Timothy Geithner said on Thursday that the Obama White House was attempting to create a new economic system in which large institutions did not assume that the government would automatically bail them out when times got tough. But the Treasury Secretary also argued against the abolition of credit default swaps - one of the instruments that helped bring the financial system to its knees - saying such a move would stifle creativity in a market desperate for innovation.
"Overall, we do not believe that you can build a system based on banning individual products - our core challenge is ensuring we have a system that has a proper balance between innovation on the one hand and consumer protection on the other," said Geithner.
In a unique merging of online media and oversight politics, Geithner's remarks were part of 12 answers he provided to questions posed to him by Huffington Post readers. Those questions had been relayed to the Treasury Department by Richard Neiman, a member of the Congressional Oversight Panel for the Emergency Economic Stabilization Act who had solicited input for his queries to the Treasury Secretary in a blog post in mid-April.
In a 10-page response to those questions that was provided to Neiman's office and the Huffington Post on Thursday evening, Geither addressed a whole host of pressing financial and economic topics. While his answers were mostly explanatory in nature they touched on some of the pressing concerns about the economy as expressed across ideological spectrum.
Among the many topics addressed, Geithner said that while the government had already made small returns on its investments in banks - and some of those banks had begun returning TARP money - he believed taxpayers would ultimately emerge from the bailout with a loss.
"In the end, it's unlikely that we will be able to escape from the worst financial crisis since the Great Depression without some losses to taxpayers," he said. "But those losses would have been much greater had we not acted."
The Treasury Secretary also outlined a regulatory framework that would essentially buffer the system from future catastrophe without sapping creativity. Ultimately, he argued, the new economic structure would provide the conditions for robust growth without getting to the point where banks and other institutions become "too-big-too-fail."
"We want to make sure that no one assumes the government will step in to bail them out if their firm fails," he said. "We want to require all firms to keep more capital and liquid assets on hand as a greater shock absorber against potential future losses and that the biggest, most interconnected firms, keep even larger amounts on hand."
On the topic of executive compensation, Geithner said that the government was powerless to direct the practices of those institutions that did not "directly receive financial assistance under TARP." But he restated the White House's commitment to better align "the executive compensation practices of financial firms with the long-term interest of shareholders, the financial system, and the economy as a whole."
For those economic observers still of the belief that the administration should nationalize particularly troubled banks, Geithner's answers provided as clear an indication to date that such a proposal was not on the administration's radar.
"A government takeover of one or more of our largest institutions would bring with it huge risks," he wrote. "Nationalization of one or more of these large institutions would raise questions about the status of others... There is also the problem of the exit strategy.... Nationalized institutions would likely have to shrink substantially before they could be privatized."
And on the early-criticized plan to purchase toxic assets from the banks using public-private partnerships, he insisted that the books of these troubled institutions had already begun clearing up.
As for measuring the administration's success on these topics and its economic policies more broadly, Geithner suggested what, in the current climate, might seem like a politically risky metric.
"A good starting point is looking at broad measures of economic performance, like jobs," he said. "Job losses in the month of May were at their lowest level since September 2008, and they were about one half of the average monthly job losses for the first quarter of the year. Although somewhat indirect, overall performance measures such as employment can provide important information about the health of the credit markets."
READ GEITHNER'S FULL RESPONSE:
While the answers provide a detailed reflection of how the Treasury Department views its approach to the economy, the process by which they were received is itself interesting. In an April 20 blog for the Huffington Post, Neiman asked readers to submit questions for Geithner for an oversight hearing scheduled the week ahead. Reflecting a profound interest in such subject matters from the online community, over 600 suggestions followed.
Towards the end of his portion of the Geithner hearing, Neiman asked the Treasury Secretary if he could submit some of the questions he had received in writing - a request that was granted. And on May 29, Neiman formally submitted the list to Treasury.
"The 12 categories of questions attached to this letter represent the genuine concerns and frustrations of the American people," Neiman wrote. "Each category contains one to three questions on a similar subject matter to allow for one comprehensive response. Some questions are very tough and express deep frustration and suspicion, but they reflect shared areas of concern and true inquires. All of the questions attached are verbatim or near verbatim."
In a show of how citizen engagement can be rolled into oversight of the highest levels of government, Geithner sent Neiman his responses slightly less than a month later.
"Thank you for forwarding the questions from the public that were submitted in response to your posting on the Huffington Post," his response letter read. "Please find my answers attached."