenario I painted above speaks for itself. The problem is that the “outcome today” is not that amazing either. Underemployment was at 17.6% in December; unemployment at 10%. Probably more important is the fact that the original problems really haven’t been fixed. Toxic debt is still weighing down the bank’s balance sheets. Housing is still overvalued. The United States consumes, not produces. Entrepreneurs have no certainty of what government action will be moving forward. And all of this with pledges on the taxpayer’s behalf for roughly $11 trillion in bailouts and stimulus. Click the link for a breakdown which includes all of the various programs and initiatives.
The economy is not in a position to thrive. Which, frankly, is what I want, Mr. Geithner. An economy that can grow for the long haul, in a sustainable trajectory free from bubbles. So it’s not only that we have a right to be outraged by the government actions, and inactions prior to the collapse, and the ensuing government response. It is also true that trading 6-12 months of Armageddon for potentially years of an only somewhat crappy situation, is not everyone’s option of choice. Some people actually want a sound economy.
Banks began collapsing in March of 2008. If the banks would have been allowed to fail, toxic home loans, unrecorded derivatives, and credit default swaps would have been liquidated; the system flushed clean. Other banks still standing would have swooped in and taken the fallen bank’s infrastructure: buildings, technology, etc. The government could have assisted in fast-tracking the bankruptcy process. It is possible the financial system could have been fully revamped, and ready to actually start underwriting loans by 2009. Surely they would be back on their feet by now. Had the government not been spending its time propping up overvalued home prices, maybe buyers would be purchasing excess housing inventories by now.
The answer to any dilemma is almost never covering up the real problems. The bailouts are certainly unfair, as Geithner points out. But so is life. The greed and bailout culture reveals a values crisis in this country. Couple that with an economy in no position to thrive for the long-run and it’s difficult to be optimistic about our leadership. The people will survive and figure it out. We have no other choice. But I gave up on the two-party system long ago. It has failed us and we need a greater diversity of options.
__________________________________________________________________________
(1) Hank Paulson: Without Bailout, Unemployment Could Have Reached 25% – CBSNews.com, retrieved January 29th, 2010, http://www.cbsnews.com/blogs/2010/01/28/politics/politicalhotsheet/entry6152317.shtml
Swift Economics 
I would like to know how the time frame of “6 to 12 months of Armageddon” is explained. The Great Depression lasted many years – why would this one have been so much shorter?
LikeLike
That time frame is speculation, Kevin. My point is that things would have been very bad, worse than they are currently, but for a shorter period of time. The Great Depression began with the Wall St. crash in 1929 (the infamous “Black Tuesday”), and lasted until about 1940. Most people credit WWII spending, and the drafting of millions of young men, as the catalyst for lifting us out of the Great Depression. But, some disagree with that: http://www.swifteconomics.com/2009/03/21/war-is-not-good-for-the-economy/
FDR’s New Deal attempted to lead us out of Depression during the 1930s, which included paying farmers to murder their livestock and burn their crops to control supply, and increase prices. Meanwhile, people were homeless and going hungry in “Hoovervilles”. Hardly an efficient use of resources.
There was also a Depression in 1920, which lasted a year and a half. Nobody seems to be aware of this one. Instead of massive government stimulus and intervention, the feds did almost nothing, other than be fiscally responsible. Says Jim Powell of the Cato Institute:
Ultimately, I don’t think the economy of the 1920s or 30s can be compared with our current situation. Between the internet, globalization, and a 70% consumption-driven economy in the US, things have changed. But technology has made us more efficient and adaptable, not less. So if by curbing spending, reducing the federal deficit, cutting federal tax rates from about 77% to 25%, allowed the citizens and entrepreneurs of the US to get out of the depression of 1920 in a year and a half … perhaps, we could have done so in a similar time frame.
The $11 trillion that the federal government has committed to prop up the economy, has consequences. It isn’t just a matter of increasing GDP again, and lowering the unemployment rate. Financial institutions still have toxic debt on their balance sheets. They’re not healthy. The Federal Reserve has $2.1 trillion on their balance sheet in long-term US Treasurys, mortgage bundles, and debt holdings of Fannie Mae and Freddie Mac. The US economy will not be in the clear just by getting more people employed, although that would be great. Consequences of our economy’s current makeup, fiscal policy, and monetary policy could include: inflation (which would lower consumption, driving economy back into recession), increase in interest rates to pay off public debt (which could cause a vicious cycle and an insurmountable debt), an eventual and even greater drop in housing as we have artificially propped up prices (which would increase foreclosures, lowering housing values even more, and overall spending once a again), etc.
The thesis of the article is that if we purged the system, liquidated debt, built an economy upon production, not consumption, allowed prices to reset, and cut taxes and spending, we would be in a position to move forward in a healthy system. Yes, it would be ugly for a period of time. But how good do things look right now? If you peer beyond the limited metrics of GDP growth and unemployment, they look pretty awful.
LikeLike
Mortgage backed securities were first issued by Fannie Mae in 1981 to the world’s banks who then discovered they were toxic. Instead of suing Fannie Mae for fraud, the world’s banks preferred to get bailouts from their respective countries. An example of this is the Troubled Assets Relief Program approved by the US President on 3 October 2008. Apparently this bailout did not include American banks acquired by the Royal Bank of Scotland whose bailout was announced by the British Government on 13 October 2008.
LikeLike