By Steven Pearlstein
Wednesday, April 14, 2010; A12
Last spring, if you believed the media, Tim Geithner was the tax-cheating Treasury secretary who used gobs of taxpayer money to bail out the banks and provide bonuses to failed executives at American International Group, even as he was running up massive government deficits in a vain attempt to stimulate the U.S. economy.
Credit was frozen, stock prices had fallen by more than 50 percent, and Geithner's launch of the administration's regulatory reform effort was such a flop that the president was forced to put out a statement affirming support for his Treasury secretary. White House Chief of Staff Rahm Emanuel and top economic adviser Larry Summers were forced to make a special project of Geithner's reputational rehabilitation.
Oh, what a difference a year makes. Today, the cost of the bank bailout is a fraction of the original estimate, with a chance that the government might even turn a profit. A stimulated economy is creating jobs, deficit projections are coming down, and stock prices have regained more than half of what they had lost. A regulatory reform bill fairly close to what Geithner proposed is about to pass Congress. And the rumors are flying that it is Emanuel and Summers who are about to leave the administration, with Geithner now the president's most trusted economic adviser.
The lesson here, of course, is never fall for the conventional wisdom. Geithner was never the bumbling fool once widely believed, nor is he the economic maestro so glowingly portrayed in the latest magazine profiles.
As the former president of the Federal Reserve Bank of New York, he bears significant responsibility for failing to see a giant credit bubble developing right under his nose and neglecting to take the necessary steps to contain it. Since the bubble began to burst, however, he deserves a lot of credit for taking the bold actions needed to contain the financial crisis, stabilize the economy and, most impressively, stay the course even when the political tide turned against him.
My own beef with Geithner is that he remains unwilling to own up to the obvious failures of financial regulators and the Wall Street executives they were meant to supervise. Together, they continue to take comfort from the fact that just about everyone misjudged the risks that were being taken on, and that it was only an unforeseeable combination of unprecedented events that brought the financial system to its knees.
This "perfect storm" explanation was laid before the Financial Crisis Inquiry Commission last week by former Fed chairman Alan Greenspan and former Citigroup executives Robert Rubin and Chuck Prince. And it is essentially the same rationalization that Geithner himself offered Tuesday before the American Society of News Editors, meeting here in Washington.
The problem with this flawed analysis is that it leads to the wrong solutions. Geithner's view is that it is naive to think that we are somehow going to prevent the next crisis by ridding Wall Street executives of their animal spirits, or inoculating investors against herd behavior or relying on prescient regulators. The wiser course, he argues, is to accept the imperfections of market participants, submit to the inevitability of the next crisis and hard-wire the system to reduce the economic impact by reducing leverage, increasing capital requirements and giving regulators the powers they need to close down failing institutions in an orderly manner.
This is the "Rockefeller Republican" view of financial regulation, and once you embrace it, the Geithner-Rubin-Greenspan approach to financial regulatory reform makes perfect sense. You give up trying to eradicate a Wall Street culture that celebrates and rewards people who find clever new ways to mislead investors, circumvent regulation, stimulate speculation and take advantage of customers and trading counterparties. You not only defend but reward, through enhanced responsibility, the Fed and other agencies that, over the years, allowed themselves to be captured by the industry. And you ensure that in future crises, regulators retain the authority to bail out the creditors of large, interconnected financial institutions when not doing so could pose risk of a global financial meltdown.
In recent weeks, a number of new books have been published offering a more populist critique of the financial crisis -- one that would lead, logically, to a much more radical restructuring of the industry and limitations on its activities. It is probably unrealistic to have expected Geithner to embrace such a critique, in that it would require him to accept more responsibility for the crisis itself.
But it remains a disappointment that there have been no sufficiently powerful voices in Congress or the Obama White House to challenge the idea that financial crises are inevitable and that the best we can hope for is to lessen the economic and human damage that they cause.