Tim Geithner — obstructionist?

Surely Treasury Secretary Geithner is a Republican. He must be since he is publicly willing to hinder the implementation of even a modest reform such as this:

…[T]he G20 will press ahead with the creation of two separate systemic bank lists, the first with an estimated 20 global banks whose failure would pose a risk to the international financial system. The second would be a country-by-country list of banks that are systemically important within their home economies, but pose little danger to the world.

To achieve these goals, the Dodd-Frank Act (H.R. 4173) authorized The Financial Stability Oversight Council to identify those banks the failure of which would threaten the financial system. Geithner chairs the Council. However, the Financial Times
reports that "Tim Geithner has questioned the feasibility of identifying financial institutions as 'systemically important' in advance of a crisis, just as the regulatory council the Treasury secretary chairs is supposed to start doing precisely that." Geithner made this argument in defense of his reticence: "What size and mix of business do you classify as systemic? … It depends too much on the state of the world at the time. You won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock." This appears to be an argument from ignorance or, more precisely, a confusion of evidence of absence (we do not know with certainty what a future state of the world will be) with absence of evidence (we cannot probabilistically predict what a future state of the world will be). I strongly suspect that of all possible future states of the world, those which we believe to be feasible possibilities are also those which resemble the world as we know it. Using this point we can infer a practical rule: Some future states of the world are offensive but can be avoided if actions are taken in the present that are meant to avoid these futures.

Geithner seems unwilling to tolerate that ambiguity entailed by the presence of any regulatory mechanism. To be sure, his willingness to avoid regulation which is uncertain to work as intended — that is, regulation which will not prevent a systemic crisis — likely depends upon his knowing that present and future American taxpayers can be made to bear the risks and pay the debts of a crisis prone financial system.

Another concern about the Dodd-Frank regulatory mechanism believed it would provide large banks with another set of rules to game. Perverse effects would supposedly follow from this rule-gaming behavior. Should the possibility of perverse outcomes deter efforts to implement regulations? No. I make this claim because one could concede the point that regulations can be gamed in every instance without also concluding that any given regulatory regime is equal to every other regulatory regime. Some regimes are preferable to others. Thus, the mere possibility that new regulations can be gamed implies that regulations ought to be designed to achieve desired results along with the knowledge that these regulations may need to be updated in the future.

Should these be problems to worry about that one would want to scuttle a part of the Dodd-Frank reforms? I doubt this. After all, the Great Recession proved that an under-regulated financial system can and will generate bubbles and instability, crises and bailouts. It is unsurprising, then, that Open Congress harshly and rightly evaluates Geithner's reserve:

This sounds to me like an excuse to not do your job. If you're serious about keeping a handle on systemic risk, you'd err on the side of caution and make as inclusive a list as possible so you don't accidentally let firms through to take advantage of their lower capital and leverage requirement and get too interconnected. Instead it sounds like Geithner is inclined to keep a short list and wait until things get messy before making judgements, because, you know, that's when the best decisions are made. Right.

This kind of waffling when it comes to actually taking decisive regulatory action is exactly why proponents of limiting bank size think hard-and-fast rules are the way to go.

This article was cross-posted to OpenSalon and FireDogLake