January 29, 2010
Geithner on fixing recessions

Treasury Boss Tim Geithner offers this impassioned conclusion to his testimony before Congress on the AIG bailout.

In 1930, many people thought that the financial system was going through a necessary adjustment, that the healthy process was to let the fire burn itself out, and that the best thing the government could do was to do nothing.

Today, few believe that. Today, we know that when confronting a severe economic crisis the government must respond with overwhelming force. That is the basic lesson of the Great Depression. That is the basic insight that informed every judgment we made. And that is the reason we are now emerging from a recession and not still in the midst of a second Great Depression. In confronting this crisis, we learned from the past. Now we must learn from more recent failures, especially those that required AIG's rescue.

If we had stronger supervision and regulation in place, the government could have acted sooner to avert the crisis. If we had better crisis management tools in place, the government would have had better options. If we could have done it any differently, we would have done it differently.

Instead, we had no other choice. That is the basic lesson of this great recession.

In the future, when another generation of Americans confronts a new crisis born of new risks, the question will be whether we provided them the tools we did not have, whether we turned our collective outrage into concrete action, whether we passed comprehensive financial reform.
I hope we will.

All of this from a man one respected economist described as “very smart and… conceptually stronger than one might have expected.”

I could, of course, devote considerable blog space to dissecting and rebutting nearly every sentence Secretary Geithner wrote. In the end, though, that would be tedious and depressing. I will limit myself to a few simple observations.

The Secretary seems to have little time for the hypotheses that (a) there is always choice, (b) for every choice there is opportunity cost, (c) aggressively activist fiscal and monetary policy before and during his tenure largely created the economic crisis, and (d) the frenetic, unpredictably lurching policy initiatives on his watch have significantly increased uncertainty in market, making a bad situation worse.

Why, o why--apart from the answers found in the voluminous public choice literature about the incentives and constraints facing government officials—would he say such foolish things?

If only I could believe as the Secretary does, that "we are now emerging from a recession and not still in the midst of a second Great Depression."

People, don't forget that the Great Depression was composed of at least three separate recessions, separated by brief periods of rapid economic growth.

Posted by Noel Campbell at 12:13 PM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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