BUSINESS
03/29/2009 05:12 am ET | Updated May 25, 2011

Geithner: Nationalization Is "The Wrong Strategy," "Deeply Offended" By Banks

Treasury Secretary Timothy Geithner spoke with PBS' Jim Lehrer on Wednesday evening about the Obama administration's economic plans.
Among the highlights:

On the bank bailout, Geithner said, "think of it as a form of insurance from the government." As for the approximately 20 banks that began undergoing "stress testing" on Wednesday--where the government checked their capital cushion to determine whether they could survive a worsening recession--Geithner called it "a core part of what banks do and what supervisors do, but we wanted to bring a more consistent, more conservative, more forward-looking approach."

Critics are panning the stress test, however, saying it does not go far enough. The government is assuming that the economy contracts by 3.3% this year and remains mostly flat in 2010. The guidelines also assume that housing prices will fall another 22% this year, while unemployment will reach 8.9%.

According to the New York Times:

...Analysts say the administration's worst projections, which it describes as unlikely, are not much more dire than what many private forecasters already expect...

..."I don't think they are harsh enough," said David Hendler, an analyst at CreditSights, who said the dire projection was itself too optimistic about the growth that would be generated from President Obama's stimulus program. "That would be a pleasant outcome, but you have to plan for the worst."

Geithner, in his interview with Lehrer, also confronts the issue of nationalization. Since news broke that the government is nearing a deal to purchase shares in Citigroup totaling some $40 billion, the idea that American banks could be nationalized has become a hot-button issue.

Nationalization is "the wrong strategy for the country, and I don't think it's a necessary strategy," Geithner said. He added that a government investment in the banks "does not go to pay dividends or excess compensation." He added: "we want the terms designed so that, as conditions normalize, our support is expensive and unattractive," motivating the banks to replace the government support with private sector investment.

Continuing with his views on nationalization, Geithner said, "governments tend to underestimate the scales of problem, they move too slowly, they're too tentative and gradual, they escalate late, and that makes crises deeper."

As for the banks and their behavior during this crisis, Geithner said he was "deeply offended by the quality of judgments we've seen in the leadership of our nation's financial institutions. They've created a deep hole of public distrust and anger..."

In related news, CIA Director Leon Panetta said on Wednesday that the intelligence community is preparing daily reports for Obama on the foreign policy of countries facing instability as a result of the worldwide recession.

According to ABC News, he specifically mentioned China, Russia, Argentina, Ecuador and Venezuela.

The first report was delivered on Wednesday.

"Obviously, the purpose of that of that is to make sure we are not surprised by the implications of (the) worldwide economic crisis and what happens with countries throughout the world as a result of that," he said.

The world economic crisis has become the biggest near-term U.S. security concern, displacing terrorism, U.S. intelligence agencies told Congress this month.

Click here for more from American Enterprise Institute's Peter Wallison on how Geithner can price the banks' troubled assets.

Click here for an interview with Geithner on NPR's Planet Money.

Click here for a nice summary of Geithner's proposal.

And here is more.

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