Geithner: “none…would have survived”

December 6, 2009

Secretary Geithner acknowledges what most doomsdayers were saying last fall, that without the government’s extraordinary rescue measures, the entire financial system was on the verge of collapse. (Miller/Harper, Bloomberg)

“None of [the big Wall Street insitutions] would have survived” had the government stood aside and let the crisis run its course, he said. “The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.”

Some have said this recent financial crisis wasn’t as bad as the 1930s’. I disagree, and have posted the following chart to make the point.

Slide1

If you add JP Morgan and Wells Fargo to the chart, it looks much worse. Goldman and Morgan Stanley don’t have deposits, but did have $2 trillion in liabilities between them as of August 31, ’08.

Geithner made his point when asked about Blankfein and Gary Cohn’s comments to Bethany McLean that Goldman would have survived without government help. They need to tell themselves that to justify the stupendous compensation accruals they’ve put aside. It’s helpful that Geithner calls bull.

But the right way to fix this isn’t to erect some clumsy compensation apparatus to control pay on Wall Street (which won’t affect Goldman anyway because they don’t qualify as having received extraordinary assistance). The right way is to let them fail, as messy as that would be.

Additional resolution authority as envisioned in House/Senate legislation is helpful, but won’t do much good unless the size/complexity of these banks can be reduced dramatically before they’re on the verge of collapse…

8 comments

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If the Fed had not stepped in, yes, most certainly, it would have been as bad as the 1930′s. But, all the Fed as done is to plug the hole, with some gum. As soon as the printing press stops, as soon as countries stop loaning the US money. We’re screwed, and that day will come.

Posted by Rick | Report as abusive

[...] Winkler says suggestions that the current financial crisis was not as bad as the Great Depression are wrong and [...]

Rolfe this is an excellent and prudent analysis of the situation. Please keep us advised about your analysis of this situation as the problems unfold.

[...] Winkler says suggestions that the current financial crisis was not as bad as the Great Depression are wrong and [...]

[...] Winkler says suggestions that the current financial crisis was not as bad as the Great Depression are wrong and [...]

To think that this whole disaster was built upon writing “bad” (illegal) mortgages…

This kind of depicts the extent of the crime committed by Wall Street as aided and abetted by the “regulators” whose “job” it was to “regulate,” “investigate,” “prosecute,” and “incarcerate.”

Does anyone know how many millions of loans were illegal?

[...] how bad things could have gotten for the financial system.  (Rolfe Winkler, Economist’s [...]

Take a look at the Fed’s H.3 Report. There was a $550B withdrawal from banks in less than 24 hours, when there was less than $500B in deposits in the ENTIRE US banking system. That’s why we had a banking holiday, and why we needed the TARP bailout. Without it, the dollar would have become worthless *instantly* and we would have had martial law.

Posted by Alex | Report as abusive

We still did not need to bail out banks. Bailing out holding companies is ridiculous — regulators are only to protect regulated entities.

An accelerated form of RTC 2 would have done well, complete with delivering losses to unsecured senior bondholders. As it is, we subsidized the behavior that we now criticize.

Right on, Rolfe.

The world had a classic bank run, in an electronic world on a monumental scale. If Bernanke and Geithner et al. had to break the law to stop it, so be it. That makes them even greater patriots and adds to their legend.

Yes, our Fed and treasury were among the authors of the great bubble, but the great bubble had millions of authors, from global speculators to the Chinese and Japanese central banks to real estate fraudsters across America. There were few other saviors.

Posted by Dan Hess | Report as abusive

If money contracted the way it did in the Great Depression, a majority of American businesses would have gone bankrupt. Few American businesses operated with little or no debt.

We would have been under pressure to sell off substantial ownership of America over to the cash-rich nations of East Asia and the Arab world.

Posted by Dan Hess | Report as abusive

Let it be worse.

The whole point of capital, of money, is that people who can invest it wisely, I.E. in ways that consumers and the population in general benefit from, keep and even expand on their money.

People who give it to corporate criminals because they supposedly get a return on their investment when it sits in a bank account, and then is backstopped by every other taxpayer in the nation (at government gunpoint) when the criminals who run the banks loses it all during a weekend at Vegas – well, they really aren’t very responsible with money, and as a result, really shouldn’t have any.

Stop giving your money to criminals because you expect a return on your investment, dummies.

Because of you dummies, and the corrupt government, trillions of dollars are allocated in non useful, wasteful sectors in the economy – like in Goldman Sachs, which really doesn’t produce anything, other than “a profit”. They make NOTHING.

I really hate people that don’t understand economics, and I hate people who think theft is the same thing as economics. Goldman Sachs only has a profit because they are stealing money from everybody, and using the Federal government to cover their butts, and you as a taxpayer, pay for it – and they produce nothing.

Posted by Richard Wicks | Report as abusive

[...] chart: http://blogs.reuters.com/rolfe-w inkler/2009/12/06/geithner-none-would-ha ve-survived/ Why the rally? Was the gold rally was due to a flight to safety? I think that there is a global [...]