Autopsies on the 2008 financial collapse are common but seldom have two of its bigger voices sounded off on the same topic in the same pages. Paul Krugman offers a review of Tom Geithner's new book in the most recent 'New York Review of Books'.
http://www.nybooks.com/...
The central question is this "To prevent a full collapse of the US economy should we have nationalized the big banks (Krugman) or treated the crisis as a traditional lender of last resort problem espoused by Geithner?"
Today Krugman admits that Geithner got it right.
Finally, there was Geithner’s position, which was that despite its scale the financial crisis should be treated more or less as an ordinary lender-of-last-resort problem—that temporary nationalization would hurt confidence and was unnecessary, that once the panic subsided banks would be OK. A principal part of Geithner’s argument against nationalization was the belief that a “stress test” of banks would show them to be in fairly decent shape, and that publishing the results of such a test would, in conjunction with promises to shore up banks when necessary, end the crisis. And so it proved. He was right; I was wrong; and the triumph of the stress test gave him the title for his book.
In some ways, one has to say, the success of the stress test remains something of a mystery—part of the larger mystery of why the US financial bailout was so cheap. Yes, that’s right: in the end, the direct costs of bailing out banks and other financial institutions were remarkably low. Historically, taxpayers have typically been called on to swallow large losses in the course of cleaning up banking crises. Even the savings and loan crisis of the 1980s, which had little effect on the overall economy, ended up costing taxpayers around 5 percent of GDP. But the cleanup from the biggest financial crisis since the 1930s ended up costing less than a tenth of that. Geithner never really explains why.
So, even though this financial crisis was the most severe since the 1930's, the remedy was inexpensive and fast. The stress tests (formally named the Supervisory Capital Assessment Program) had us in positive GDP by the summer of 2009.
My position (a common one) is that the panic was foremost a liquidity problem. So the 'lender as last resort' was the appropriate response. Krugman confirms this.
Now, to be fair, Krugman goes on to criticize Geithner and the administration on the unfolding balance sheet recession in this review but that is a different matter altogether. Treasury's job is to make sure the financial system works and in that regard Geithner got it right.
