And Speaking Of Moral Hazard...

There is nothing quite like the acting Secretary of the Treasury promoting it on national TV. In his most recent Charlie Rose interview, TG openly tells the banks not to be concerned with things getting worse. Well, Mr. Geithner, if the banks by that definition always have the governmental backstop, then who are we kidding that the entire financial system has not be nationalized. Would it make you feel better if banks fired all their risk managers and everyone ended up with a Goldmanesque VaR over $250?

Moral of the story, and this goes to the theme earlier of reverse engineering Greenspan: every bank is now expected to take undue risk, compliments of the Tim Geithner, and not be at all concerned with the consequences.

In the interview above, please fast forward to 17:49 for this key exchange.

CR:You will set the standard as to how much capital they need and they will tell you how much capital, or you will help them define how much capital they have.

TG: Thats right.

CR: ...and therefore theres a shortfall, in some cases, in some cases there will be none.

TG: There will be a shortfall in some cases, but again, this is not a solvency thing. There's very significant cushions in these institutions, today, and all Americans should be confident that these institutions are going to be viable institutions going forward. This is designed to make sure that the economy will be able to benefit from larger lending capacity going forward, in the event we were to face greater uncertainty again about a deeper recession. So it's like insurance... against... precautionary insurance against the risk of a deeper recession. That'll help make recovery more likely, because then banks won't have to keep behaving against the possibility that they have to protect themselves against things getting worse. So that's the dynamic this'll help us with.

hat tip Dave Sphere: Related Content

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