The Edmond Sun


May 30, 2014

THE ASTUTE INVESTOR: Revisionary history?

Geithner’s book needs dose of reality

EDMOND — As you may have heard, the financial world is all abuzz about former New York Fed President and Treasury Secretary Tim Geithner’s book titled “Stress Test.”  To be fair, it’s actually quite a fascinating and well-written book about what went on behind the scenes during the financial crisis of late 2008.

Poor little Timmy. To hear him tell it, we were close to blood in the streets, empty ATMs and people hiding money in mattresses. These are the dire things from which Geithner saved us, at least according to him.

All hail hero Tim Geithner! Or not. To me this is a little like giving an arsonist a medal for putting out the fire that he started. Of course, he’s not entirely responsible and he had lots of help from people like former Fed Chairman Alan Greenspan and Ben Bernanke, and former Treasury Secretary Hank Paulson. But, Geithner wants to rewrite history.

You might recall that Greenspan laid the groundwork that made the subprime fiasco possible. And in 2007 Ben Bernanke assured us all the subprime crisis was contained. My favorite was in 2007 when bazooka Hank Paulson asked Congress for permission to purchase about $700 billion in “troubled assets,” but only if necessary. His reasoning, as he described it to Congress, was that if you have a bazooka in your pocket and everyone knows it, you won’t have to use it. Next thing we knew it looked like the shootout at the OK Corral.

While the bailouts and handouts Geithner pushed through the economy are now five to six years in the past, many of us still remember them, and we don’t regard them fondly. (If you’ve read any of my past columns, you know that I’m not a fan.)

But now Geithner is on a mission to sell books and resurrect his image. I guess being thought of as one of the main guys who forked over billions of taxpayer dollars to bankers and corporate mavericks doesn’t feel so good.

So he’s taken to the airwaves and pages to set the record straight — or should I say, adjust the record to his view. There is his view and then there is reality. In The Wall Street Journal on May 13, 2014, Geithner pointed out the possibility of utter collapse that hung over the financial system in late 2008, and how that eventuality was avoided only because of the extraordinary measures he, Paulson and Bernanke took. Without their heroic efforts, we were well on the way to repeat some of the worst parts of the Great Depression: shantytowns, soup lines, and a severe retrenchment in the banking system brought on by bank runs.

However, this ignores just a few things. We did away with soup lines and shantytowns by instituting unemployment insurance, which put the checks in the mail. States handle this system, but it was supplemented by federal laws that extended benefits from 27 weeks up to 99 weeks in the hardest-hit areas.

As for bank runs, that’s what deposit insurance is for, and it works. While there is a conversation to be had about the efficacy of deposit insurance and whether it motivates banks to be as risky as the laws allow, it’s evident that depositors weren’t running for the doors, even as banks went under. Depositors knew their money would be available at the end of the day.

Bailing out poorly managed banks did nothing to address either of these situations, no matter what Geithner claims. His main point in the book is that, in times of crisis, regulators have to do what is wildly unpopular to save the system so the innocent victims can be rescued.

I disagree. The reason the bailouts were so unpopular, and remain so today, is because the efforts didn’t rescue the little guy. Wiping out the stock and bondholders of Citigroup, Bank of America and Bear Stearns would have been painful for some, but certainly not a catastrophe for all. So instead, we not only left the bad companies standing, we left the bad actors in charge and handed them billions of dollars. Now the world knows that if anything happens to shock the financial system in the future, the U.S. government will come running with a bucket of taxpayer cash to put out the fire.

Moral hazard —  where one profits when things are good but doesn’t suffer when things are bad — is alive and well, witnessed by the fact that the worst offenders have some of the lowest borrowing costs when taking on new debt, and their stock prices are dramatically higher.

It’s been said that the financial crisis was a depression headed for Wall Street, not Main Street. That’s not entirely true. While Wall Street would have (and should have) suffered more if the financial institutions had been allowed to implode, there was still a deflating housing and property bubble that swept across the nation.

What’s so frustrating about the way the crisis was handled is they singled out for saving the exact people and firms that had created much of the crisis! We would be much better off today if the main thrust of the downturn had been allowed to take its course, protect depositors in banking institutions, and letting the rest of the chips fall where they may.

The drop would have been deeper, but the rebound would have been on more solid footing, with lending institutions and investment banks clear on what the word “risk” actually means and who takes it. Let’s hope next time it will be the people taking the risk who get the rewards and the losses, not the taxpayers.  Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment adviser.

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