Geithner says history will validate unpopular Wall Street bailouts

Outgoing Treasury Secretary Timothy Geithner defended the Obama administration's unpopular decision to push for a bailout of the nation's largest banks in a pair of exit interviews published Thursday, telling The Economist and The Wall Street Journal that history would validate the decision.

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But Geithner admitted that bank bailouts would remain unpopular among voters who viewed such assistance as looking "like you're giving aid to the arsonist."

"There's no explanation powerful enough to soften the inevitable fear and anger and resentment that's going to come with a crisis that did so much damage to the innocent," Geithner told the Journal.

The Treasury Secretary admitted that the fear of a financial collapse required a government intervention that appeared "deeply unfair."

"The paradox is that the things that are ultimately just in terms of making sure you can protect the average person from a failing system require you to do things that are going to look deeply unfair and unjust because you have to try to make sure to prevent a collapse," he continued.

But Geithner told The Economist that despite the moral hazard created by such a response, the alternative was worse.

“You will end up having to socialize much more risk and [create] much more future moral hazard,” he said. “You have to design the crisis response to mitigate moral hazard to the extent you can, and then change the rules of the game going forward to undo some of the damage you’ve caused.”

The Treasury secretary heralded the Dodd-Frank banking reforms as crucial tools to prevent such a hazard from happening again, allowing policymakers to be almost “indifferent about contagion caused by one institution."

And Geithner noted that despite the unpopularity of the bailout, when all was said and done, "we'll have earned tens of billions of dollars for the taxpayer, you can put to reducing the long-term deficits or to Head Start or to education or to infrastructure, when people thought we'd lose a trillion dollars."

Geithner also defended the administration's decision not to criminally prosecute many of those responsible for the economic collapse, saying "a huge part of what happened across the system was just a mixture of ignorance and greed, or hope over experience, and not illegal."

"Most financial crises are not caused by fraud or abuse. They're caused by people taking on risks they don't understand, too much risk," Geithner said.

President Obama has nominated his current chief of staff, Jack Lew, to replace Geithner at the Treasury Department. Asked about his view of the economy going forward, Geithner worried that his successor would face a country where "people are too dark about the economy now, in part because of the shadow of pessimism, skepticism about our political system today."

"But, and for the moment it's very hard to do, if you look past the political dysfunction, the economy looks encouragingly resilient," Geithner said. "We've got much more diversity of strengths, from energy to high tech to manufacturing, than is true for any major economy, and people should find comfort and some optimism in that."