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Tim Geithner discovers the shadow banking system

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US Treasury Secretary Timothy Geithner

Treasury Secretary Tim Geithner has an op-ed in the Wall Street Journal today in which he makes the case for financial reform based on a "It's déjà vu all over again" argument. We had "financial crisis amnesia" when the financial crisis struck in 2008 — and in 2012, we the amnesia has returned.

But Geithner has his own form of amnesia. Specifically, he's forgotten his role in bringing the financial crisis about in the first place. Here's an excerpt:

Regulators did not have the authority they needed to oversee and impose prudent limits on overall risk and leverage on large nonbank financial institutions. And they had no authority to put these firms, or bank holding companies, through a managed bankruptcy that wound them down in an orderly way or to otherwise adequately contain the damage caused by their failure. The safeguards on banks were much tougher than those applied to any other part of the financial system, but even those provisions were not conservative enough.
 
A large shadow banking system had developed without meaningful regulation, using trillions of dollars in short-term debt to fund inherently risky financial activity. The derivatives markets grew to more than $600 trillion, with little transparency or oversight. Household debt rose to an alarming 130% of income, with a huge portion of those loans originated with little to no supervision and poor consumer protections.

Geithner is at pains to present himself not as a regulator, but rather as a noble financial pompier. "I was then the head of the Federal Reserve Bank of New York, which serves as the fire department for the financial system," he maintains. 

In other words, he didn't set the fire. Those who rolled back financial regulation pre-crisis did. But as head of the New York Fed, which operates cheek-by-jowl with Wall Street, he certainly contributed to the emergence of the shadow banking system, specifically by participating in the easy-money monetary regime that was overseen by Federal Reserve Chairman Alan Greenspan (Geithner became President of the NY Fed in 2003, an Greenspan retired as Fed Chairman in 2006).

So the fireman, um...did kind of set the fire. Or at least pile up the kindling. And the logs. And make the matches available at very low interest rates to the arsonists.

But heck, before that, Geithner worked under both Larry Summers and Bob Rubin in the Clinton Administration — both of whom fought any meaningful regulation of the shadow banking system and strenuously undermined the efforts of regulator Brooksley Born to drive a stake into the dark heart of that same shadow banking system, over-the-counter derivatives.

Geithner was around for much of this, so his amnesia line sounds pretty hollow in light of his history. That said, he isn't wrong in principle. We do need financial reform to prevent a replay of 2008-09, just like we needed financial reform, dismantled by Geithner, Greenspan, Rubin, and Summers, to regulate the financial markets that gave us the Great Depression.

But maybe we could also use a Treasury Secretary with a less selective memory.

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