Noam Scheiber, the always-interesting economics commentator at The New Republic, has some kind words for one of Treasury Secretary Geithner’s less remembered initiatives. Geithner ordered “stress tests” on the big banks last February, modeling worst-case scenarios with the goal of identifying the banks that couldn’t make it through the crisis on their own. The results were surprisingly upbeat – and at the time they were leaked (in May 2009), the media reaction was skeptical to say the least.
But Geithner got the last laugh. All but one of the 19 banks have since repaid their bailout money. Equally important, many analysts believe that the banks’ passing grades played a big part in turning the market herd from doom-and-gloom to bottom-feeding mode — as reflected in the sharp reduction in the cost of business credit.
So the Treasury Secretary does deserve points for increasing the transparency of the banks’ financial structure. But we’re not in a mood to celebrate. It was no secret that one of Geithner’s primary motives in ordering the test was to beat back demands for nationalization of the big banks, which would have been followed by recapitalization by the taxpayers and sale back to the public. Now, maybe the nationalization path, cleaning up the banks’ balance sheets and relaunching them afresh, would have been a mistake – that certainly seems to be the economics establishment’s view. But what’s emerged from the ashes of 2008 doesn’t offer much to cheer about. Most of the system’s losses have been socialized anyway (think AIG, Fannie, Freddie), the banking business is far less competitive, and the post-bailout industry has proved a very reluctant partner in rebuilding the market for credit.