Bailouts: Geithner vs Barofsky

By Felix Salmon
November 7, 2011
David Leonhardt has managed to get a quite astonishing on-the-record quote from Tim Geithner:

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David Leonhardt has managed to get a quite astonishing on-the-record quote from Tim Geithner:

“The central paradox of financial crises,” Timothy F. Geithner, the Treasury secretary, said before leaving for the Group of 20 meetings in Europe last week, “is that what feels just and fair is the opposite of what’s required for a just and fair outcome.”

This is textbook Geithner. For one thing, it’s pure Technocrat. Geithner, here, is the worldly policy wonk, explaining why it’s silly to simply do what feels right. In fact, you should do what feels wrong!

The quote is also extremely defensive — as it probably should be, coming from the one member of Obama’s economic team who played a central part in orchestrating the Bush bailouts.

And I can’t help but see the influence of Occupy Wall Street here, too. They’re demanding justice; and Geithner is, essentially, dismissing them as unsophisticated rubes. If only they understood what he understands — then they’d see that the bailouts were in their own best interest! Still, they’re setting the terms of the debate — to the point at which Geithner now considers such questions “central” to financial crises in general. (I don’t recall him talking that way when he was at the New York Fed.)

Meanwhile, Zachary Goldfarb gets an equal-and-opposite quote from Neil Barofsky:

“There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program, or TARP, the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.”

Goldfarb goes into chapter and verse explaining what Barofsky is talking about — the way that too-big-to-fail banks have gotten ever bigger and more profitable, at the expense of the rest of us. And after reading his article, it’s extremely difficult to understand what Geithner might be talking about. Does he think that what we’ve seen on Wall Street in the past year or two is a “just and fair outcome”? If not, is he saying that he did “what feels just and fair” instead of what was the right thing to do?

What’s undeniable is that Barofsky is easy to understand, while Geithner is being cryptic and opaque. That might be because Leonhardt didn’t give him enough space to explain himself more fully, or it might be because Geithner simply isn’t a great communicator. But knowing the Treasury press office, I suspect that negotiations between Leonhardt and Treasury were required before Geithner’s quote became on-the-record. Which does make me wonder what they thought that they were saying here.


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I don’t really want to carry water for Geithner, but this is an extremely uncharitable reading of his quote. From the context of the article, which is a mess of confusing short and long term trends, the quoute is about Germany bailing out the EU periphery,

‘In the short term, this trap takes the form of resistance to emergency measures, like Germany’s distaste at bailing out more profligate countries, which may increase deficits. “The central paradox of financial crises,” Timothy F. Geithner, the Treasury secretary, said before leaving for the Group of 20 meetings in Europe last week, “is that what feels just and fair is the opposite of what’s required for a just and fair outcome.”’

I don’t see what this has to do with what Goldfarb is saying, and it has nothing at all to do with Occupy Wall Street.

Posted by AASH | Report as abusive

@AASH: “The central paradox of financial crises,” This sounds sweeping and general to me. Geithner’s statement is about financial crisEs – plural – all of them, in general. So Mr. Salmon is right to compare Geithner’s statement directly with Barofsky’s.

To me, Timothy Geithner comes across to me as being guarded, shifty and dishonest. I can’t help forget, for example, how Chinese university students laughed him out of town, after he proclaimed to them that China’s investments were in American dollar-denominated assets were very safe. cialcrisis/5423650/Geithner-insists-Chin ese-dollar-assets-are-safe.html

With the Federal Reserve’s inflationary* race to the bottom, which Geithner clearly supports*; executed so deliberately [as "quantitative easing"] and so soon after Geithner’s assurances to the Chinese; we can see the true face of Geithner’s promises.

* Inflationary “quantitative easing” is the right policy at the moment; it’s unfortunate, confiscatory, unfair and damaging, but absolutely necessary after so many years of unaffordable tax cuts for the wealthy and so much stagnation in American public investment (which is making America increasingly un-competitive). It’s painful and destructive, like a course of chemotherapy for a person who’s been smoking and drinking heavily for far too long; but it’s the only way to restart the stalled American economy – the only way to save the patient. So Geithner is right in that a further injustice is necessary to make the system less unfair.

The problem (as Barofsky points out) is that the “stimulus” bailout money has gone to precisely the wrong people, and instead of “stimulating” the real economy with this money, the rich have done the pragmatic thing in an inflationary/confiscatory market: they’ve converted this “wealth” into gold to ride out the storm and emerge from it with their usury intact… Or otherwise (where not converting it into gold) have used it to leverage an even bigger advantage over the very “have-nots” who helped contribute the “stimulus” funds – forcing the rest of the American economy to hand over increasing slices of a decreasing pie.

So in a sense, both 1. Geithner and 2. Barofsky are correct:
1. It is absolutely unfair to confiscate hard-earned income alongside usury, through deliberate inflationary policy, but paradoxically, would be even MORE unfair NOT to inflate away these ill-gotten-gains [extorted by holding the American economy to ransom] and also inflate away some of the asset-backed debts accumulated under duress during times when the market was distorted and while its real distress was being covered up by these crooks. The medicine is a necessary evil.
2. On the other hand, it’s even MORE unfair STILL for the “stimulus” money to go to the very same wealthy folks who made the biggest ill-gotten-gains in the first place. This only serves to increase the very imbalances that the “stimulus” ought to have been correcting.

So instead of a real stimulus programme, America got a political crony bailout heist. It’s a wonder Democrats didn’t see the last-ditch shake-down coming as it was organised during the final days of Bush’s presidency. It’s no wonder it didn’t work. Who honestly believes that Bush expected a bailout to work, that would damage Bush’s reputation and enhance Obama’s reputation if it DID? It’s a wonder the Democrats acquiesced in this criminally mismanaged program.

We should be very worried now that the U.S. Government has spent much of their economic firepower on misguided policies that exacerbate the very imbalances that helped cause the crisis… We should be even more worried, with Republican presidential candidates talking about fixing the Bushed U.S. economy by further increasing these very same imbalances, and with many American voters taking these fellows seriously…

We can furthermore see that the wealthy and well-informed ARE VERY WORRIED – because they’ve been putting all their available wealth into gold, a trend which is still getting worse. Even the rich don’t have any confidence in the medicine their political pawns are prescribing!

Posted by matthewslyman | Report as abusive

It’s sometimes fascinating to watch you get worked up layering things onto innocuous quotes. It makes me wonder what’s going on inside your narrow little world that allows you to project such things.

Posted by dWj | Report as abusive

[Follow-up comment] SO: Mitt Romney (who I don’t agree with on everything) is absolutely right to suggest that the bailout was terribly mismanaged, and that many more companies should have been allowed to go into bankruptcy (the proper procedure for handling corporate failure) instead of being bailed out. (This way, failed executives might not have been able to hold taxpayers to ransom in order to secure their contractual but immoral bonuses. All contracts would have been off, and ripe for renegotiation – as they should have been…) Romney’s crisis management approach would have led to a much quicker recovery than Bush’s or Obama’s approach.

Posted by matthewslyman | Report as abusive

Geithner doesn’t get it, but if you see the report out from St. Paul’s as covered in the Finance Addict blog today, you’ll think that the bankers are starting to.

Posted by rickstevens65 | Report as abusive

Agree with AASH. I read that quote in a totally different direction: which is that while it may feel like the right thing to inflict punishment on the Greek sinners for borrowing too much, it will in fact lead to a very wrong outcome. And kudos to Geithner for saying so.

This, to me, is sort of emblematic of the Obama administration in general and Geithner in particular: he says things that make it sound like he actually understands what’s going on, but then does very little in practice to follow through (and sometimes does the opposite than you’d be lead to believe from an interview). Same can be said for Larry Summers, who in interviews and columns doesn’t sound very different from Krugman, but when left at the helm…

Posted by Y.Alekseyev | Report as abusive

Love to get your comment on Leonhardt’s front-page Sunday NYT piece arguing the “voters have overindulged themselves” perspective that sounds just like Geithner: europe/the-gridlock-where-debts-meet-pol itics-economic-memo.html

Posted by SamPenrose | Report as abusive

The central paradoxes of financial crises is that the people who caused the crisis want to be given the right to take riskier actions.

What Mr. Geithner is missing is that the “just and fair outcome” of the financial crisis would have been major financial institutions getting turned into boring utilities in exchange for the bailout.

Their risky parts could have been parceled out to the MF Globals which could then fail at will without intervention.

Mr. Geithner and Mr. Bernanke have simply refused to take on their just and proper roles as regulators of major financial firms.

Posted by ErnieD | Report as abusive

@ErnieD : Basically, you have nailed it.

Posted by maynardGkeynes | Report as abusive

read this: s/2007/gei070323.html

and I challenge anyone to say that Geithner has any clue as to how the finance markets work, what variables affect stability, and what he should do.

Posted by fresnodan | Report as abusive

Greece is its own unique case. The borrowed funds were consumed by the Greek nation in the manner that its successive democratically elected governments choose. There were no big frauds. If they can’t pay, they can’t pay, but to call a reversion to a public sector sized to what Greece can actually afford as some gigantic betrayal of “the people” is absurd. The Greek public sector was much bigger than their own resources could afford because that is how the people of Greece liked it. No pity for the creditors getting haircuts, mind you, but the Greek people are not the victims of some horrendous conspiracy of Davos men (and women).

Posted by Eric377 | Report as abusive

Europe was forgiven their debt after WWII. They will try this again but we are in a different time and have no assets to help.

Posted by Truman99 | Report as abusive