Mark Calabria

In case you missed Treasury Secretary Tim Geithner’s revisionist fiction in today’s Wall Street Journal, he takes the critics of Dodd-Frank to task for forgetting about the financial crisis and how it came about.  Sadly it is Geithner who forgets (or willfully ignores) the causes of the crisis.  Just a few highlights:

Geithner reminds us of the AIG bailout.  He forgets that it was the NY Fed’s approval of using credit default swaps to lower bank capital that lead to so much bank counter-party risk being concentrated in AIG (see Gillian Tett’s Fool’s Gold), as well as increasing bank leverage.  But then who was heading the NY Fed at this time?  Tim Geithner.

Mr. Geithner goes on to complain about the growth of the shadow banking sector.  Who was it that approved banks’ exemption from the Sarbanes-Oxley rules on off-budget entities, which lead to the growth of various bank off-budget, hidden liabilities?  Again, Geithner’s NY Fed gave that approval.

Geithner raises the issue of “risky short-term financing” but does so without mentioning that the primary reason for such was the low interest rates and steep yield curve created by. . . again Geithner’s NY Fed (and the rest of the Federal Reserve System).  There’s a reason that MF Global failed in basically the same way that Bear Stearns did, because monetary policy provided both with strong incentives for maturity mismatch.  But since Geithner also acts shocked that “household debt rose to an alarming 130% of income” perhaps he needs a few lessons in monetary policy.  Did he seriously not think that cheap credit, via the Fed, would result in increased debt?

Mark Calabria

Mark A. Calabria, is director of financial regulation studies at the Cato Institute.