Friday, May 09, 2014

What Timothy Geithner Really Thinks

Geithner explains how the "bail out" has made money.

"He paused and looked out at a crowd that, it’s safe to say, probably did not fully appreciate how intense the anger around the financial bailouts had been and how close the country was to the precipice of a full-on depression. “We are going to earn, all in, a couple hundred billion dollars,” Geithner said. And six years after the bailouts, the too-big-to-fail banks and the insurance giant A.I.G. have since repaid the money they took from the government. Even the rescues of Fannie Mae and Freddie Mac, the mortgage-lending companies that once had to borrow $187.5 billion, have turned profitable. “Much of the dominant view about the strategy,” Geithner said, “is the inverse of the truth."

The Fed is filling a market failure.  The myopia and high-level of risk aversion mean that the government is the only institution that can provide liquidity to the system in exchange for assets that have value but are not valued at present.  The demand for liquidity is so great that additional liquidity must be provided.

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