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I arrive at the Bukhara Grill in Midtown Manhattan promptly at 11.30 on a bright Friday morning. The restaurant is empty and I am shown to a table in an alcove near the entrance, where I wait for my guest, Tim Geithner, former US Treasury secretary. We have arranged this early time in order to get long enough together before he needs to leave.
Geithner has chosen the restaurant. He knows Indian food well, having lived there as a child for five years. I have known him since the mid-1990s, when he was a young civil servant working for Lawrence Summers at the US Treasury department. (Summers was himself Treasury secretary, in the last year and half of the Clinton administration.) Even then, Geithner was already the person his seniors expected to solve messes.
The messes Geithner came to specialise in were financial crises. In the 1990s, he worked on the Mexican and Asian crises. As president of the New York Federal Reserve (2003 to January 2009) and then as President Barack Obama’s Treasury secretary (until January 2013), he was at the centre of efforts to cope with the financial crisis that hit the US in 2007 and reached its peak a year later.
My own view is that the people, including Geithner, who dealt with this crisis made big mistakes but also saved the world from another Great Depression. Almost the only thing the left and right of US politics agree upon, however, is that the actions taken during the crisis were a crime and a folly. The reason for our lunch is the publication of Geithner’s book, Stress Test: Reflections on Financial Crises . It is his case for the defence.
He arrives, a few minutes late and we greet each other warmly. He has always looked younger than his age and, at 52, still does. He is slim, fit (he runs several times a week) and tanned.
The waiter arrives to take our order. I ask for a salted lassi to drink and a bottle of still water for the table. Geithner orders chicken makhani (buttered chicken) and an onion kulcha (bread). I choose chicken malai kabab (cooked in cream), with okra and naan bread. We share some rice. The food comes quickly, and is delicious.
Last month Geithner took on a new role as president of Warburg Pincus, a Wall Street private equity firm. So I start by asking what his life has been like after leaving public service. Has it been a difficult adjustment? “I was prepared for it, been thinking about it a lot and I spent a year writing a book and thinking about what I’d done and speaking about it. But also I took 10 trips with my wife, and it was great.”
I note that his book has been perfectly timed to hit the “Piketty storm” – the reaction to Capital in the Twenty-First Century , the surprise bestseller by French economist Thomas Piketty. Does it concern him that everybody’s moved on from the crisis? “No, it doesn’t. I wrote the book because I wanted to explain what we did and try to explain why panics are different, why they require that kind of different and counterintuitive response and I wanted to do it for the long run.”
So what is his message? “Well, financial crises are devastating. But it’s not beyond the capacity of mankind to limit the damage.” You need shock absorbers, such as more capital. But you must also “equip yourself with a forceful set of tools and use them aggressively in the face of a panic. I think the hardest thing to understand is that runs in a panic require a different response – a much more counterintuitive response – than a normal financial crisis.”
To have the chance of getting those better outcomes, he argues, you have “to lean against the instinctive reactions people have in a normal crisis, which is to let it burn out, be indifferent to the failure of individual firms, or embrace austerity quickly. And I think the big persistent misperception is that we acted out of an excessive concern for the banks rather than out of recognition that if you leave the country vulnerable to the failure of the system, you leave the average person exposed to much greater damage even than we saw in this crisis.”
So what are these novel techniques? “I would say we did three types of things that were pretty different from the past playbook. One is something I know you very much embrace – it seems obvious, although rarely accepted – which is that we used monetary policy, fiscal policy and the financial strategy in concert. The second thing we did is make broad use of guarantees. Since so much of the system was outside the banks, we had a much more complicated set of backstops to design. The third thing, the stress test, was a novel device for trying to recapitalise the financial system and restructure it as quickly as you could and in a way that, to the extent possible, reduced the risk to the taxpayer. So, we wanted to design something that maximised the chance that private markets would recapitalise the system.” Indeed, he says, the incentive to raise capital privately proved “much more effective than we thought it would be.”
How did things ever get so bad in the first place? What is to blame? “We had a 50- to 70-year quiet period in American finance. It bred this vast degree of excessive confidence. And those conditions allowed two dangerous things to happen. One was a long period of rapid growth in debt relative to income. The second thing was that in the US most of that risk ended up outside the core of the banking system.”
Is it possible, I ask, that success in preventing another Great Depression will lead people to repeat the follies quite soon? “Yes, but I think the bigger risk is that there’s this overhang of insecurity and lack of confidence that leads to suboptimal growth outcomes for a longer period of time. Also I have a more optimistic view of what’s possible because, although we’re vulnerable to manias, that only happens when policies have been successful for a long time. But the fact that you can’t eliminate the risk of systemic crises and panics doesn’t mean you don’t have enormous capacity to limit their effects, again just by better policy choices in the midst of the storm.”
. . .
I then turn to how the crisis itself was handled. Did policy makers react too slowly? In Geithner’s view, “the reaction was late in our crisis mostly because of the limits on the tools we had going into it, because we didn’t have the authority, until the panic scared people to death, to do what we needed to do. You also have this fog of diagnosis at the beginning: you don’t know if the shock is systemic. The optimal response should be gradual initially because you learn something from that and you don’t want to be prematurely generous.”
One possibility, I add, is that everyone had forgotten the Great Depression, because it had passed from living memory: it was our grandparents’ crisis, not that of our parents.
“Exactly right,” he responds. “But we had an advantage because we’re in a more globalised world. Larry [Summers] and I had lived through and watched a bunch of crises and Larry was sort of the architect of the modern application of the Powell doctrine [after former General Colin Powell] of overwhelming force in financial panics. We were able to take our experience and use it in the strongest country on the planet.”
At this point, the restaurant owner comes by and we express our enthusiasm about the food. He seems to think I might be important but appears not to know who my guest is.
I turn the conversation towards fiscal policy. The crisis itself caused huge fiscal deficits, which the Obama administration inherited. Yet I also thought the fiscal stimulus the administration introduced in 2009 was too small. Wouldn’t it have been better to have asked for more than they could get? Instead of being crucified by the argument that stimulus didn’t work, they could have said, “Well, you didn’t give us the tools we asked for.”
Geithner responds robustly: “Look, we thought we were over the abyss. We didn’t want to put ourselves in the position where we were fighting a protracted war with uncertain outcome.”
Then he adds: “I think you’re right about how Americans feel about the economy now. I mean, it’s true that confidence is a little bit better and it’s true that you’re seeing for the first time a little wage acceleration at the median income level and short-term unemployment is back down to normal levels.
“Yet another way to think about it is that the economy has actually done pretty well, given the overhang of deleveraging and those shocks to policy [notably the European crisis]. But why would people understand that? ”
One doesn’t win arguments on counterfactuals, I say. One can’t win the argument that the stimulus made things less bad than they would have been without it. It is too nebulous.
Geithner gets into his stride: “But the other thing is that perceptions matter a lot and the inescapable and overwhelming perception created by what you have to do to break a panic is this sense of deep unfairness, of rewarding the unjust, of rewarding the arsonist. And there’s no way to heal that.”
He continues: “I tell a story in the book about Erin Burnett, a CNN correspondent, recounting a story about how she went up to an Occupy Wall Street protester holding a Tarp [Troubled Asset Relief Program – the federal bank bailout] sign and asked, ‘Did you know the taxpayer earned a positive return on the investments in the banks?’ ‘No.’ ‘If that were true, would it change your view?’ ‘Yeah, it would.’
“The other thing is that the wheels of justice move slowly and we have in the US a very strong enforcement response, that got traction a little bit late. Now, it may not be in the forms people think are the most just but there’s well over $100bn in fines on banks coming back to the taxpayer.”
Geithner pauses, obviously dissatisfied with what he has said: “Let me do it one more time, differently. The fact that five years later people may still feel that what we did was unjust, because they couldn’t imagine the counterfactual is, of course, not an argument for not doing it.”
The country faced an existential implosion of its financial sector, I note. Yet the response has been anti-federal-government populism, even though the federal government saved the economy. Is this temporary hysteria or something more profound?
Geithner is always optimistic. “What’s happened in American politics has had a long fuse. The crisis made it all worse. But if you look through the political noise and the political theatre, the policy outcomes the US has been able to produce have actually been, in a relative sense, quite good and I don’t just mean relative to what we saw in Europe or Japan, I mean relative to our challenges. And so if you look through the terrible, distracting, discouraging noise of our adolescent political theatre, there’s been a pretty remarkable amount of messy, not perfect, but well-designed policy. I didn’t mention the financial reforms. So, our political system, as many British politicians have observed, is able to deliver when it’s most important.”
I move on, and ask him what he thinks of Obama. “He is an excellent decision maker in a crisis – willing to decide and not paralysed by indecision, puts a lot of pressure on the debate, trying to get better outcomes. No posing, no posturing and willing to take a long view of politics – maybe not long enough, but a long view of politics.”
And, I add, as the man who prevented Great Depression II and passed health reform, Obama is one of the transformative presidents in the past 50 years. Geithner says: “I have the same view but I want to be fair. Again, the stuff that worked came in two stages and the first stage Hank Paulson [Geithner’s predecessor] and George W Bush made possible ... They acted exceptionally bravely and sensibly.”
. . .
I order coffee and later I am presented with an enjoyable sweet Indian dish – gulab jamun – on the house. Geithner declines his. I turn to his future. Won’t people say, “Here’s another guy who was in the Treasury and now he’s waltzed off to Wall Street?”
“Most people thought I came from Wall Street,” he says. I agree – it seems everybody thinks anyone in a high policy making position in economics once worked at Goldman Sachs. “I did public service my entire professional life and I loved it. But I knew I couldn’t do it for ever and I was going to have to do something different. I was very worried about the perception of the way our system works. So I decided I would not work for a firm we’d regulated or rescued and I was very careful in choosing a firm [Warburg Pincus] with a good ethical reputation.”
So, I observe, now that he leads an essentially crisis-free life and can get home on time, his two children have grown up. “Exactly right. It’s a little bit tragic. I’m late, I’m late, it’s a terrible thing. I can give my family more privacy now, because I’m not in the public eye, which is good. It was very tough for them, much harder for them than for me. You put a huge burden on your spouse and you miss vast swaths of their lives. My kids are very strong and well-adjusted.” I tell him I loved the quote in the book from his protective daughter Elise when he was asked to take a call while in hospital in 2010: “Who the fuck is POTUS?” she asked, before the acronym of the President of the United States was explained and she agreed to her father taking the phone.
Elise is studying medicine, and we talk about Complications, by surgeon Atul Gawande, given to Geithner by Dr YV Reddy, erstwhile governor of the Reserve Bank of India. “It was a fascinating book, in part because he [Gawande] described how in that profession they do things that in economics we don’t do that well. They have these things they call morbidity and mortality reviews every Friday, where they go over mistakes.” I agree that central banks don’t like analysing their past mistakes but should.
I pay the bill and, after a photo with the restaurant owner, we depart. I see Geithner as quintessentially American – an optimist who wants to make things work, imbued with great belief in his country. The world is lucky that Obama turned to him. It is, however, unlikely that either man will ever get popular credit for it.
Martin Wolf is the FT’s chief economics commentator. Read the full transcript of this interview
217 East 49th Street,
New York, NY 10017
Basmati pulao rice $8.00
Chicken makhani $22.00
Chicken malai kabab $14.00
Kurkuri bhindi $19.00
Naan toorewala $5.00
Onion kulcha $6.50
Evian x 2 $14.00
Total (incl tax, service) $130.00
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