Geithner and Amnesia

I a recent Op-ed in the Wall Street Journal, U.S. Treasury Secretary Timothy Geithner argues that the financial crisis that gave way to the Great Recession was a result of amnesia:

"There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up outside of the safeguards all economies require."

On the contrary, the safeguards were undermined by government institutions which pressured banks to offer loans to sub-prime clients. The myth of home-ownership as holy grail brought poor and middle-class aspirants into banks to seek out loans on temporary low interest terms, which would rise in a few years. Most investors assumed that the value of their homes would keep rising, enough to support refinancing then quick-sale, enough to repay the bank, make off with a better home, and even pocket some cash.

Yet like all bubbles, from the Tulip Craze of the 1600's to the Dot.com bubble of the 1990's, buyers stop buying, selling price falls, and soon enough investors become debtors weighed down with worthless investments and negative equity.

If amnesia is the cause of such irresponsible lending and borrowing, then banks, reckless investors, government institutions, and ultimately baffled and bewitched sub-prime buyers all share the blame.

Beneath this easy, blameless cop-out rests moral hazard, the risky behavior in which those who throw caution to the wind will endure little loss, in part because the government promises to back up any toxic debt. Risky mortgages, massive refinancing schemes, and racial-based quotas imposed by federal institutions all contributed to the massive fraudulent hazard of risk, the housing bubble that expanded, and then the necessary correction that burst investment, exploded debt, and brought down financial firms around the world.

No, Mr. Geither, the Housing Crisis of 2008, the massive market burn-up that took down Bear Stearns and startled Congress into pushing a massive TARP bailout for failing financial firms -- that was not a result of amnesia, but arrogant ignorance of the proper function of markets, mixed in with pandering political promises. The less government offers credit and easy revenue, the less likely this country will see such nasty booms and busts in the future.