Guest Post: Geithner Says “The Size Of The Shock Was Larger Than What Precipitated The Great Depression”

Washington’s Blog


Tim Geithner says:

Things were falling apart. We had no playbook and no tools…Life’s about choices. We had no good choices…We allowed this huge financial system to emerge without any meaningful constraints…The size of the shock was larger than what precipitated the Great Depression.

Indeed, there are some signs that we’ve been in a depression for a number of years.

Geithner also warned that another financial crisis will hit:

“It will come again. There will be another storm,” warned Geithner, who in early 2009 succeeded Paulson as treasury secretary. “But it’s not going to come for a while.”

***

“I’m certain we will” experience another catastrophe—he just couldn’t say when or what kind.

“You will not know,” he answered when Sorkin tried to pin him down. “It’s not going to be possible for people to capture risk with perfect foresight and knowledge.”

As I noted last year:

Greenspan says that the financial crisis was caused by a once-in-100-year event.

Tim Geithner says its more like once every 40 years.

Jamie Dimon implies every 5-7 years.

But Simon Johnson says its really once every 5 years:

Visit msnbc.com for breaking news, world news, and news about the economy

Would the American people stand for the lack of any real reform if they knew that the financial system will likely melt down again within the next 5 years? [given that the crisis started in 2007, that means that the next crisis will hit in 2012 … if nothing blows up in the meantime]

Geithner has been a big part of the problem.

He’s previously said that his job as head of the New York Fed wasn’t as a regulator, even though one of the Fed’s core jobs is to regulate. As Dylan Ratigan writes:

In Geithner’s own words during confirmation hearings in March: “First of all, I’ve never been a regulator…I’m not a regulator.” According to the New York fed bank’s Web site, that was your job!!

Quoting from the Fed’s website: “As part of our core mission, we supervise and regulate financial institutions in the Second District.” That district of course is the epicenter for bailed out banks and billion dollar bonuses.

(In other words, the 2007-2008 shock was even bigger than the one leading up to the Great Depression because Geithner and the other regulators were sitting on their hands.)

Indeed, as I’ve previously noted:

Tim Geithner told the Today Show that:

It’s “deeply unfair” that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans.

Geithner also argued that President Barack Obama had no choice when confronted with a financial crisis.

“As the president has said, we had to do some very unpopular things,” Geithner said. “People looked at what had happened.”

“It’s not fair. It’s deeply unfair,” he said. “He (Obama) had to decide whether he was going to act to fix it or stand back … and that would have been calamitous for the American economy.”

There are only a couple of minor inaccuracies in Geithner’s statements:

  • Geithner’s entire approach is wrong, because the economy can’t recover until many of the “financial institutions that got taxpayer-paid bailouts [and] are emerging in better shape” are broken up
  • The government has been anemic in addressing unemployment

Moreover, it is not like their approach fell on them and they couldn’t do anything about it. Geithner … and the boys made a conscious decision to side with the oligarchy at the expense of the people.

As Simon Johnson and James Kwak write:

[There was a] point at which the government had to decide if it would defend the financial oligarchy from populist outrage, or whether it would reform the financial system that brought us the financial crisis and severe recession. We do not think it was an easy choice. But ultimately Obama and his advisers chose to bet on the bankers they knew. The result has been even larger banks and an even more concentrated financial sector.

***

Geithner ended the interview with this pearl of wisdom:

“What happened in our country should never happen again,” he said. “People were paid for taking enormous risks. It was a crazy way to run a financial system.” Geithner said, “It’s the government’s job … to do a better job of restraining that kind of risk-taking.”

Indeed … too bad that Geithner and the boys are still encouraging that kind of risk-taking.

Geithner was, of course, largely responsible for much of the failure of the government to restrain risk-taking in the first place.

As William Black points out:

Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth.

Geithner was also complicit in Lehman’s accounting fraud [and see this].

And pushed to pay AIG’s CDS counterparties at full value, and then to keep the deal secret.

And as Robert Reich notes today, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval.

(So the shock was even bigger than the one leading up to the Depression because Geithner and his buddies helped blow the bubble and try to cover up wrongdoing on Wall Street.)

Geithner has been equally bad as Treasury boss. Indeed, there is hardly a single independent economist who thinks he has been responding appropriately to the economic crisis.

Sorry to say, but Geithner has long been a yes-man to the powers-that-be, who ships pallets of money wherever he is told without question or any follow-up or tracking whatsoever.

Even worse, Geithner has been called an idiot by Nassim Taleb and a “con man” by Time Magazine.

No wonder we’re going to eventually have another crash …

And because Geithner (along with Bernanke) have insisted that the big banks be bailed out at Main Street’s expense, that the status quo be protected instead of reformed, and that the U.S. insure the debts of the too big to fails, the next crisis will be even bigger than the last.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

24 comments

    1. Fed Up

      I agree. There were people who understood debt who got this correct. I’m not sure all those people’s timing was exact.

      “The size of the shock was larger than what precipitated the Great Depression.”

      More like the size of the aggregate supply shock was larger than what precipitated the Great Depression and so was the amount of debt that was used to prevent price deflation instead of currency with no bond attached.

      The economy has a medium of exchange problem.

  1. Tertium Squid

    I recall from 2008 and 2009 how much our political and economic elite labored to minimize the danger of what was happening. Since our main job was to go buy more stuff and get further in debt, we were better off not knowing how bad it was. Now that it is “over”, the opposite is the case and they want to take credit for thwarting a financial asteroid.

    Statements like this indicate there is currently tranquility at the top. Not necessarily tranquility about the well-being of peasants like us, but certainly about the security of their power.

  2. Paul Tioxon

    So Tim Geithner is not the man for the job. Unless the job is to protect the privileges of the privileged. The structure of the financial system is not crisis prone. It seems that it is an ongoing crisis. There is no reform, there is only complete and total revolution. Of course, we are not so starving and depraved to risk the relatively affluent life that most American do in fact live. And like Rome, we will not fall in a day. And like Rome, it is not only how absolutely strong we are at our hegemonic peak, but that we are still relatively strong in our decline from that peak.

    And like Rome, our competition is even in worse shape with their own inbred corruption, unspeakable cruelties, and hollow, one dimensional flacid leadership. See the Arab Spring uprising for people with really bad social problems and the governments they want to defenestrate. Also see any of the posts here about China with its inevitable tumble. Somehow, the scale of China even with labor unrest is a boiling crucible of modernization, repression and more than a few rays of hope for a better China and a better world because of THAT. Here in America, there is a Dual State that has developed, in the legal system, the economic, and the political. The financial oligarchy is not the only vital threat to our social order. Our Military Establishment is the de facto and de jure 4th branch of government as per the National Security Act of 1947, as amended several times since then, an act of Congress, signed by the President. If you think a Mega Financial Depression is bad, wait til you see even an attenuated Nuclear war.

    The fact is, to have power among the elites, you must have some critical function that supports the very nation state system as we know it today. The military is that indispensable institution, and now, FINANCE has joined the club, by an act of Congress, signed by the president, The Dodd Frank act. Our democratically controlled republic has written into law, the way we like things to be done, authorizing and legitimizing the bail out of risk taking banks ad infinitum and the preservation of the management of these institutions. The laws will continue to be re written, allowing for any all practices to continue. It is all very reasonable, bloodless and rational. And totally corrupt. But then, so was the inclusion of slavery in the US Constitution.

    So when the next catastrophe occurs, how well will it be managed? Will the people be more organized to seize power or will we be outflanked by the re-branded reactionary right wing elements of the republican party to have them contain revolt and confuse the public and further consolidate power into the hands of the people who already dominate much of the political landscape? Pick a side. Join with people who organize specifically to acquire, retain and expand revolutionary change of the government and the private corporate sector.

  3. KnotRP

    A fraction of the government/fed spending makes it to the non-financial economy, yet people think we exited the last
    crisis? That’s like saying the nuclear reactors are not a
    crisis any more because TEPCO managed to pump a lot of sea water into the building, though they cannot account for where it went nor is the building showing any sign of retaining the water (and the core melted down on day 1 and isn’t going to unmelt down just because it’s been a few months and the MSM cycle has moved past it)

    1. aet

      Who says its not serious? Not the IAEA:

      http://www.iaea.org/newscenter/news/tsunamiupdate01.html

      The MSM may have moved on, but the more specialized press remains:

      http://www.world-nuclear-news.org/RS-Revisions_to_Fukushima_restoration_roadmap-1705114.html

      And the water is not missing, it is accumulating in the structure’s understoreys and basements.

      But “crisis” in the sense of a crucial urning point conditioning the future? That point has passed for now.
      That is not the current situation, which is more stable than that. But it remains serious, and dangerous.

  4. attempter

    Let’s hear the criminal defense hacks lately infesting these threads explain this one. Here’s Geithner out of his own mouth promising that the policies he’s always pushed, and continues to push ever more aggressively, inevitably lead to crises.

    If that’s not an admission of intentional triggering of crises, I don’t know what is.

    The denial that he was a regulator, even though it was explicitly in his job description, is also an admission of dereliction and corruption. (It reminds me of how capitalism’s defenders are increasingly denying they ever endorsed the “invisible hand” ideology, that letting markets rule would maximize benefit to all.)

    1. Up the Ante

      .. and all he has to do is occasionally cast a fierce glance at any camera that happens to be pointed at him .. ?

      “Geithner has been called an idiot by Nassim Taleb and a “con man” by Time Magazine.”

      Now that’s rich. Secretary of the Treasury of the U.S. called a con man and it’s universally accepted as the most accurate description.

  5. Atch Logan

    Why would anyone think or care about what Geitner says or does. He is totally without merit or creditabilty. His power has been and is being used solely for the benefit of the top 400, and their menions.

  6. Patch Savage

    Geithner is just another generic, treacherous politician, that’s why he dons a suit and makeup and rolls into the Today show and says that things are “deeply unfair.” What a tool. Timmy, let’s bail out the American People by pulling a reverse vampire tap on the Banksters. Start with examples like Capital One and Suntrust who sucked up nearly 35 Billion (and much more when the press bothers to look closer) in handouts, backed their data centers right up to the Fed, and ‘let the good times roll’. Enjoy Dean Baker’s ‘Terrible Tale of the TARP’, wherein this mild mannered economist rips the subserviant press for their misrepresentations.

  7. ep3

    to get something off my chest: that fucking rich scumbag asshole piece of shit.

    Now…
    “He’s previously said that his job as head of the New York Fed wasn’t as a regulator”

    So, what was his job then?

  8. PQS

    “The size of the shock was larger than what precipitated the Great Depression.”

    So we can expect an equally large positive response from the government any day now, correct? You know, to rein in the abuses, punish the wrongdoing, change the laws, bail out Main Street, institute worker protections, and perhaps create a program as successful and long-lasting as Social Security? Right?

    ..crickets…

      1. F. Beard

        The Austrians think a depression is the cure for the “malinvestments” of the boom. If only their jobs were the first malinvestments to be liquidated…

        1. PQS

          So I see.

          My usual retort to anyone advocating “austerity” in any form is always: “You First.”

  9. Philip Pilkington

    Reading this is truly depressing. A once great economic powers is on her knees — and those in power know it.

    I watched Geithner on Charlie Rose the other night with Wang Qishan, Vice Premier of China. It was a boring interview — plenty of, “No, stop… CHINA’S the best”; “No, you stop… USA is the best”. But then Charlie Rose raised THE question that Qishan had been dreading:

    “So, what do you think of the future for the US economy?”

    Rose wasn’t being a hard-ass. He’s one of my favourite interviewers, but we all know he’s a soft-touch. He asked the question with a certain naivety — and I think he regretted asking it the second it slipped from between his lips.

    You could see Qisham squirm.

    “Erm… er… I see that there was job growth last quarter… erm… we find that to be… erm… very promising…”

    …awwwwwkward!

    1. F. Beard

      A once great economic powers is on her knees — and those in power know it. Philip Pilkington

      Good! Now maybe we can move on from banker fascism to genuine capitalism and once again out-compete the world.

  10. Random Blowhard

    “It will come again. There will be another storm,” warned Geithner, who in early 2009 succeeded Paulson as treasury secretary. “But it’s not going to come for a while.”

    WRONG, WRONG, WRONG!!!…Useful idiot…

    “Every 5-7 years”, that was from Jamie Dimon CEO of JPMorgan.

    These are the facts, the financial CRISIS WILL CONTINUE until the TBTF banks are nuked OR total economic collapse renders the US dollar Zimbucks and the United States implodes into failed state.

  11. jacke

    So it’s not fair, huh, Timmy to criticize you for your misdeeds? You are the one who stood up and told the banks that they were not to use the TARP funding for EXISTING loans, only NEW ones. Do you have any idea how many commercial real estate loans, some on projects nearly complete, and business lines of credit were canceled under “at will” provisions that represented thousands of workers’ jobs?
    No, it’s not fair – not fair to the people running good honest businesses, operating with integrity and taking care of their employees, to have their business assets seized because you told a bank that had exceeded its capital holdings to throw those babies out, to starve their workers, and, then a few months down the road, finance the same project through a new company set up by the banker with a NEW TARP-funded loan. Each and every such loan so canceled led to multiple tiers of business failures, worker layoffs, home mortgage defaults, and on and on. Every sector of the economy was affected by your failure to understand the consequences, intended and unintended, of your ignorance of the interrelationships on the economic circle. It’s not just numbers on paper and the numbers in your bank account, Timmy, it is the lives of the good, hard-working people of this country that you have destroyed and continue to destroy. Crony capitalism at its worst, and it does not work. Do your job, which is to understand the whole picture and regulate the banks so that corruption and collusion does not destroy what it was supposed to protect. Free markets only work when they are truly free, everyone operating on the same footing and under the same rules, not special rules and handouts for your buddies.

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