During his confirmation hearing on Wednesday, Timothy Geithner's bottom-line defense of the controversial actions taken by the U.S. Treasury and the Fed last fall -- including the bailout of AIG and the decision to ask Congress for $700 billion -- boiled down to this: Worse stuff would have happened if we hadn't done those things:
I believe that the actions taken in October by the Treasury Department and the chairman of the Federal Reserve and the FDIC were absolutely central to trying to arrest the risk of a much more damaging, deeper deterioration in our financial system.
I think that was the right decision at the time. I think if that had not been done at that time, I think we would be facing, really, a catastrophic failure in our financial system.
The clearest manifestation of such a "catastrophic failure" would have been a drastic deepening of the credit crunch. The problem wasn't just that banks were unwilling to lend to other banks, but that regular corporations were also having trouble raising cash in debt markets by selling their own "commercial paper." Barack Obama alluded to this during his second debate in October, when he explained to one town hall questioner why he supported a bailout of Wall Street:
Right now, the credit markets are frozen up and what that means, as a practical matter, is that small businesses and some large businesses just can't get loans.
If they can't get a loan, that means that they can't make payroll. If they can't make payroll, then they may end up having to shut their doors and lay people off.
And if you imagine just one company trying to deal with that, now imagine a million companies all across the country.
The implementation of the bailout has been justly lambasted hither and yon, and evaluating Geithner's (or Obama's) reasoning is difficult because we don't know what economists like to call the "counterfactual" -- what would have happened if Congress had held firm and denied Hank Paulson his billions.
But there are now concrete signs emerging from the debt markets that the credit crunch is easing -- corporations are beginning to successfully raise cash by selling debt again.
The Houston Chronicle reported on Thursday that "Credit markets are showing some signs of life after months of inactivity, with energy companies helping to lead a surge in new debt and equity deals in recent weeks."
Globally, new corporate debt sales totaled $91.4 billion last week, the highest since last May when $103 billion was sold.
Last week, General Electric reported that it had raised more than $29 billion in three separate rounds of bond sales. The Wall Street Journal also reported a slew of new debt offerings in the week ending Jan. 12.
Some of these new offerings would not have happened without the help of federal loan guarantees brokered by the FDIC. But not all. And again, it's possible that the resurgence in corporate debt offerings would have happened anyway, no matter what Paulson, Bernanke and Geithner orchestrated last fall. Nor are we completely out of the woods yet, by any stretch of the imagination. If the real economy continues to slide deeper into recession, it's possible that credit markets could freeze up once again.
But it's also possible that maybe, just maybe, soon-to-be Treasury Secretary Timothy Geithner was not wrong when he warned the Senate Finance Committee that it could have been much, much worse.