James Galbraith, in a private communication, raised a justified concern over my point that the US Treasury Secretary Tim Geithner imposed proper stress tests on the US banks in 2009 and proceeded with their recapitalisation – unlike the Europeans who are allowing Europe’s banks to be zombies for ever and ever. James told me that he thinks ” …there is considerable doubt… that Geithner did effectively force a proper write-down of the toxic assets. If he had, it’s hard to see how Bank of America and Citi could have been counted as solvent in March 2009.” James is of course right. In my defence, however, I think the juxtaposition between the US and EU responses to the parlous state of the banks is still insightful, and quite damning for the European side. Here is my reply:
You are perfectly right implying that I gave an undeserved pat on Geithner’s back. I shall recant. What I ought to have said is that Geithner did not dither like the Europeans. Together with Summers they found ways and means of recapitalising the banks (even though they did that at the expense of the taxpayer and of society at large). My understanding is that his stress tests informed him and his department on the true state of the banks (and their effective insolvency; e.g. Citi and BoA – which of course they never made public) and then he proceeded to give them the oodles of cash and guarantees that would stop them from being zombies. It should have been done differently (i.e. they ought to have been nationalised) no doubt. Yet in the end US banks were recapitalised sufficiently to ensure that the liquidity that Bernanke pours into them does not all get hoarded – which is precisely what is happening now in Europe (billions in a trickle out).
By the way, elsewhere I had chastised Geithner and Summers for the scam that was their plan: Instead of giving the banks the money (as Paulson wanted to do), they created a new derivatives market by which to make amends for the one that perished in 2008. Nevertheless, however dodgy that scam has been, the EU’s version of that scam in Europe is even more contemptible: While just as politically and socially regressive as the Geithner-Summers plan, it helped escalate the banking crisis in ways that make Geithner’s policies in the US seem almost emlightened.