Geithner helped save the banking system from collapse, but then did nothing to reform it. And Lew himself was a beneficiary
The long-anticipated departure of Tim Geithner and the appointment of his successor, Jacob Lew, has brought much discussion of Geithner’s record, his legacy, and the likely trajectory of the Obama administration treasury department under Lew. In considering this question, I found inspiration in our most profound political philosophers. I refer, of course, to The Who, in the finale of their immortal and highly relevant Won’t Get Fooled Again:
“Meet the new boss
Same as the old boss”
Consider first Geithner’s legacy, first as president of the New York Federal Reserve, then as treasury secretary. (Actually, his tendencies were evident even earlier, when he was carrying Larry Summers’ water during the Asian financial crisis of the late 1990s.) As head of the New York Fed during the bubble, Geithner did – well, not much of anything: no regulation, no warnings, no protests about abuses or excesses, nada, zilch. Geithner was in the audience at Jackson Hole in 2005 when Raghuram Rajan, then the IMF’s chief economist, delivered his now-famous warning about systemically dangerous incentives and risk-taking in the financial sector – a warning that Larry Summers slapped down publicly, and about which Geithner never uttered a public word, then or later.
Then came 2008, when, so far as we can determine, Geithner basically did everything that Hank Paulson told him to, and not much else. In fairness, one must concede that Paulson, Ben Bernanke, and Geithner were effective in preventing utter systemic collapse – albeit a collapse caused in large measure by their own earlier actions and inactions. Geithner continued that pattern, and then firmly established it as his legacy, after he took over at treasury.
But what, precisely, is that pattern?
In sum, it was to be intelligently pragmatic, in preventing acute systemic collapse and then returning the financial system, the political system, and the economy to their status quo. So, on the plus side, the Obama administration did not embrace the suicidal austerity path and laissez-faire preached by some, and practiced in some now-devastated European nations.
Banks and financial markets were propped up by the treasury department and by Federal Reserve purchases of over $2tn in securities; the auto industry was saved (or at least General Motors was); and a second Great Depression was avoided. Not to be assumed – and worthy of serious praise.
But what wasn’t done, and Geithner never even tried to do, is equally telling.
No purge of the senior managements and boards of directors of the financial sector, not even those, such as Citigroup and Bank of America, which were totally dependent on federal support for their existence (Citigroup was nearly 40% owned by Geithner’s department). No curtailment of bonuses, no attempt even to tax them. No breaking up of too-big-to-fail institutions, some of which were and remain so complex that they are, as my colleague Charles Morris has said, too big to succeed. No attempt to curtail the toxic lobbying and revolving-door hiring of those same institutions – once again, including several that would not exist except for federal aid. No attempt to develop an evidentiary record to support criminal prosecution for the massive criminality that accompanied the bubble. No attempt to develop an evidentiary record for asset seizures under Rico, the law routinely used to seize the assets of criminal organizations. No serious attempt to rescue millions of homeowners facing foreclosure, or imprisoned in houses that they will never be able to sell for as much as they owe. No attempt to rein in the deeply entrenched culture and incentives that produce toxic financial “innovations” and increasingly frequent crises. A pattern of hiring truly dreadful people, ranging from Goldman Sachs lobbyists to private equity executives who worked with banks to bet against their own securities.
And so, now we have, indeed, “succeeded” in returning to something roughly like the status quo. What is that status quo?
We have an even more dangerously concentrated, politically even more powerful, still highly corrupt, unproductive financial sector; a clear message sent that even a horrific crisis caused by massive criminality yields no punishment whatsoever; insufficient, weak regulatory laws and institutions; an administration largely managed by people who were, and remain, part of the problem; a massively corrupt political system in which opaque, uncontrolled contributions yielded a $3bn presidential election; and even greater economic inequality than when Obama and Geithner took office.
Tim Geithner, upon returning to private life, will surely be rewarded in the typical ways. Perhaps, he will become a banker. If not, president of a university or thinktank, with consulting arrangements, board memberships, and speechmaking to the financial sector bringing him a living wage of five or ten million a year.
And now we will have Jack Lew. What can we expect of him?
I refer you to The Who’s lyrics. For three years before entering the Obama administration, Lew was a Citigroup executive, and for the last year he was the chief operating officer of Citigroup Alternative Investments, which made some money by betting against mortgage securities, but which lost many billions more when the crisis came. That crisis and those losses did not prevent Lew from receiving a handsome bonus, paid after he had been appointed to his first Obama administration job.
But that isn’t his main problem. His main problem is that he has already demonstrated that he’s willing to be a typical political hack, and to give bankers what they want. In congressional testimony, he actually said, with a straight face, that deregulation had not contributed to the financial crisis.
As The Who have warned us …