The Times' Rorshach Geithner Story

The New York Times has provided a handy blogging point for today in the form of a long piece on the relationships Tim Geithner formed while head of the New York Fed. The story is based in part on the results of a Times FOIA request, for the contents of Geithner's daily calendar while at the bank, and bloggers have primarily approached the story as a search for potentially nefarious activities. As examples, we see Paul Kedrosky concluding that there's no real "smoking gun," and Yves Smith writing that the story is far too kind, as it mysteriously excises all the times Geithner was scheduled to dine on babies and puppies in the company of Satan and AIG executives.

For the life of me, I don't know why we're not spending at least a little more time on the opening anecdote:

Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation's economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked.

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation's most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

Smith notes the line and proceeds to throw of a line constituting one of the most epic examples of point missing in recent memory:

The story fails to note this was almost assuredly the most bank friendly program possible.

To begin with, that's not even true. The most bank friendly program possible is handing the banks a lot of money with no strings attached. But how does Smith miss that this would not only have been a very smart and prescient move, but it might also have laid the groundwork for a much tougher bank policy? Guaranteeing all the bank debt was, of course, one of the key ingredients of the Swedish bank rescue so beloved by fans of nationalization. Smith just assumes Geithner is looking to help his Wall Street buddies, but he might just as easily have been reading directly from the Swedes' playbook.

Moreover, this move would have entirely changed the calculus in September. It would have made the government much more reluctant to let Lehman fail, which I believe we can agree would have been a good thing. Had they nonetheless decided that Lehman should be allowed to go down, in the knowledge that the government would have to make the debtholders whole, then we would have avoided most of the negative effects of the actual Lehman collapse. No money market fund would break the buck. No freeze in commercial paper markets would have resulted. And no emergency rush to TARP would have followed. Correspondingly, no intense fear of bank failures or nationalizations would have cast its shadow over all subsequent decisions.

This should be getting more attention, and it should also be causing Geithner-haters to rethink what they think they know about the man -- about his timidity, subservience, and allegiances. But it's already clear that it won't.