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Gayle in MD
03-10-2010, 08:05 AM
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Annals of Economics

"No Credit"

Timothy Geithner’s financial plan is working—and making him very unpopular.
by John Cassidy



In the history of product launches, the rollout of the Obama Administration’s plan to stabilize the financial system was in the category of “Ishtar,” smokeless cigarettes, and New Coke. On February 10th of last year, the newly appointed Treasury Secretary, Timothy F. Geithner, appeared in the Treasury’s Cash Room to outline proposals that would relieve banks of toxic assets, force them to undergo stress tests, and provide relief for struggling homeowners. Immediately after Geithner’s speech, the Dow fell sharply, and it closed the day down 382 points. Critics from all quarters dismissed Geithner’s plan as vague and inadequate. “Has Barack Obama’s presidency already failed?” Martin Wolf, the Financial Times’ influential economics commentator, wrote. “In normal times, this would be a ludicrous question. But these are not normal times.”

In the ensuing weeks, the Dow dropped below 6,500, and other indicators of financial stress, such as the interest rate that banks charge one another, rose, pointing to continued skepticism about Geithner’s plan. Commentators from Paul Krugman and Joseph Stiglitz on the left to Alan Greenspan and Lindsey Graham on the right called on the authorities to seize control and restructure the most troubled banks, which were widely believed to be insolvent. “I understand that once in a hundred years this is what you do,” Greenspan told an interviewer. Adam S. Posen, a senior fellow at the Peterson Institute for International Economics, said to the Times, “Putting it off only brings more troubles and higher costs in the long run.” At a lengthy White House meeting last March, Lawrence Summers, the head of the National Economic Council, pressed Geithner and his aides on whether nationalization was now the least bad option. Geithner held his ground, arguing that rushing to take over salvageable financial institutions would be irresponsible and economically damaging. In the end, Summers and the President agreed with him. But his stilted public performances, together with his reluctance to take a populist line on other issues, such as Wall Street bonuses, led to demands for his resignation—calls that have continued into his second year in office. From across the political spectrum, critics have accused him of kowtowing to Wall Street and failing to hold to account those responsible for the financial crisis.

On the anniversary of Geithner’s disastrous speech, the Treasury issued a two-page briefing paper hailing the achievements of the stabilization plan, which much of the media ignored. “A year later, there’s still a lot to criticize,” David Wessel, the economics editor of the Wall Street Journal, wrote, noting that the unemployment rate remains close to ten per cent and that banks are paying generous bonuses to their staff but remain reluctant to lend to small businesses.

And yet—whisper it softly—there is good news about the financial system and the roundly loathed bank bailout, the seven-hundred-billion-dollar relief package that Congress approved in October, 2008. During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses. While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers. Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars—and much of that related to propping up General Motors and Chrysler. Barring something unexpected, the bailout will end up costing taxpayers less than the savings-and-loan implosion of the early nineteen-nineties. The government could conceivably end up making money.


Wessel is right, of course, that the unemployment rate remains stubbornly high—the rise in long-term joblessness is particularly worrying—but other economic trends are pointing up. Although some businesses are struggling to get bank financing, municipalities, car buyers, and students again have access to credit. Consumption and exports are rising. Corporations are once more spending money on software and machinery. Meanwhile, it looks as though the Senate may be finally preparing to vote on an overhaul of financial regulation.

Economists are still debating what it was that ended the financial crisis and turned the economy around. It is inarguable, though, that Geithner’s stabilization plan has proved more effective than many observers expected, this one included. “The policy worked,” Brad Hintz, a top-rated financial analyst at the research firm Sanford C. Bernstein, said. “Now, did it raise the mob to come after the bankers and politicians and try and drag them off to the guillotine? Certainly it did. That’s part of the political price that is being paid for the policy having worked.”

A few weeks ago, during a blizzard that deposited several feet of snow on Washington, I met Geithner in his office. Dressed casually in bluejeans and snow boots, he seemed to have largely given up hope of convincing the public that the financial-rescue plan was well calibrated, but he insisted that it had been necessary. “My basic view is that we did a pretty successful job of putting out a severe financial crisis and avoiding a Great Depression or Great Deflation type of thing,” he said. “We saved the economy, but we kind of lost the public doing it.”

When President Obama came to office, the Bush Administration had already committed two hundred and thirty billion dollars of taxpayers’ money to big banks—a policy that Geithner, as president of the New York Federal Reserve Bank, helped to enact. During the transition, he warned the incoming President that more “repugnant” actions would be necessary to shore up the financial system and restore economic growth. (In the first three months of 2009, G.D.P. declined at an annual rate of 6.4 per cent.) “We knew it would be politically costly, but not nearly as costly as if we hadn’t got it right,” Geithner said to me of the financial stabilization plan. “And we didn’t think we had other options available that were credible.”



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http://www.newyorker.com/reporting/2010/03/15/100315fa_fact_cassidy

cushioncrawler
03-10-2010, 02:46 PM
Gayle -- But how many crooks hav gotten away scott free.
madMac.

Gayle in MD
03-11-2010, 05:53 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: cushioncrawler</div><div class="ubbcode-body">Gayle -- But how many crooks hav gotten away scott free.
madMac. </div></div>


Way too many, Mac, but it's nothing new. This country hasn't been a democracy for decades, or maybe centuries, especially when it comes to the courts.

If you're rich, or famous, or well connected, you get to walk, especially if your Pa Pa was a well known politician.

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