Geithner Answers His Critics: Putting Toxic Assets on Uncle Sam’s Balance Sheet Would be Riskier

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During his appearance today at the Council on Foreign Relations, Treasury Secretary Tim Geithner was asked the question on many progressives’ minds: Why does the Obama administration’s bank rescue plan seem to rely on “socializ[ing] risk but keep[ing] profits private?”

But Geithner seemed to sidestep the question at least in part by offering a explanation for why he decided against setting up a “bad bank” — not directly addressing the option of nationalizaton or receivership. The full exchange is posted after the jump.

Q: [T]he real question, I think, is whether there are mechanisms that would allow, if taxpayers are going to take the risk, for them to enjoy all, not some, of the profits rather than a system in which you’re trying to revive the markets on the taxpayers’ back.

GEITHNER: Understand your concern. But let me just be clear about this. To solve financial crises, governments have to be willing to take risk, because the definition of financial crises is the markets are not willing take risks that looks — otherwise would be economic.

The central fact is that governments have to be prepared to take risks the markets can’t take, for a temporary period of time, in order to get a firmer foundation for repair.

Of course, you want to do that in ways that doesn’t have the government assuming all the losses in the system. And what makes these things hard to solve is because the world ultimately will want us to take more risk than we think is prudent for the taxpayer.

And the programs … we’re designing or pursuing are very cognizant of the risk you [described]. And again, just think about the alternatives that most people advocate in this kind of context.

The dominant alternatives people are proposing would have the government come in and purchase these assets on their own, hold them on the government’s balance sheet, take all the risk in that choice.

And you know, this is a system that’s much, much more complicated than what we went through in the ’90s and what other major economies went through over the last couple decades.

And because of the basic complexity of these products, scale of these institutions, that, in our judgment, would pose much, much greater risk to the government that taxpayers are assuming greater share of losses than is necessary or prudent, and taking risks they cannot effectively manage.

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