We hope Ben Bernanke is still savouring his “Person of the Year” award from Time, as well as the glowing profile and childhood photo slideshow that came with it.
The American media has made its judgment about who got us out of the fiscal crisis.
History, however, will likely make a different choice.
Of course, Bernanke deserves his share of credit. His aggressive expansion of liquidity is responsible for the great reflationary recovery of 2009, and he’s pressed every and all lever to make sure that as many parties as possible have access to this liquidity, taking the Fed in unprecedented directions, using every last loophole (and then some?) allowable.
But let’s also not forget that Bernanke — an academic who spent his entire life studying and preparing for another Great Depression — was late to action. Very late. So late that even Jim Cramer went on TV to rip Bernanke for being asleep at the switch.
The player who really deserves the credit for lifting us out of the mess is Tim Geithner. Remember, it was Geithner who very early on, while he was still President of the New York Fed, who proposed that the federal government simply backstop all the bank debt in America.
At the time, that seemed like a laughably absurd idea and it was dismissed. So, politicians and regulators and the Fed tried one thing after another to stem the crisis, but the sucker was in a tailspin, and as George W. Bush said at the time, the sucker could have gone down.
Ultimately, the only thing that worked was Geithnerism. It was basically once the public realised that the government never force a haircut on another bondholder, and that the government would stand by every bank that the crisis started to abate.
Now, granted, there’s still never been a public statement of Geithnerism. It would have been impolitic to actually state that all the bank debt in America was being backstopped by Uncle Sam, so instead of coming out and saying that, Geithner had to propose something much more wild and ludicrous: PPIP.
PPIP — the plan to provide funding to hedge funds and investment partnerships interested in purchasing “toxic” assets of the banks — never really went anywhere. But it didn’t need to.
The message was so clear: Dear banking system, we’re so intent on bolstering the banking system at any cost, we’ll even let hedge funds take a huge, taxpayer-subsidized profit as part of the process.
Now, by the time you’ve sent that message, it hardly needs spelling that the government is backstopping the entire banking system. And it was not long after PPIP’s unveiling that the market started to rise.
Remember, most of what the government was able to do, it was able to symbolically. Just take TARP. It turned out, in a sense, not to be necessary. With most of the money returned (by the big banks), the transer of cash and the purchase of preferred stock was largely irrelevent. What mattered was the symbolism — that the government was there to protect banks.
(recognising this helps to answer a popular debate at the time of the crisis, which was why the government wasn’t bailing out homeowners, which, in theory would have trickled up to help out banks. The answer: This might have helped bank balance sheets, but it wouldn’t have solved the symbolic purpose of bolstering the entire system.)
If you need further evidence that it was the backstop which saved the banking system, look no further than the ongoing wave of carnage being seen at the level of small banks, where Bernanke’s wave of cheap money is doing nothing to slow the handful that die each week.
What matters, clearly, is the full-on government backstop.
What’s funny now is that pundits and economists have become obsessed with the question of: How do we unwind Bernanke’s various stimulative measures? But the answers to that are fairly clear and conventional, even if they’ll prove to be tricky.
Unwinding Geithner’s support measures will prove to be way more difficult, if not impossible.
Most likely we’ll get a few more months of debate on financial reform — with the questions of too big to fail and the implicit government guarantee getting some discussion — but it will soon dawn on everyone that the government really has no way of undoing Geithnerism in a credible manner. Nothing the government can say will ever really convince the market that in a time of crisis it wouldn’t step in.
And so Geithner’s original idea becomes the de facto law going forward, and when the aftermath of this period is fully known, and history renders its judgment for person of the year, the much-malignd Treasury Secretary will be the winner.