Geithner’s Plan: It’s Not Transparent and It’s Still a Bailout

Testifying for a second day before the Senate Budget Committee about the plan he sketched out yesterday to save the banking sector, Tim Geithner promised to inform Congress as quickly as possible if more taxpayer money is needed. He said a supervisory review of banks — a so-called “stress test” — would help determine that. It’s likely the stress tests will show the banks are in far worse shape than Geithner’s plan can deal with. But it seems doubtful Geithner will return to the well any time soon. Neither Republicans, Blue-Dog Democrats, or progressive Democrats like the idea of bailing out Wall Street — and revelations about Wall Street’s malfeasance, misfeasance, and just plain stupidity over the last few years are likely to multiply in the weeks and months ahead.

So far, the Geithner plan requires no new money beyond the remaining $350 billion Congress has already okayed to bail out Wall Street. But in truth, the plan assumes trillions more from the Fed, based on the Fed’s seemingly infinite capacity to backstop almost anyone putting up almost any collateral. The idea is to lure private investors into buying up the banks’ toxic assets, by having the Fed limit their downside risks. If private investors pay too much, the Fed picks up the tab.

Taken as a whole, this is hardly a model of transparency. To date, the Fed has already committed some $2.5 trillion to rescuing the financial system, yet no one outside the Fed knows exactly how or where this money went. The Fed is subject to almost no political oversight. Yet if the trillions of dollars the Fed has already committed and the trillions more it’s about to commit can’t be recouped, the federal debt explodes and you and I and other taxpayers are left holding the bag.

In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place – namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors – should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don’t want to take these steps for fear of spooking the Street. They think it’s safer to put the costs and risks on taxpayers — especially in ways they can’t see.

Geithner’s plan is better than the first Wall Street bailout but make no mistake: It’s not transparent, and it’s still a bailout.

About Robert Reich 545 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

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