Geithner says government was 'surprised' by derivatives

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Earlier today, Treasury Secretary Timothy Geithner told an assembled group of lawmakers that the Obama administration's plan to stimulate the U.S. economy is on the "expected path." The White House plan calls for an economic stimulus that will allocate billions of dollars to construction and other local projects. Geithner's statement was made before a joint hearing of the House Financial Services and Agriculture committees on Capitol Hill.

The Treasury Secretary was asked where the plan went wrong, which led Geithner to opine that unemployment is inescapable during a recession. He added that the stimulus plan "was necessary and critically important to reduce the risk that we'd see hundreds of thousands of losses of jobs, and we'd see millions of job losses beyond this point, and see thousands of more businesses fail unnecessarily." Geithner also pointed out that the rate of decline in the economy has slowed, that consumer confidence is improving, that the financial system is healing, and that concern about a financial meltdown has receded.
These comments came while Geithner was discussing derivatives, financial institutions whose values are based on something else. Geithner noted that some financial institutions were encouraged to take on too much risk, thanks to the relative ease with which derivatives were bought and sold.

Geithner is asking the committee for more government control over derivatives, which he (and many others) feels contributed to the financial crisis by surprising government officials. The treasury secretary felt that the complex nature of derivatives "overwhelmed the checks and balances of risk management and supervision" -- in essence, surprising the government.

I want to go back to Geithner's assertion that the U.S. economy is on the expected path -- especially his belief that the concern over a financial meltdown has receded. It sure doesn't seem that way to me. I see the Dow going lower every day, and I wonder if investors' feelings are the same as those Geithner interprets.

In addition, I see that the administration has made a shift from its stance that the economy will get worse before it gets better. Does this mean the administration sees more pain ahead and is afraid to admit it? Perhaps, but I don't want to try and read any politician's mind.

As for derivatives, the proposed moves may not be enough. Furthermore, there are the concerns that the proposal would "raise costs and squash innovation." These kinds of ramifications are not what we need when the U.S. is trying to dig itself out of an economic hole.
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