By Simon Johnson

It would be easy to take relatively cheap shots at the portrayal of Tim Geithner — “we saved the economy but kind of lost the public doing it” — in the New Yorker, out today.

Mr. Geithner is quoted as saying, “Some on the left have fallen into a trap set by the Republicans, allowing voters to mistakenly think that the biggest part of the bank bailout had come under Obama rather Bush.” Mr. Geithner should know – as he spearheaded the saving of banks and other financial institutions under both Bush and Obama. In fact, it’s the continuation of George Bush’s policies by other means that really has erstwhile Obama supporters upset. “I think there are some in the Democratic Party that think Tim and Larry are too conservative for them and that the President is too receptive to our advice.” Probably this is linked to the fact that Tim Geithner is not a Democrat. Geithner also suggests that his critics compare government spending on different kinds of programs under President Obama: “By any measure, the Main Street stuff dwarfs the Wall Street stuff.” This insults our intelligence. Wall Street created a massive crisis and we consequently lost 8 million jobs; any responsible government would have tried hard to offset this level of damage with all available means. This includes fiscal measures that will end up increasing out privately held government debt, as a percent of GDP, by around 40 percentage points. It’s not the fiscal stimulus, broadly defined, that is Mr. Geithner’s problem – it’s the lack of accountability for the bankers and politicians who got us into this mess.

But the Geithner issues reflected here run much deeper. The New Yorker’s John Cassidy alludes to these but he may be too subtle. Here’s the less subtle version.

What exactly was the “Geithner stabilization plan” that frames the article – and is the basis for Secretary Geithner claiming to have saved anything? We are not really talking about the much vaunted but little used toxic asset/loan purchase program (the “PPIP”). “The plan” here means essentially the stress tests designed by Treasury and run by the Fed – which brought some transparency to banks’ balance sheets, but which also used a relatively benign “stress scenario” (watch commercial real estate, residential mortgages, and credit card losses now unfold).

The main feature of the plan, of course, was – following the stress tests – to communicate effectively that there was a government guarantee behind every major bank or quasi-bank in the United States. Of course this works in the short-term – investors like such guarantees. But there’s a good reason we usually don’t guarantee all financial institutions – or act happy when other countries do the same. Unconditional bailouts lead to trouble, encouraging reckless risk-taking and undermining responsible governance. You can’t run any form of reasonable market system when some big players hold “get out of bankruptcy free” cards.

All crises end – this is actually Larry Summers’s famous line. We avoided a Great Depression primarily because, compared with 1929-31, we have a government sector that is large relative to the economy – and which does not collapse when credit goes into freefall. What exactly did the Obama administration do in ending the crisis that a Clinton or McCain administration – or even Bush – would not have done? The most plausible answer is: Nothing.

Geithner insists, according to John Cassidy, that the Obama administration has “proposed the biggest regulatory overhaul in seventy-five years.” This is the worst conceit. The sad and unfortunate truth is quite the opposite – because Mr. Geithner and his colleagues refused to seize the moment and didn’t break the economic and political power of anyone who mattered, they have doomed us to re-run the same horrible credit loop as before. Legislation may tweak the details, but the regulation and control of systemic risk remains just as weak as before.

Is the Secretary of the Treasury completely unaware that our biggest banks have become even bigger? Why does he send out Herb Allison, long-time Merrill Lynch executive, and now an Assistant Secretary to say the US government has “no too big to fail bailout policy,” when this is patently not true? Why has he reshaped the details of the “Volcker Rules” so they are now meaningless?

In truth, “too big to fail” is not the worst thing we should fear – our financial institutions are now on their way to becoming “too big to save”. In 1929-30, even if the federal government had wanted to put in place a big fiscal stimulus, it could only have mounted something around 1 percent of GDP; the financial shock of that day was much bigger. Perhaps monetary policy in the early 1930s could have done more, but today we have already pushed “quantitative easing” (meaning that the Federal Reserve buys junk) beyond recorded limits. How much do you want to gamble that, next time, the Fed can do enough to save the day without also creating massive collateral damage?

If we continue to allow banks to grow, as they have over the last 30 years – and did again through the latest boom-bailout-rescue cycle – we head towards a day when Mr. Geithner or his successor will try to save the financial system and will fail.

You might think that is a good thing and for sure it will bring on a big change in creditor attitudes and presumably much stronger regulation. But, just as in the 1930s, first we will have to dig out from under a lot of economic rubble – and we’ll lose a lot more than 8 million jobs.