The accolades for Timothy Geithner came on so thick and heavy in the last week that it’s necessary for those of us in the reality-based community to bring the discussion back to earth. The basic facts of the matter are very straightforward. Timothy Geithner and the bailout he helped engineer saved the Wall Street banks. He did not save the economy.
We can’t know exactly what would have happened if we did not have the TARP in October of 2008. We do know there was a major effort at the time to exaggerate the dangers to the financial system in order to pressure Congress to pass the TARP.
For example, Federal Reserve Board Chairman Ben Bernacke highlighted the claim that the commercial paper market was shutting down. Since most major companies finance their ongoing operations by issuing commercial paper, this raised the threat of a full-fledged economic collapse because even healthy companies would not be able to get the cash needed to pay their bills.
What Bernanke neglected to mention was that he personally had the ability to sustain the commercial paper market through direct lending from the Fed. He opted to go this route by announcing the creation of a Fed special lending facility to support the commercial paper market the weekend after Congress voted to approve the TARP.
It is quite likely that Bernanke could have taken whatever steps were necessary himself to keep the financial system from collapsing even without the TARP. The amount of money dispersed through the Fed was many times larger than the TARP, much of which was never even lent out. The TARP was primarily about providing political cover and saying that the government stood behind the big banks.
Of course we can never know the right counterfactual had the TARP and related Treasury efforts not been put in place, but even if we assume the worst, the idea that we would have seen a second Great Depression was always absurd on its face. The example of Argentina proves otherwise. READ MORE
