Friday, August 22, 2014

Tim Geithner’s Stress Test: Can the Government Do No Wrong?

Tim Geithner’s Stress Test: Can the Government Do No Wrong?

By Mark Skousen
Editor, Forecasts & Strategies
Most Austrian economists argue that the best response to the 2008 financial crisis was to “do nothing.” By refusing to bail out the banks, investment firms and insurance companies, the government would be sending a clear message that Wall Street and the private markets must avoid irresponsible decisions in the future.

A few make an exception for the banking system itself, defending the government’s guarantee of money market funds, for example; otherwise, the whole system would have collapsed.

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I just finished reading Tim Geithner’s book, “Stress Test,” which makes the case for the opposite — he justifies almost every decision by the Feds to reduce short-term rates to zero, to flood the system with money and to bail out the banks, investment firms and insurance companies, as well as General Motors. He was at the center of the crisis, before and after, as New York Fed chairman under Bush and Treasury Secretary under Obama.

I suspect the best solution was to do something in between these two extremes. To “do nothing,” the extreme Austrian position, would have resulted in a total collapse of our monetary system and probably would have caused chaos and rioting in all the major cities in the United States and most of the world. I doubt if it would have caused a return to the gold standard, but rather a discrediting of the capitalist model and a rise of totalitarian regimes.

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On the other hand, the establishment view of the Keynesians, as typified by Geithner, has created the gigantic problem of “moral hazard” in the future. Wall Street knows that any big financial institution probably will be bailed out in the future, and such thinking will affect private sector decision making about risky investments.

Geithner expressed concern about “moral hazard” and supported the growth in regulating the financial centers with Sarbanes-Oxley and Dodd-Frank legislation. The result is a series of troublesome characteristics of today’s financial system: too big to fail… and too big to sail… in sum, a slow-growth economy. There is no free lunch.

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In case you missed it, I encourage you to read my e-letter column on Eagle Daily Investor from last week about the popularity of the Libertarian movement. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

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