By Denny Gulino
WASHINGTON (MNI) – Treasury Secretary Tim Geithner, saying he’s not
a politician but just trying to do what’s right, told an Oregon Public
Radio interviewer Wednesday “the challenge of our time” is to rebuilding
public confidence in government.
Geithner went beyond his usual talking points to reflect on his own
“good preparation” for crises, in what was almost a companion piece to
the PBS television documentary on the crisis that presented its
first two-hour chapter Tuesday night — in which Geithner is a prominent
player. The following two hours will be presented on successive Tuesday
nights.
“I spent most of my professional life initially dealing with
financial crises in other countries, good preparation, paradoxically,”
he said. In Tuesday night’s beginning to the documentary Geithner at one
point is pictured in a meeting as assisting Secretary Robert Rubin and
Under Secretary Larry Summers get through crises in Asia and Mexico.
The crises taught him, “All crises are different and they can kill
you if you don’t manage them carefully,” he said. “You can learn a lot
from the crises in other countries and the mistakes made in the United
States made in the past.”
He said the United States “allowed our financial system completely
outgrow the safeguards put in place after the Great Depression,” he
continued. “We let a huge amount of risk, a whole industry of financial
activity that was essentially banking to build up outside of the banking
system with none of the protections to contain the risk in banks.”
It was a “tragic mistake made over decades in the United States and
that is the most important reason why this crisis was so damaging and so
difficult to continue to manage,” he continued.
“One important lesson, don’t let that happen, and that’s what these
financial reforms are designed to prevent,” he said.
After he went to the New York Federal Reserve as president in the
fall of 2003, “the early stage of this huge financial boom that sowed
the seeds of the crisis, and what I discovered then and what worried me
right from the beginning, was the extent to which again we had allowed a
whole parallel financial system to build up outside the constraints of
regulation.”
As the television documentary points out, Alan Greenspan was Fed
chairman then, and testified repeatedly against any regulation for
derivatives, one of the crisis trouble spots.
“Remember, the Federal Reserve, its authority to limit risk in the
system, was contained then to about half of the financial system,”
Geithner told his Oregon interviewer. There was no authority over Fannie
Mae and Freddie Mac, “no ability to constrain risk taking in the
investment banks that grew to be quite large, much less AIG, the thrifts
like WAMU, etcetera, Indy Mac, or non-bank financial companies like GE
Capital, and no authority to regulate and constrain risk-taking leverage
in the broader markets like derivatives where firms come together.”
Geithner continued, “Confronted with that reality of our system we
worked and we did not do enough, soon enough, did not have the ability
to change this to get regulations more conservative where they existed
and to try to bring the broader supervisors together to try to contain
risk.”
The actions taken then, “were not powerful enough to protect the
economy from the huge increase in risk” and “it was going to take
legislation, fundamental reform of the system, to provide a better set
of tools.”
The 2010 reforms “give us a more modern set of oversight safeguards
that we did not have before the crisis,” he said.
“Most financial crises are mismanaged because governments fail to
act early enough, fail to understand fully the scale of the damage that
can be caused to the innocent, don’t escalate quickly enough,” he said.
The reasons are for one reason, “People hope things will burn
themselves out, won’t have to do some tough things. That’s sort of the
natural inertial conservative force in policy,” he said.
“But the other reason is because the things you have to do in a
financial crisis are unavoidably, politically terrible,” he said.
“To protect an economy from a broken financial system you have to
stabilize the financial system,” he went on. “for the economy to have
the oxygen it needs to grow, you have to make sure that credit can flow,
that people are not worried about the safety of their savings in banks.”
In doing things “that are terribly difficult politically for people
to understand, and that’s why most politicians hold back and wait and
that’s what causes financial crisis to burn longer than they should,” he
said.
“The crisis was partly worse than it should have been because it
took Washington a while to decide to legislate the full set of
authorities we needed to stabilize and put out the financial fires,” in
the fall of 2008.
“When it came we used it very quickly and very forcefully and
broke the back of the financial panic,” he said. When President Obama
took office, “he still faced an economy in free fall” and got initial
authority from Congress to try and protect the economy from the rest of
the damage.”
“Yes, it’s unfair. And yes, it feels unjust,” Geither said. “And
yes, everything that still feels terrible in this economy today is the
aftershocks and the scars of that basic reality — we had a financial
system burning, causing a huge amount of damage to the innocent.”
He continued, “That came on top of a long period of no growth in
median income, a huge rise in inequality. And again, we’re a country
that lives with truly alarming levels of poverty for a country this
rich.”
After the crisis, the government “did force a dramatic
restructuring of the American financial system,” he said. “The weakest
parts of our system, the institutions, no longer exist.”
In early 2009, the firms that survived, “We said, we are going to
force you to meet a very tough market test for viability and go out and
raise private capital to make sure you can survive. And if you are
unable to do that, then we’re going to come in and take over and
restructure you and put you out of your misery.”
The banks that did survive “were forced to go out and raise $300
billion of private capital that diluted existing shareholders roughly in
proportion to the mistakes those banks had made. There was no
alternative,” he said.
“You don’t act to save the financial system. You act to save the
country from the consequences of a collapsing financial system, an
important distinction,” Geithner said.
As far as punishing the guilty, “The wheels of justice are turning
now. They’re not turning as fast as people would like but we have the
best system in the world for making sure we can enforce the laws of the
land.” Nevertheless, he added, “Rarely is an actual crime a material
source of the damage.” Instead, the crisis is caused by a mix of
stupidity and greed and recklessness and risk taking and hope — the
illusion that the world will be stable in the future, that you borrow a
huge amount and everything will be fine.”
Credit default swaps, he said, “played no material role in causing
the crisis or making it harder to manage, and they certainly were not
illegal,” he said.
It was “decisions across the country to take too much risk, to
borrow too much against future income — that’s what makes financial
crises so brutal and damaging and unfortunately or fortunately the way
it is, most of that is legal,” he said.
“You cannot legislate away stupidity and risk taking and greed and
recklessness,” he said. “What you can do is make sure that when it
happens it doesn’t cause too much damage.”
The result of the bailouts and the survival and continuing
prosperity of amny of those widely seen as responsible for the damage
was a loss of public confidence in government, and now, Geithner said,
“It’s the political challenge of our time” to win back the public trust.
“It’s a huge loss of faith in public institutions across this
country,” he said. “It was happening before the crisis but dramatically
magnified by the crisis.”
So, “you have to earn back confidence of Americans that government
can make sensible judgments, not just with their money, but in designing
and the rules and protections economies need,” he said.
** MNI Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MAUDS$,M$$CR$,M$$FI$]
