What is the legacy of Timothy Geithner? In an essay, I write,
In 2009, at the height of the financial crisis, there was widespread public and political support for making serious changes to how Wall Street and the financial sector operated. Presented with an opportunity to break these too-to-big-to-fail banks down to a size where an institution could be allowed to fail without threatening the entire national economy, Geithner instead attempted to restore the status quo. This was a win for the biggest banks, but the nation as a whole may eventually come to regret his policies.
The American Enterprise Institute sent me a copy of Peter J. Wallison’s Bad History, Worse Policy, which provides Wallison’s take on the financial crisis and the Dodd-Frank legislation. At $90, the book is priced for libraries and specialists. The book reprints his essays written over the period 2004-2012, with some added commentary in hindsight.
My guess is that a decade from now Wallison will look better than Geithner. In particular, I think that Wallison will be vindicated on the following points:
1. Freddie Mac and Fannie Mae lowered their lending standards considerably during the housing bubble, under political pressure. On p. 169, Wallison quotes from Fannie Mae’s 10K disclosure form for 2006:
We have made, and continue to make, significant adjustments to our mortgage sourcing and purchase strategies in an effort to meet HUD’s increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD’s goals and subgoals, which could increase our credit losses. [emphasis added]
2. As a result, Freddie and Fannie purchased large amounts of high-risk mortgages, helping to fuel the housing bubble.
3. Dodd-Frank was enacted in order to enshrine a narrative of the financial crisis. That narrative attributes the crisis primarily to predatory lending and to financial deregulation.
4. The narrative enshrined in Dodd-Frank is false. Predatory lending was a minor factor, especially relative to government housing goals. There are few actual examples of financial deregulation, and the examples most often cited (such as the repeal of portions of Glass-Steagall) had little or no bearing on the crisis.
5. The most significant impact of Dodd-Frank is to entrench the largest banks, as they benefit from their status of “too big do fail.”
Incidentally, Wallison probably would disagree with me that we should go so far as to break up the big banks.
Wallison calmly presents evidence. His enemies would do well to try to do the same.
#3 is a pretty outlandish claim. Dodd-Frank is a massive bill that does very many things, and to force it into the box proposed here does massive violence on the complex reality. Even a trenchant, conservative critic of the law such as David Skeel admits that it pursued many purposes, some of them quite sensible (such as bringing derivatives into exchanges), and that trying to dismiss it as some kind of ideologically-driven mess is quite hyperbolic. Wallison has seriously hurt his credibility by overstating his case, and especially by prioritizing the claim that Dodd-Frank deserves 100% repeal over a more granular examination of its parts.
I do not think putting derivatives on exchanges is worth anything. I imagine that if I went through the entire legislation I would find something constructive, but that is hardly a reason not to repeal it.
My anger with Geithner is for what he left undone. While he rescued the banks, he did not recognize the fact that they could not continue operating indefinitely in the same forms that caused the crisis. So while things could have been much worse, the crisis is far from over because the same structure remains in place which primarily serves as an vehicle to spread around higher income instead of more incremental, true growth based financial approaches to serve all income levels. Such incremental forms of financial competition would have been far superior to any restraints, “punishments” and regulations that are likely to be imposed in the future.