Geithner says crisis could have been milder

Published 10:11 am Thursday, May 6, 2010

WASHINGTON — The financial crisis could have been “less severe” if the government had moved faster to contain the damage, Treasury Secretary Timothy Geithner said today.

“I do not believe we were powerless,” Geithner told a special panel investigating the roots of the crisis. “I would say that if the government of the United States had moved more quickly to put in place better-designed constraints on risk-taking … then this would have been less severe.”

Geithner said the lack of authority for regulators to restrain financial risk was a fundamental cause of the 2008 crisis.

Financial overhaul legislation now before the Senate would close gaps to give regulators needed powers to curb risk-taking by firms operating outside traditional rules, he said. Regulators didn’t know before the crisis hit how that “shadow” banking system could shake the foundations of the economy, Geithner said.

Geithner testified at a hearing of the Financial Crisis Inquiry Commission, which is investigating the roots of the crisis that plunged the country into the most severe recession since the 1930s and brought losses of jobs and homes for millions of Americans.

Geithner praised a vote by the Senate today to protect taxpayers from losses in the failures of large financial institutions. But he also warned against affording exemptions in the legislation from new rules for certain types of financial activities. “We have to create a strong set of rules that no institution can escape,” he said.

Geither spoke after his predecessor in the Bush administration, Henry Paulson, cautioned against overreaching on the overhaul legislation now being debated in the Senate. That could stifle innovation in the markets, Paulson warned.

As president of the New York Federal Reserve in 2008, Geithner was one of the key architects of the government’s response to the crisis and the federal bailout.

“The history of this crisis is full of examples where regulators did not use the authority they had early enough or strongly enough to contain risks in the system,” Geithner testified at Thursday’s hearing. “But a principal cause of the crisis was the failure to provide legal authority to constrain risk in this parallel financial system.”