Geithner Lets the Cat Out of the Bag

By Marshall Auerback

Michael Kinsley once defined a gaffe as “when a politician tells the truth – some obvious truth he isn’t supposed to say.”  On that basis, the recent headline that just popped up might well represent a major gaffe of the Kinsley variety by Treasury Secretary Tim Geithner:


Speaking on CNBC’s “Delivering Alpha” conference, the Treasury Secretary argued:

What is very important is that [Eurozone officials] not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe.

In essence, Geithner is letting the cat out of the bag. He is implying that Europe is hanging on the edge of the abyss. Only Germany can prevent it from falling in, and at the same time it appears that Berlin has now moved into a position where they cannot or will not prevent that disasterous scenario, either for economic or legal reasons.  The decision by Germany’s constitutional court to delay its approval of the German Parliament’s ratification of the ESM and fiscal compact may be a warning. The court could have moved to approve quickly. Instead, it will not rule on emergency appeals for an interim injunction against the parliamentary approvals until the end of this month. If the court rules in favor of an interim injunction, the final decision on the ESM and fiscal compact may not be made for several months.

This decision to delay by the constitutional court suggests that it cannot be counted on to approve bailout measures for other European nations even if a failure of Germany to participate in such bailouts may lead to a quick and perhaps decisive European financial crisis. Also its decision to delay may also reflect a growing opposition to such bailouts in Germany that will lead to more and more constitutional challenges. If so, the odds of an adequate ECB and EU policy response is surely dimmer.

In short, there is virtually no appetite for the kind of FDIC style eurozone-wide deposit insurance needed to halt the bank run which is still afflicting the EMU.  Geithner’s Kinsleyian gaffe might therefore represent a very,very revealing slip on his part.

So why is there so little reaction in the markets?  Is it simply a case of the summer doldrums?  Are people just plain and simple sick of the whole crisis and just want to enjoy a few weeks’ respite on the beaches?  That might be part of it, but an equally salient factor is that the ECB now appears to be engaged in a massive cover-up to disguise the extent of the bank run and the corresponding problems afflicting Europe.

Consider this:  about 18 months ago, Wilhem Buiter wrote a very interesting paper for Citibank on the legality of the ELA’s use in Ireland.  He suggested the following:

Above we noted that, at least in the interpretation of the ECB, the monetary financing prohibition in the Treaty would be violated if ELA were granted to an institution that was not just illiquid, but insolvent. Of course, the distinction between the two concepts is notoriously difficult, and especially so during periods of high market stress and very volatile asset prices. Nevertheless, in the Irish case, it appears that the main beneficiaries of ELA were institutions whose solvency must at the very least have been in question even at the time ELA was provided …

The implication was that the use of the ELA for Ireland was probably illegal as Ireland’s banks were probably insolvent. If Ireland’s banks were insolvent, then those of Greece today can only be described as “insolvency squared.”

How are they surviving? They are almost certainly being kept alive solely by the ELA. But nobody talks about it.  The odds are that, once the deposit run unexpectedly got out of hand, the ECB and the EU authorities have been afraid to make any mention of it because, in drawing attention to it, they would probably exacerbate the run.

In fact, you can’t even find the ELA on the ECB’s balance sheet as a specific line item. Two months ago the prevailing estimate for ELA financing from the central bank of Greece was 50 billion euros as of the end of 2011. As of February of this year, according to the central bank of Greece, its ELA rose to 109 billion euros. However, those same central bank of Greece reports now show that their ELA exposures are almost nonexistent. Has such emergency lender of last resort financing suddenly been repaid? Of course not. It has been reclassified.

And as Buiter’s report indicated, the manner in which the ELA has been used might well be illegal.

The cover-up will be hard to sustain going forward, given that there has been a precipitous plunge in Eurozone interbank lending in the nine months through April and a very sharp decline in the net foreign assets of the ECB since the beginning of May.

And, in the final twist to this saga, Buiter’s report on Ireland, entitled   ‘Ireland Emergency Liquidity Assistance (ELA) 21/01/11’  (excerpts of which were available courtesy of FT Alphaville) have now been deleted (see here).

ADDENDUM* The full report is available here (h/t Ramanan).

10 responses to “Geithner Lets the Cat Out of the Bag

  1. Geithner let two cats out of the bag in one sentence. The first, that Europe is hanging on the edge of the abyss. The second, that this is intentional policy intended to gain “leverage for ‘reform'”.

    It really is unconscionable what’s going on in Europe.

    • Interesting, but probably unknowable, is whether or not Geithner did it on purpose? If he walks back those comments, then it probably was a mistake. If he doesn’t, then it begs the question: what end is this comment trying to achieve?

      Maybe to avoid a nightmare scenario?…

      Imagine the combination of going over our “fiscal cliff” (increased taxes and decreased government spending), coupled with a Eurozone financial crisis… in early 2013? December 21st 2012 will be a walk in the park…

  2. The full blown aspects of Orwell’s 1984 are now upon us. Just to list some so called conspiracy theories (so called because the damaging effect of government and elite groups’ actions on the public contain elements of plausible denial):
    1. The sinking of the USS Maine: An internal explosion on the ship caused the onboard gunpowder magazine to explode. The official US government explanation placed the blame on an external explosion, a Spanish mine.
    2. Fast forwarding to the 1950’s: the US Government denied culpability in the untimely deaths of perhaps hundreds of thousand if not millions of people who were doused with regular bouts of nuclear fallout as a result of above ground nuclear bomb testing. Agitation reached a peak with the signing of the test ban treaty with Russia in 1963. This after most of the Northern Hemisphere was polluted with deadly radiation and fallout. The official policy went from ‘there is no danger’ to ‘there’s some but not many people were affected’ to finally ‘ Oh, by the way, exactly 49,521 people may have died painful, unnecessary deaths.’ Since millions of people were in the same environment as the putative 49,000 its hard to see where the reasonableness of the government claim lies.
    3. More to the point, the financial sector’s leading lie to date has been centered around the necessity of continual central bank bailouts while the prodigal lying and spending continues in the financial sector. Maybe the term ‘pathological liar’ has some meaning after all-at least to judge by the behavior centering around mortgages, finance and banking from the likes of Obama, Geithner, Bernanke & Co.

  3. Note to All Governments: When the next financial crisis occurs, do NOT bail out the banks. Nationalize them, or bankrupt them or replace them. Do Not Bail Them Out!

  4. Bayard Waterbury

    Oh, my God, Mr. Geithner, who knows what will happen next if you can’t seem to seal your lips. Of course, regarding your role in the Wall Street bailout debacle, it is accepted that we will never be exposed to the full truth of the massive backroom dealings which you either directed or co-directed with lots of the banksters needing help. But, now that we are talking about Europe, you seem not to be able to make a real connection, since the puppet masters, unlike the banksters on Wall Street, probably can’t manipulate you, and you can’t seem to make a connection with the erosive power of this truth regarding the ability to overcome massive insolvency chasing the banks of Europe. We don’t know where this will end, but it is certain that Bernanke, because of his substantial involvement in the European float, is far more cogent and far less likely to surprise the non-insiders with more truthfulness concerning the likelihood of approaching European fiscal catastrophe.

  5. The Dork of Cork

    Ireland is special……..

  6. Lie begets lie out of necessity. Saying a bank is near-insolvent would precipitate a bank run that makes it insolvent for sure, so to void it, lies are necessary. Of course, it all flows from the first lie “too big to fail”. Why so? There is no proof that it is so. Let any bank fail, nationalize it, protect retail depositors (prevents the bank run), flush the shareholders and bondholders that speculated in the bank, stabilize the (much smaller) remaining operation, resell it to the public possibly at a profit for the agency that did the heavy lifting. The moment we accept “too big to fail” (for the benefit of bank owners) we start the endless cascade of lies. Geitner, Bernanke and the rest of the financial industry Mafia fed us a lie and shame on us to accept it and let our politicians be indebted to that racket. Since the chain of lies eventually becomes unsustainable, stay tuned for the bitter end. BTW Glass Steagall Act made it much easier to limit the size of failures to be confronted – it’s time to bring it back in its original and literal form.

  7. Paolo Barnard

    I quote Migeru 100%. The truly outrageous thing is that EU technocrats are purposely devastating our economies to get more reforms, which mean plain and simple Hayekian devastation of democracy and citizens for the supremacy of the financial elites. And I see it every day here. Paolo, Italy

  8. Paolo Barnard

    Me again: I think Marshall should’ve also stressed that Timmy G. seems to have suggested that the US now suffers from the effects of too little deficit spending, which is an MMT consistent statement. Paolo, Italy

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