STRESS TEST
Reflections on Financial Crises
By Timothy F. Geithner
Crown. 580 pp. $35
Book review: ‘Stress Test: Reflections on Financial Crises,’ by Timothy F. Geithner
Unlike most of his recent predecessors as treasury secretary, Timothy F. Geithner had no experience on Wall Street or in corporate America. He did not have a PhD in economics. Nor was he a politician or even a lawyer. Far from being a presidential confidante, Geithner barely knew Barack Obama before his nomination.
What he did bring to the job was a deep-seated belief: Policymaking is a fundamentally tragic business, often involving choices between two or more bad options, and the best that can be hoped for is to avoid making matters worse. He is, as he confesses in his memoir, “Stress Test,” “reflexively skeptical of excess conviction in any form, especially excess optimism.”
It is a sensibility worthy of his first powerful mentor, the uber-realist former secretary of state Henry Kissinger, who gave Geithner a job as a researcher when the younger man was fresh out of the international affairs school at Johns Hopkins. Thereafter, Geithner refined and internalized his sense of government-as-damage-control during his career managing financial crises for the Treasury Department, the International Monetary Fund and, just before joining the Obama administration, the Federal Reserve Bank of New York, which he headed from 2003 through 2008.
And it was this mind-set that informed Geithner’s embrace of massive taxpayer aid to Wall Street firms amid the financial panic of 2008 and 2009, which he defended then — and vigorously defends again in “Stress Test” — as the price of averting general economic catastrophe.
Geithner’s selection by Obama made sense as a gesture of continuity toward a financial sector still in the throes of an epic crisis, but he was an unlikely member of a hope-and-change administration. As the U.S. economy spiraled downward between November 2008 and Inauguration Day, the president-elect asked Geithner what he should try to accomplish in his first term. Geithner, who admits that he “wasn’t wrapped up in the spirit of limitless possibility and new beginnings that had driven the Obama campaign,” defined success in negative terms: “Your accomplishment is going to be preventing a second Great Depression.”
Half a decade later, it’s fair to say that Obama did achieve that much — or at least that no second Great Depression happened on his watch. Historians will debate how much credit belongs to the president and how much to Federal Reserve Board Chairman Ben Bernanke. Geithner’s version emphasizes the administration’s contribution — and, not surprisingly, casts Geithner in a favorable light, as a kind of Sancho Panza to more quixotic officials who saw the Great Recession as a political opportunity to be exploited, not a disaster to be mitigated.
History will be especially kind to the Geithner innovation that gave his book its title. In early 2009, the largest U.S. banks were still in financial cardiac arrest, unable to make loans or attract investment because markets doubted the adequacy of their capital. Many inside and outside the White House advocated nationalizing the banks, as Sweden had done to help cure a financial panic in the 1990s. Geithner resisted, citing unintended negative consequences from entangling the U.S. government in the banks’ hideously complex affairs. He proposed instead a “stress test,” conducted by the Federal Reserve, which would scour the banks’ books, then tell the markets how well they could withstand a further economic downturn. When the results came in, they credibly showed that the banks’ capital needs were manageable, inducing a renewed flow of private investment and obviating nationalization.
As for the bailouts, the charge that Geithner advocated taxpayer relief for Wall Street regardless of the financial community’s sins will probably follow him to his grave. “Stress Test” is his definitive rebuttal to critics whom he derides, repetitiously, as “populists” or “fundamentalists” gripped by an “Old Testament” mentality.
Whether aimed at Geithner from the left or right, the basic criticism of his approach was essentially the same: that shielding reckless financiers from the full consequences of their actions, monetary and legal, is not only wrong but also encourages similar behavior by others in the future. And Geithner himself acknowledges that “moral hazard” is an inherent feature of government intervention in financial crises.
He just disagrees with his opponents that there’s any point in trying to avoid moral hazard, given the need to act swiftly in a crisis and the much higher costs of letting systemically important firms collapse. Geithner’s thinking on this point reflects the global shock that followed the September 2008 bankruptcy of Lehman Brothers, which he, Bernanke and then-Treasury Secretary Hank Paulson failed to prevent. The fallout from Lehman’s demise scarred Geithner — and he expresses deep regret about it in “Stress Test.”
The argument over Wall Street bailouts is one that no one can ever truly win, since both Geithner and his critics make a lot of assumptions about what would have happened if the government had not acted. On balance, Geithner’s probably right, though. The Federal Reserve’s emergency credit programs and the $700 billion Troubled Asset Relief Program that Geithner and others crafted enabled the economy to make a soft landing at much lower cost to taxpayers than many predicted. Another point in Geithner’s favor is that foes of his approach never quite articulated a workable alternative, or at least one that the political system might actually accept.
Geithner’s aversion to “excess optimism” was not always an asset for him at Treasury. A more buoyant secretary might have been better equipped to reassure the public amid hard times, as well as less vulnerable to the political slings and arrows that ultimately made Geithner yearn to leave Washington. Yet to the extent that he had a knack for imagining the worst, and how to avoid it, he may have been the right man for Treasury at the right time. Certainly we could have done a lot worse.
Charles Lane is an opinion writer at The Washington Post.
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