Bernanke, Paulson, and Geithner: Champs or Chumps?

We can all probably recite the story by heart at this point. Easy credit terms -- encouraged by a low federal funds rate -- led to a massive expansion of credit in the years leading up to 2007. Major mortgage lenders like Countrywide and Fannie Mae (NYSE: FNM  ) went bananas giving home loans to pretty much anyone with a heartbeat.

Meanwhile, investment banks like Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) encouraged the process by securitizing massive amounts of debt and selling risky assets as something supposedly safe and sound. Consumers used the newfound ability to borrow hefty sums -- whether through their credit card or their house-cum-ATM -- to buy everything in sight while leveraging themselves to the eyeballs.

Then it all came crashing down.

Scene: Dust fills the air, fires rage, and people run through the streets screaming. Out of the chaos step three suit-clad men armed with a simple, yet powerful weapon -- a printing press that can churn out unlimited amounts of money.

The three caballeros take action
In a whirlwind of rapidly drying credit and extreme financial fear, Federal Reserve Chairman Ben Bernanke, former Treasury Secretary Hank Paulson, and current Treasury Secretary Tim Geithner possessed the three sets of shoulders that people all over the world hoped could hold up the U.S. economy during the worst financial crisis since the Great Depression.

The crew's actions were of a magnitude and swiftness unheard of for these normally behind-the-curtains government agencies. The major salvo against deflationary spiral and depression came from the Troubled Asset Relief Program (TARP). Designed to buy troubled assets from at-risk financial institutions, the program was used primarily to inject capital by buying chunks of preferred stock from major financial institutions such as Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and JPMorgan Chase (NYSE: JPM  ) as well as smaller banks like little ol' Monadnock Bancorp.

But this was far from the only capital these government magicians summoned. Nearly $610 billion has been spent on mortgage-backed securities from Fannie Mae and Freddie Mac to help bring down mortgage rates. More than $220 billion has been committed to the Term Auction Facility, which allows banks to borrow against hard-to-sell assets. An amazing $116 billion has been invested in struggling insurer AIG (NYSE: AIG  ) .

According to CNNMoney, the government has invested $2.8 trillion in recovery efforts, while it has outstanding commitments of a staggering $11 trillion.

And???
The results so far have suggested that -- with the exception of letting Lehman Brothers sing its swan song -- Bernanke, Paulson, and Geithner have staved off a second U.S. depression. As I wrote yesterday, the Treasury positions that primary dealers are carrying, as well as the movements in credit spreads, tell us that credit markets are starting to come back to life after their frightening deep freeze.

However, as I also noted yesterday, we're far from the last chapter. We've felt the consequences of the sirens' call, and we might have successfully navigated Scylla and Charybdis, but just like Odysseus, plenty of challenges lie ahead.

With massive amounts of new money injected into the economy, the Fed faces the daunting challenge of getting the economy humming along with a comfortable rate of inflation without letting all that capital turn into a raging inflation inferno. At the same time, a significant amount of deleveraging still needs to take place, and the Fed and Treasury could still end up feeling like they're pushing a string trying to fight off deflation.

Meanwhile, even if monetary efforts do what they're supposed to do, gunshy consumers, a persistent unemployment problem, and that same darn deleveraging issue could leave us with an economy that plods along at a growth rate notably lower than the 2.9% we've seen over the past 20 years.

Grading the gang
If you're thinking that I'm about to toss a letter grade at Bernanke, Paulson, and Geithner, I'm sorry to disappoint. At best we're at the halfway point of a full examination of the government's policies, so what I'll do is issue the trio an interim report that reads, "Shows promise, but keep your noses to the grindstone."

But I want to know what you think. Scroll down to the comments section below and share your thoughts on how the Federal Reserve and Treasury have handled the financial crisis.

For another assessment of the last year, see "Fannie and Freddie: 1 Year Later."

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool’s disclosure policy gives Tim Geithner an "A" for disclosing that he can't sell his own house.


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 09, 2009, at 1:08 PM, plange01 wrote:

    better than greenspan who belongs in prison for creating the financial collapse by being food by wall street to lowering interest rates to ridiculous low levels....

  • Report this Comment On September 09, 2009, at 1:31 PM, dasdaniel100 wrote:

    The question is, will this resolve the crisis? This is like setting a back fire to put out a forest fire, sure hope the winds don't change direction.

  • Report this Comment On September 09, 2009, at 3:23 PM, jsamans wrote:

    Consumers are not "gunshy;" they're waking up to the realization that endless marketing has had them borrowing what they don't have to purchase what they don't need and only loosely want.

    The catalyst has not been the economic meltdown so much as the bottomless, limitless greed of banks that, within hours of taking billions in taxpayer money, hurridly paid out bonuses and then got down to the business of raising fees and rates on every customer they could find.

    The author muses that, "we might have successfully navigated Scylla and Charybdis." I doubt it; we dodged Scylla, because -- like Odysseyus -- we refuse to accept the scope of our real problems. The next crash will be much worse, brought on precisely by the seeming ease with which the masters of the universe have recovered their big-dollar pay packages even as the rest of us continue to lose jobs.

  • Report this Comment On September 09, 2009, at 9:25 PM, FuzzySideUp wrote:

    Greenspan wasn't the only one responsible for the melt down.

    The repeal of Glass-Steigal in 1999 created the loose credit of the 2003-2009 melt-down.

    The creation of "Credit Default Swaps" was the biggest scam ever.

    While the majority of American's have sufferred, a few Wall Street crooks made a real bundle.

    Greenspan went to work for an individual that made Billions on the melt down.

    Paulsen made his money in a like manor!

  • Report this Comment On September 09, 2009, at 9:30 PM, xetn wrote:

    It is not marketing that has caused the consumer to over spend, it is the lure of cheap money and a FED created bubble in dot.com or housing that led to the feeding frenzy.

    As for the threesome cited; they are trying to dig us out of a hole with the same tools that caused the problem; interest rates at ridiculously low levels, creating money out of thin air, purchasing toxic assets at par to prop up dead banks.

    As for the collapse of Lehman, why did they let it fail? How about the reduction in competition with GS?

    The whole idea of "too big to fail" is ridiculous.

  • Report this Comment On September 10, 2009, at 1:18 AM, thomdd1959 wrote:

    Bernanke, Paulson, and Geithner: Chumps!!!

    Something is very wrong! I can remember a time when Integrity, Honesty and Truthfulness were very important character traits that most people valued so highly in our leaders. Especially our own government leaders! What has happened? Why have our standards been lowered to our current embarrassing levels?

    This can not go on! We can no longer accept and tolerate this disgraceful behavior!

    Where is the “We the People’s” missing 1.2 TRILLION? It’s not The Fed Scam’s” money! This money belongs to “We the People” of the United States of America!

    Watch this video in disbelief!

    http://www.youtube.com/watch?v=cJqM2tFOxLQ&eurl=http%3A%...

    “The cost of freedom is always high, but Americans have always paid it. And one path we shall never choose, and that is the path of surrender, or submission.” – John F. Kennedy

    If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” –Thomas Jefferson

    When the International Bankers first looked across the ocean at us I bet they started drooling. Then they started plotting. They found are week spots and moved in patently and persistently for the kill. Jackson got rid of them, but they slithered back later. There bait was power, money and greed! This is why when we win our Country back we can never be so naïve again. No matter who our leaders are, or how much we trust them, how much integrity we think they have, they must completely understand they must be under the spotlight 24/7. With many more “checks and balances.” The experiment was a success! Think about it, we remained number one for along time even as we were robbed blind from within. The system just needs a huge housecleaning and many tweaks on the checks and balances. The thieves must go! The slackers must go! Think how well we can do when we are not handicapped, the cancer is healed and we are well again.

    http://www.tomdavidd.com/blog/

    Anybody who supports “The Fed Scam” is clearly a Traitor to “We the People” of the United States of America!

  • Report this Comment On September 10, 2009, at 4:19 PM, rookie2009 wrote:

    LOOK OUT BELOW!!!!!!!!!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 980499, ~/Articles/ArticleHandler.aspx, 10/24/2014 2:13:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement