Financial Crisis Redux

A new book says the government should have focused more on homeowner debt and less on banks.  But, what would you expect of a former banker like former Treasury Secretary Timothy Geithner?  Sure, the banks were frozen and their balance sheets needed to be restored so they could loan or the economy would have been frozen.  Even now, the banks have more loan capacity than they know what to do with.  Even corporations have more cash than they know what to do with.  So instead of making productive investments that would employ people, they buy their own stock making their own managers richer.  And if that were not enough, capital gains are taxed less than ordinary income that the rest of us earn.  Go figure!

Mian and Sufi in their book, House of Debt, say they cannot understand why the government encourages borrowing through tax deductions for mortgage interest payments.  When consumers accumulate debt loads that can only be sustained with continual price increases, it can endanger the whole economy when asset deflation finally occurs.   “When there is an activity that is dangerous, you should tax it in one way or another.  And instead we have a system that actively subsidizes debt.”  Go figure!

Banks enjoyed the ride and paid nothing for it.  Most were propped up and made whole, even foreign banks.  Some were saved by making them consolidate with weaker banks, making the remainder—too big to fail for sure. 

With the salve of Mr. Geithner’s own book, there is a certain resignation that little more could have been done. They did not even try.  The bankers complain of the peanuts reserve requirements in the Financial Reform Act.  But, no plausible reserve requirement can cope with a drop in housing values of more that 25 percent.  We are now beholden to a colossal failure of imagination.  Readers of this blog can imagine better.