Treasury Secretary Geithner is on a crusade to prevent the debt crisis in Europe from spinning out of control. The Wall Street Journal reports that Mr. Geithner is chiding European leaders on their crisis response. He apparently believes he has a better strategy for Europe. Geithner wants Europe to pile on more debt to solve a debt crisis and conduct bank stress tests. Can you believe the nerve of this guy? This is the same Treasury secretary who, 16 months ago, exacerbated the financial panic with a disastrous communication strategy and half-baked policy prescriptions.
Mr. Geithner came into office on January 26, 2009, when the S&P 500 Bank index was trading at 77. He had no plan to shore up market confidence at the time. Interesting, when you consider that he told European leaders that the basic lesson of financial crisis is that you have to come in and act quickly with force. He sure didn’t. Instead he waited until February 10 to announce his plan to stabilize market confidence. The centerpiece of his plan was bank stress tests, the same kind he is advising Europe to conduct. But during his announcement, the Treasury secretary neglected to provide details regarding the stress tests. The market panicked, fearing that the stress tests were cover for bank nationalizations. The S&P 500 Bank index plummeted 36% in the days following the announcement. It took Geithner another two weeks to get around to releasing the details of the stress tests. When the details were finally released, it was clear bank nationalizations were off the table, but the fear of massive dilution hung over markets. The S&P 500 Bank index fell another 30% before hitting bottom. The announcement of Geithner’s stress tests undoubtedly worsened the financial crisis.
The true catalyst for the turnaround in the U.S. financial crisis was twofold. First, on March 12, Congress held a threatening hearing with the Financial Accounting Standards Board (FASB) to revise mark-to-market accounting rules, which were intensifying the financial crisis. At the hearing, FASB pledged to change the rules. The S&P 500 Bank index surged 13% that day. Then in early April, the big banks reported better-than-expected earnings. The S&P 500 Bank index rose more than 28% in April and another 25% in the first week of May. The results of the stress tests were announced on May 7. Markets had already stabilized by that point.
Mr. Geithner has no business advising European leaders on anything. He has no clue how to prevent an escalation of a financial crisis in Europe. He worsened the crisis in the U.S. His policy recommendation to add more debt to solve a debt crisis is foolish. And his stress tests are a nonstarter. If European leaders start listening to Mr. Geithner, you can count on an escalation in the European debt crisis.
Jeremy Jones, CFA
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