Thursday, May 6, 2010

Geithner Says Can't Take All Risks Out of Banking and He Should Know

Treasury Secretary Tim Geithner in his prepared statements to the Financial Crisis Inquiry Commission says that it would be a mistake to take all the risks out of banking. "The lesson of the that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for business and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation."

Funny, I thought the main lesson of the crisis was that regulators should actually pay attention to what our banking system is doing before the system blows itself up, takes the economy with it, and requires massive government bailouts and subsidies. Another takeaway from the crisis? That massive bailouts and subsidies to the banking sector essentially remove risk from the banking sector and cause them to do really stupid things that will eventually blow up the system anyway. Except now the government is paying for the clean up. Want a good example? Check out what's happening in Europe right now. European banks are absolutely browning themselves over a Greek default. Why do they own Greek debt given the risks, you might ask? Because the ECB allowed them to pledge Greek debt as collateral into its term repos at extremely low rates. So banks bought up loads of Greek debt at high rates and pledged it to the ECB to make huge "risk-free" spreads, something they certainly would not have done if they had nowhere to go with the debt and had to finance it at market rates. In retrospect, the trade was maybe not such a great idea. Although if the European bailout of the Greeks actually works, it was a great idea. Yet another way of removing financial risk from the banks and passing it on to the public sector.

Mr. Geither says you can't take all the risks out of banking and yet that is exactly what he has done in his handling of the crisis. Here's a list of the many ways that Mr. Geithner, in cahoots with Mr. Bernanke, was responsible for taking all the risk out of banking:
  • Bailing out Bear, AIG, Fannie, Freddie, [insert all your favorites here.] By the way, bailing all these companies out was primarily a bailout to debt-holders, which were generally banks.
  • Creating a variety of Fed facilities to help banks finance their inventories.
  • Allowing banks to borrow at cheap rates via FDIC's government-guarantee program.
  • Zero interest rates. Really does this need any elaboration?
  • Quantitative easing. Ditto.
  • Capital injections, in some cases repeated capital injections, into the largest banks.
I mean, could we possibly take any more of the risk out of banking? I have a better idea. Let's return all the risk to banking, regulate our financial firms, and let the losers actually take the fall the next time they screw up.

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