Update (2/5/09): Since Geithner's new role as Treasury Secretary has increased the public's interest in him, I should note that with the benefit of hindsight, it's clear now that Geithner was right, and I was wrong. The breadth and severity of the financial crisis, which are now apparent but weren't necessarily obvious when I originally wrote this post, absolutely justify extending the lending facilities like the TAF and the TSLF. Geithner was clearly ahead of the curve in terms of recognizing the magnitude of the problems in the financial sector. Tim Geithner has an op-ed in tomorrow's Financial Times. Geithner, as President of the New York Fed, is probably the most important financial regulator in the country, so anything he says should be taken seriously. He is the Fed's point-man on Wall Street. He also knows a great deal more about the financial markets than almost anyone, so I'm comfortable deferring to him on most financial matters. But I can't get on board with this:

The Fed has put in place a number of innovative new facilities that have helped ease liquidity strains. We plan to leave these in place until conditions in money and credit markets have improved substantially. We are examining what framework of facilities will be appropriate in the future, with what conditions for access and what oversight requirements to mitigate moral hazard risk. Some of these could become a permanent part of our instruments. Some might be best reserved for the type of acute market illiquidity experienced in this crisis.
Geithner is presumably talking about new facilities like the Term Auction Facility (TAF) and the Term Securities Lending Facility (TSLF). The TAF and the TSLF were indeed innovative, and could well have helped the Fed stave off a complete meltdown of the financial system. I don't question their utility in this financial crisis. But making them "a permanent part of out instruments"? That sounds an awful lot like making the bailout permanent. Geithner does say that the Fed is examining the conditions for access to these facilities. But the Fed would have to increase the strictness of the collateral requirements significantly to even begin to mitigate the moral hazard risk. I didn't believe the story when it came out, but maybe it's true: maybe Geithner has, in fact, been captured by Wall Street.

4 comments:

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