Tim Geithner's Message To The Next Treasury Secretary Who Has To Deal With A Financial Crisis
Leaders dealing with those crises will no doubt look at the US financial crisis in 2008-2009, and the actions taken by Treasury Secretary.
So the outgoing comments of Tim Geithner will be crucial historical texts.
Part of that required reading forms today, as both The Economist and WSJ have published exit interviews with Geithner.
On the issue of the bank bailouts, two comments will be critical for future Treasury Secretaries or Finance Ministers.
First, people will always hate bank bailouts, he told WSJ:
There's no explanation powerful enough to soften the inevitable fear and anger and resentment that's going to come with a crisis that did so much damage to the innocent. .... The paradox is that the things that are ultimately just in terms of making sure you can protect the average person from a failing system require you to do things that are going to look deeply unfair and unjust because you have to try to make sure to prevent a collapse. You look like you're giving aid to the arsonist.
But that's not an excuse for inaction, and you can't get paralyzed by the notion that bailouts create moral hazard.
Mr Geithner readily admits that his interventions have bred moral hazard, but says holding off for that reason worsens a crisis and requires even bigger interventions later. “You will end up having to socialise much more risk and [create] much more future moral hazard,” he says. “You have to design the crisis response to mitigate moral hazard to the extent you can, and then change the rules of the game going forward to undo some of the damage you’ve caused.” Hence the Dodd-Frank banking reforms. The law became maddeningly long and complex in its passage through Congress. But it retains the features Mr Geithner considers crucial. It creates a mechanism for seizing and winding down big failing firms while limiting the government’s discretion to keep them as going concerns. By reinforcing capital and liquidity buffers throughout the financial system, the law allows policymakers to be almost “indifferent about contagion caused by one institution”.
So yes, people are going to hate you. But the longer you wait, the bigger your bailout is going to be.