Springtime for Bankers
Paul Krugman, The New York Times
MAY 18, 2014
By any normal standard, economic policy since the onset of the financial crisis has been a dismal failure.
Now Timothy Geithner, who was Treasury secretary for four of those six years, has published a book, “Stress Test,” about his experiences. And basically, he thinks he did a heckuva job.
How can people feel good about track records that are objectively so bad? Partly it’s the normal human tendency to make excuses, to argue that you did the best you could under the circumstances.
But there’s also something else going on. In both Europe and America, economic policy has to a large extent been governed by the implicit slogan “Save the bankers, save the world” – that is, restore confidence in the financial system and prosperity will follow. And government actions have indeed restored financial confidence. Unfortunately, we’re still waiting for the promised prosperity.
Much of Mr. Geithner’s book is devoted to a defense of the U.S. financial bailout, which he sees as a huge success story – which it was, if financial confidence is viewed as an end in itself.
One reason for sluggish recovery is that U.S. policy “pivoted,” far too early, from a focus on jobs to a focus on budget deficits. Mr. Geithner denies that he bears any responsibility for this pivot, declaring “I was not an austerian.” In his version, the administration got all it could in the face of Republican opposition. That doesn’t match independent reporting, which portrays Mr. Geithner ridiculing fiscal stimulus as “sugar” that would yield no long-term benefit.
But fiscal austerity wasn’t the only reason recovery has been so disappointing. Many analysts believe that the burden of high household debt, a legacy of the housing bubble, has been a big drag on the economy. And there was, arguably, a lot the Obama administration could have done to reduce debt burdens without Congressional approval. But it didn’t; it didn’t even spend funds specifically allocated for that purpose. Why? According to many accounts, the biggest roadblock was Mr. Geithner’s consistent opposition to mortgage debt relief – he was, if you like, all for bailing out banks but against bailing out families.
Tim Geithner, unreliable narrator
Felix Salmon, Medium
Published May 18, 2014
one thing has become generally-received wisdom about the book: whatever you might think of Geithner’s actions and opinions, he’s at least presenting himself in an honest and unvarnished manner. Michael Lewis describes this as a “near-superhuman feat”: “there’s hardly a moment in Geithner’s story when the reader feels he is being anything but straightforward,” he writes.
If Geithner isn’t being honest about his actions and the actions of others, then the whole book becomes much more problematic. And already critics on the right have, predictably enough, accused Geithner of lying.
Most of the time, such accusations boil down to a he-said-she-said about private conversations held in secret. But sometimes, Geithner makes simple declarations which are easily fact-checked.
Geithner at his most prescient and heroic. He enters a hidebound wood-paneled institution where coffee is brought to his desk on a silver tray while briefings involved precious little discussion or debate; and in his very first speech he decides to speak truth to entrenched financial power, trying to “push back against complacency” and warn against the rise of the shadow banking system.
But here’s the thing: we can read the speech, it’s archived on the Fed’s website. And so it’s pretty easy to tell whether Geithner did indeed try to push back against complacency, in his speech, and warn of the rise of the shadow banks.
Spoiler: he didn’t.
Geithner was saying that the shadow banking system is getting bigger, that the banks the NY Fed regulated were accounting for a smaller and smaller part of the total financial system - and that this was a positive development. Geithner wasn’t warning his audience about the risks of shadow banking, he was extolling it, on the grounds that it had “improved the capacity of our system to handle stress”!
This is a bright green light to all the bankers in the room, saying “go ahead with all your whiz-bang new innovative products, we think they’re great, even if we don’t really understand them or know how to regulate them, it’s our job to keep up with you, and we have people in Basel who are on it.” Not once did Geithner indicate that the financial system was getting too complex and that the Canadian approach of forcing banks to keep things simple was maybe a good idea. Instead, he embraced all of the complexity, and just said that the regulatory architecture would have to cope, somehow.
There are two big worrying things here. The first is that Geithner didn’t see the crisis coming at all, and indeed was something of a cheerleader for all of the dangerous activities that the banks were getting up to. The second, which is just as bad, is that with hindsight, Geithner sees this speech as being prescient and heroic - that it’s something to be proud of, rather than sheepishly ashamed of.
As I read the rest of Geithner’s book, then, I’m basically forced to treat the author as an unreliable narrator. Geithner might seem to be straight-up and guileless, but his report of this speech shows that he can remember things - even things which are easily found on the internet - in an extremely self-serving manner. Maybe that’s only to be expected, from a political memoir. But it’s disappointing, all the same.