The Banking Emperor Has No Clothes

from the Baseline Scenario:



The Banking Emperor Has No Clothes
By Simon Johnson


In a major speech earlier this week to an American Bankers Association conference, Treasury Secretary Tim Geithner laid out his view of what went wrong in the financial sector prior to 2008, how the crisis was handled 2008-10, and what is now needed with regard to implementation of reforms. As chair of the Financial Stability Oversight Council and the only senior member of President Obama’s original economic team remaining in place, Mr. Geithner’s influence with regard to the banking system is second to none.

Unfortunately, there are three major mistakes in Mr. Geithner’s speech: his history is completely wrong; his logic is deeply flawed; and his interpretation of the Dodd-Frank reform does not mesh with the legal facts regarding how the failure of a global megabank could be handled. Added together, this suggests one of our most powerful policymakers is headed very much in the wrong direction.

On history, Mr. Geithner places significant blame for the pre-2008 excesses on the UK and other countries that pursued light-touch regulation. This is reasonable – apart from the fact that he is apparently unaware that the US led the way in lightening the touch of regulation, at least since 1980. A senior British official retorted immediately, “Clearly he wasn’t referring to derivatives regulation because as far as I can recollect, there wasn’t any in America at the time” (Financial Times, June 8, p.1).

More broadly, Mr. Geithner seems to have forgotten how big banks were saved – by government intervention, at his urging. He should probably watch Too Big To Fail, now playing on HBO, or peruse Andrew Ross Sorkin’s book, on which it is based – just look in the index for “Geithner” and trace the arguments that he made for repeated and unconditional bailouts of big banks and their creditors from mid-September 2008. ............(more)

The complete piece is at: http://baselinescenario.com/2011/06/09/the-banking-emperor-has-no-clothes/

Apparently Democrats now are finding it fashionable also too.

They already have. That is why I say that the actions taken have done nothing whatsoever to alleviate the problem.

The problem is that ALL the so-called too-big-to-fail banks are insolvent due to their involvement in toxic investment vehicles. The US government has not made them write down the value of these assets, and that is the only reason they still exist... well, that and a few trillion in cheap money made available to them from good 'ol Uncle Sam.