Geithner
Treasury Leverage
The Secretary of
Treasury is responsible for paying bills of the US government, not running the
economy. Tim Geithner is not an
economist. The Treasury borrows to pay
for government budget deficits by selling US bonds as promises to pay in the
future. The Secretary of the Treasury
should generate trust the money the US government is borrowing will be paid
back. The financial collapse of 2008 was
due to the distortions of government backed mortgage loans. Since then, government bailouts to keep
failed banks in business have further eroded the US financial industry relative
to its increasingly serious international competition. Financial engineering by governments has not
had happy outcomes throughout history, leaving little reason to hope there will
be any change in that pattern of policy failure.
Secretary
Geithner is leveraging Treasury lending with taxpayer provided default
insurance. Consider the typical
scheme. The Treasury lends to bank A at
2%. Bank A can lend to bank B at 3% with
a Treasury guarantee of at most a 5% loss if B does not repay. A private loan would suffer 100% loss if B
defaults. The Treasury is providing
taxpayer backed default insurance to bank A.
Lucky bank A makes 1% profit on the deal
without worry of default. The moral
hazard is that riskier investors will become involved. More ominously, A and B can stage a default
and scam taxpayers or holders of US dollars.