The former US Treasury secretary was at the centre of efforts to save the world from another Great Depression. Over Indian food in New York, he talks to Martin Wolf about future risks, crisis management, mistakes and misperceptions
Iarrive 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.”
Ithen 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.”