Geithner on the Defensive
Tim Geithner, secretary of Treasury, today faces the Senate Banking Committee (in the morning) and the House Financial Services Committee (afternoon) to defend the administration’s new regulatory reform proposals.
These hearings are important because they are an opportunity for all participants to set the tone and frame issues for the debate and legislation to come.
Geithner is obviously seeking to position himself as the reformer for whom we have all been waiting. This claim is undermined to some degree by the fact that – as former head of the New York Fed - he is very close to Wall Street. But perhaps a poacher has finally become gamekeeper?
The chairs of the respective committees, Sen. Chris Dodd (D) and Rep. Barney Frank (D), want to preserve their autonomy and make it clear that, while cooperating with the administration, they will put their own stamp on the final legislation. Dodd may push harder on consumer protection; this has been one of his themes. Frank may express concern for how smaller banks will be treated under the new regulations.
The real resistance will probably come from those on the left, the right, and in the center who are deeply suspicious of how Big Finance brought on and behaved during the recent crisis. The Joint Economic Committee held a hearing in April, for example, at which Thomas Hoenig (president of the Kansas City Fed, and from the right of the political spectrum) and Joe Stiglitz (Columbia University and Nobel Prize winner, from the left) agreed that any bank that is “too big to fail” should not be allowed to exist – the dangers to the financial system and to the taxpayer are far too serious.
But this elementary point is nowhere really addressed in the administration’s voluminous proposals. Instead, Geithner is bringing forward an encyclopedia of mini-changes, none of which add up to anything that would downsize our largest financial institutions or really change their behavior.
In fact, given all that has happened over the past two years, we have good reason to fear that large banks and other financial institutions now feel they can take risks with impunity – if something goes wrong, they know that generous bailouts will be forthcoming.
Geithner will probably be pushed by committee members on Thursday (and perhaps even by the chairs) to explain (a) how his new rules would have prevented the most recent crisis, and (b) how they will avoid damaging bubble leading to devastating bust in the foreseeable future.
At least given what we have seen so far, it appears he will have no good answer to these questions.
-- Simon Johnson
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