Live-blogging the Geithner speech

Aug 02, 2010

4:50 The-end.

4:48 What about the Bush tax cuts?

Geithner says the administration wants to extend them for most taxpayers, as well as a series of business tax cuts, and to make permanent the research and development tax cut.

He says the administration believes the economy can withstand the expiration of the Bush tax cuts for the top 2% of earners, and believes an effective tax cut will raise revenue and show the world the U.S. is serious about deficit reduction.

He adds that allowing the tax cuts to stand for the highest earners would add to the dreaded uncertainty about the economy.

4:47 Does Geithner see a role for community lenders?

He does. "We have made a conscious effort ... to hold the largest firms to tougher standards," Geithner says of the Dodd-Frank Act. He says Community Development Financial Institutions have been a "high-return" investment for the taxpayer.

4:45 Still on Japan.

Banks are stronger, and for that reason "I'm very confident" we can avoid a Japan scenario.

4:43 Is the U.S. turning Japanese, headed for decades of low growth or worse?

Answer: No.

Geithner then cycles into his explanation of the need to act with force in a crisis, which he says the Obama administration did. Most countries "wait too long to escalate," he says not for the first time in the last two years.

Geithner, for his part, is waiting too long to explain why he doesn't believe a Japan-style slowdown is at hand.

4:40 What's up with Fannie and Freddie?

Answer: We had a system that obviously didn't work, Geithner said. There are aspects of that arrangement that "aren't tenable," he said. "We also have to make sure we help advance this process in the housing markets, but we still have a lot to work through."

The administration is holding a conference next month and plans to propose legislation next year. "This isn't rocket science," Geithner said.

4:39 What's going on in Basel?

Answer: Geithner rejects the notion that the capital/liquidity rules overhaul is easy on the banks or will conflict with his call for a stronger international banking regime. Says will work hard to make sure rules don't get weakened. 

4:36 What weapons does the government have to help the economy at a time of zero interest rates?

Answer: "substantial ones," though unnamed. Geithner says there is a "gradual strengthening" in the economy visible in hiring trends. Notes Senate to consider tax incentives this week; calls it important for Congress to give states help to keep teachers in classrooms.

Also calls for "political will" to confront deficits, says U.S. can summon it over time.

"You always face more headwinds coming out of a financial crisis than a typical recession," Geithner said.

4:33 Question: How do we keep the shadow banking system from growing out of control again?

Answer: It's a "good question," but everyone must play by the same rules. "Our failure to do that was at the center of the crisis," Geithner said. Capital must offset moral hazard, capture the risks firms run. "I think we can get that balance right."

Geithner says the stress tests last May give U.S. firms a leg up on this process, but "these institutions will have to evolve."

4:31 Speech ends, questions to begin. No mention of "macroprudential."

4:30 Reforms will be tough, but they will be toughest on those who operated closest to the "edge of prudence."

4:28 Compares opponents of current reform push to those who fought against the creation of the FDIC and the implementation of national securities laws. Notes the relative stability of the economy in the intervening decades. 

4:27 Banks will have till 2013 to meet the higher capital standards, which will allow them to use their ongoing earnings to build up bigger buffers against a big loss.

4:26 Geithner says "procyclical" for the first time. Will he also say "macroprudential"?

4:24 The key aspects of the international agreement Geithner envisions:

  1. More capital
  2. Capital made up primarily of common equity, rather than things like trust preferred shares, etc.
  3. More capital against risky trading assets
  4. Higher capital requirements for bigger firms. "That is a simple principle of fairness," Geithner says.
  5. New global standards for liquidity.

4:23 The fourth area of reform is "perhaps the most important:: working out an international agreement to contain risk-taking and leverage at the biggest financial firms.

4:22 Consumers are the first major reform push; Fannie Mae and Freddie Mac and the housing markets are the second; derivatives moving to clearinghouses are the third.

4:19 Geithner says the first of four major efforts under the new rules center on protecting consumers. Specifically, he wants to combine two "separate and inconsistent federal mortgage disclosure forms" consumers get. Also, if consumers could put a cover sheet on that TPS report, because we need to have cover sheets on there.

4:17 The current system allowed "too much freedom for predation, abuse and excess risk." Geithner adds that we "have to strive to achieve a careful balance" in the name of supporting growth. "Freedom for predation" has quite a ring to it, even if there is too much of it.

4:14 Geithner pushes bank at the "uncertainty is killing us" crowd, saying, "Don't wait for Washington to draft every rule before you start changing how you do business." I don't suppose he's referring to the reports that Goldman Sachs and the other Wall Street banks are moving their proprietary trading businesses into their asset management divisions...

4:11 Americans are rediscovering the importance of living within their means. These changes will make us stronger as a country.

4:06 Geithner says he wants to outline the next steps for reform, but will first revisit the meltdown to remind us why the financial reform push was necessary. He then outlines the goals the government has:

  1. "The obligation of speed": Get the rules in place quickly so people can get back to work.
  2. Full transparency and disclosure: "The public will have a chance to comment" before rules are finalized.
  3. "We will not simply layer new rules on top of old, outdated ones."
  4. "We will not risk killing the freedom for innovation that is necessary for economic growth."
  5. Set high global standards to prevent another race to the bottom in lending standards, etc.

4:05: Geithner begins by saying he admires the educators assembled at NYU.

 

4 p.m. We have the text of Geithner's remarks. He reminds us that bankers don't always play as nice as they might have you believe.  "Reform was an obligation,  never a choice," he says.

Geithner also says the manic risk-taking and rush to leverage of the boom resulted in the misallocation of "hundreds of billions of dollars," and the collapse of the financial system in 2008.

He calls on bankers to "restore the trust and confidence of the American people and your customers and investors around the world."

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