I keep reading Secretary Geithner's speech today. The phrase that keeps going over and over in my head is that "we are letting it happen again before we prevent it from happening again."
Geithner identifies the financial crisis as being "caused by banks taking too much risk." In another wording, he characterizes it as a series of "bad lending decisions" made by banks. The bad lending decisions that resulted in this excessive risk were caused by "The lack of an appropriate and modern regulatory regime and resolution authority."
Overall, Geithner's argument is that this financial crisis could have been avoided if there was a better regulatory system, and that we will need to revamp financial regulations to avoid another crisis caused by bad lending decisions. That certainly rings true. I can't really argue with that assessment.
As such, the second to last paragraph in the speech sums up this fear (emphasis mine):
But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms.
While Geithner's assessment of the problem rings true, his look to the future at the end of the speech strikes me as backward. If the lack of a "modern regulatory regime and resolution authority" both caused this crisis and will cause future crises, then shouldn't we construct that new regulatory regime first, and then hand money out to the private sector second? Otherwise, according to Geithner's own logic, aren't we just handing out more money to the people who caused the crisis, without any guarantees they won't just do the same thing again?
This gets back to the fundamental issue of trust that I discussed earlier today, and that would have led me to vote against the bailout both in October and in January. We shouldn't be handing over any money to the people who caused the crisis until there are guarantees in place that those people will no longer be allowed to make the same bad decisions that made them rich, but which destroyed our economy. Before we give them any more money, we need the guarantees--aka, new financial regulations--first. Since we have no guarantees now, basically this is just trusting the banks who made the bad decisions not to make them again. Trust just isn't good enough for me right now.
Geithner admits that the current crisis was caused by bad decisions from financial institutions. He also says that we won't be able to stop future bad decisions from financial institutions until there is a new system of financial regulations. My conclusion from all this, based on Geithner's own words, is that we shouldn't be giving financial institutions more money until, at the very least, we can prevent those bad decisions. Otherwise, we are letting a second financial crisis unfold before we can put in safeguards to prevent future financial crises. We need to prevent them from making more bad decisions before we let them make any more decisions.
No Democrat should have voted in favor of releasing the second round of TARP money before, at the very least, President Obama had signed the TARP Reform and Accountability Act into law. Even according to Geithner's own logic, handing out this money without new regulations in place gives us no guarantee at all the bad lending decisions will stop. In short, we are doing this all backwards. We are letting another crisis happen before we prevent another crisis from happening.
I am very nervous about all this. Until we have new laws preventing these "bad decisions," I don't want to give the people who made the bad decisions a single dime.
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