If you’ve wondered just what was happening in the halls of the federal financial power centers before, during, and after the Great Recession, pick up a copy of Timothy Geithner’s Stress Test: Reflections on Financial Crises. I just finished the book, and it left me with a much greater understanding of why things did/did not happen during this global man-made disaster when Wall Street came close, once again, to shutting down the world’s financial systems.
Everyone knows the basics of the story, so I won’t spend any time on the chronology. Besides, Geithner’s book really reads more like a defense attorney’s closing argument, if that attorney had the personality of an undertaker. Geithner is not a natural story-teller in print, and so the book is dry, cumbersome, and even tedious in some parts. Yet, anyone patient enough to get through it will come away with a clear portrait not just of Geithner but also of the Obama Administration’s approach to the financial crises, which was basically to let Tim Geithner and a few smart people over at Treasury and the FDIC sort it out. For both the good and bad outcomes of that approach, Geithner is unapologetic. He is clear in his belief that the Administration’s response the best one possible at that time, and he seems to have very little sympathy for those individuals who think we wasted a great opportunity to reform the American financial system, because, he informs us, it just was not worth the effort when all things were considered.
One of the critical insights I took away from the book is that Geithner himself is the reason, in some sense, that the crisis happened and that the opportunity for reform was wasted. He was, in a way, both the best and worst person to be at the helm of the NY Fed and U.S. Treasury. Why is that the case? Because his personality, which is primarily rational and unemotional, allowed him to rationalize away the risks pre-crises and the cost of reform post-crisis. A telling moment illustrates this mindset. Geithner, having just been appointed head of the NY Fed, describes his approach to alerting the world about the systemic risks brewing on Wall Street:
Even though the financial sector seemed healthy, I talked about systemic risks in almost every speech I delivered as New York Fed president.
These speeches weren’t designed to be warnings. I didn’t try to be Chicken Little. I expressed my concerns in the on-the-one-hand-on-the-other-hand tone of a central banker, as if I were suggesting that the recent history of celestial stability did not necessarily rule out the possibility of some portion of the sky falling at some point in the future.
What’s interesting is that someone listening to those speeches might have concluded Geithner was being guarded given his role. They would have been only half-right, since this is pretty much his manner in all of life it seems. In fact, early on in the book he describes when his teenage daughter got sick in Thailand. Rather than describing his anguish and rush to her side, he notes that he kept on working and had a friend track her down and help her deal with her situation. It’s classic Geithner: weigh the risk, debate the options, and then take the sensible course.
That mentality made him a steady hand, for sure, during the meltdown, and that was a good thing. On the other hand, would a stronger, more forceful personality have sounded stronger warnings and helped us avoid the crisis in the first place? Would a person with a deeper sense of moral outrage have been better placed to clean up the mess the bankers left behind? I personally think the answer to both questions is yes. What’s more, Geithner himself agrees with this assessment, as he notes in the closing pages:
I wish I had pushed harder to improve the financial system’s ability to withstand a crisis of confidence when I was at the New York Fed. I wish I had figured out a way to respond more aggressively to the initial panic, and to sustain the initial power of our fiscal stimulus. I wish we had expanded our housing programs earlier, to relive more pain for homeowners. I wish I had persuaded Congress to create more authority for the Fed and the Treasury in the financial reform legislation, and to make sure policymakers have the tools they need to engineer unpopular financial rescues in the future. And I wish I had done a better job of explaining our strategy, so that more Americans would have understood that we were working on their behalf, and would haver lost so much faith in their government.
That’s quite the wish list, and one which which I think most of us would wholly concur.