By Wolf Richter www.testosteronepit.com

The charade: Treasury Secretary Timothy Geithner spoke before the House Financial Services Committee—chaired by Spencer Bachus, who'd declared in an interview last December that in "Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."



Geithner was speaking on behalf of the Financial Stability Oversight Council, which he chairs. Established in July 2010, it was to come up with strategies that would ensure that the financial crisis wouldn't show up on our TV screens as reruns.



Now the reruns are here. Only the banks are bigger, the problems larger. The "solution" of the financial crisis—shifting trillions of dollars in risks and losses to taxpayers and central banks—is backfiring. What was largely a private-sector drama now engulfs entire countries. And while there are plenty of exciting financial subplots in the U.S., for the moment, the Eurozone is front and center.

"A severe crisis in Europe could cause significant damage by undermining confidence and weakening demand," Geithner said (Reuters).



Confidence! A series of bank "stress tests" were supposed to suffuse us with a cozy sense of confidence in the banking sector—despite all the very obvious issues that were piling up left and right. The last desperate stress test was held in July in Europe. Dexia, which had already been bailed-out in 2008, passed with flying colors. Three months later, it goes kaput (Euro Tidbit: The Lies of 'Stress Tests'). Other banks will follow.



If inspiring confidence isn't based on facts and transparency, it's a con game. And if the facts are awful, trying to pull a bag over our collective heads isn't going to help.



Geithner could have admitted, for example, that keeping Greece's economy afloat long enough to get us through the next election would only increase the magnitude of its problems. The Greek economy has been taken hostage by a political vote-buying machine funded by cheap euro debt. It needs to be restructured in ways that are not going to be pretty or necessarily predictable. It should be up to the Greeks to decide how to do that. And it should be bondholders that pay, not taxpayers.



"The critical imperative is to ensure that the governments and the financial systems under pressure have access to a more powerful financial backstop," Geithner said.



The ultimate "backstop" behind governments and financial systems? The printing press. Print trillions and bail out bondholders, Geithner pressured the ECB—though it has already printed enough to buy $211 billion in crappy Greek, Irish, Portuguese, Italian, and Spanish bonds. That wasn't sufficient for him. He wanted trillions. He failed to mention the damage these types of policies are doing to the real economy in the U.S. Inflation has whacked the purchasing power of the middle class and has created a hellish scenario for savers and fixed income investors. Credit markets are now controlled by the Fed and not by market participants. Housing has become a complex government program. Even stock markets are impacted by this flood of money. And the essential cleansing process that comes with failures has been stifled.



Apparently, it hasn't occurred to Geithner that governments and central banks need to stay out of the markets so that market participants can determine appropriate price levels via the chaos of trading. If Greek debt becomes worthless, it should be allowed to go that route. If U.S. housing has further to fall, let it find its bottom quickly so that things can move forward. If Italy needs to pay 8% to borrow money for ten years, discipline will descend on its government. If stocks go south, let CEOs figure out what to offer investors to entice them back. Concerted efforts by central banks and governments to set minimum price levels and depress yields hearken back to the good ol' days of the Soviet Union. It's not a fertile feeding ground for optimism, the lifeblood of a strong economy.



Capitalism, free enterprise, and even democracy require a belief in the future. Optimism may take a temporary hit when stocks or housing or bonds crash, but we all know that's part of the deal, and if they're allowed to bottom out quickly, optimism will return. But governments and central banks have conspired to reverse the slide by creating credit bubbles and other mechanisms that are already causing more damage and blowups. After enough of these kinds of setbacks, optimism might cede to an increasingly dour social mood—and not just in the US.



Winners and losers of the Fed's policies: Inflation As A Solution—Hosing The Middle Class.

Wolf Richter www.testosteronepit.com