Greg Ip

Articles by The Economist’s U.S. Economics Editor

Review: Tim Geithner’s Stress Test

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A former treasury secretary tells all

Stress Test: Reflections on Financial Crises. By Timothy Geithner. Crown; 580 pages; $35. Random House Business Books; £25. Buy from Amazon.com,Amazon.co.uk

THE financial crisis that began with the collapse of America’s mortgage market was just one of many episodes of recent financial mayhem, from the Mexican and Asian financial crises of the 1990s to the euro crisis and America’s near-default in the summer of 2011.

To draw common lessons from such disparate events, it helps to have had a hand in responding to them. Tim Geithner, President Barack Obama’s former treasury secretary, has certainly done so, and it shows. Consider the moment when he was trying to negotiate a deal to keep a bank from cutting off funding to Countrywide, a big mortgage lender. Angelo Mozilo, Countrywide’s chief, brought to mind Thailand’s bewildered finance minister at the start of the Asian financial crisis a decade earlier: Mr Mozilo seemed “overwhelmed and unclear about what was happening,” Mr Geithner writes in “Stress Test”. That sort of battlefield observation cannot be learned from briefing books; it is what makes this less a memoir and more a how-to manual for anyone faced with a financial crisis.

The author has always been something of an enigma. At a state dinner in 2011, Barbra Streisand told him he must be alright because he was a Brooklyn Jew. It was “kind of her,” he writes, “except that I’m not Jewish and I’ve never lived in Brooklyn.” Congressmen often assumed he was an investment banker, when in fact he had spent almost his entire life in public service. Perhaps his lack of political or economic conviction is to blame; he holds no lasting partisan allegiances, and found his one university economics course “dreary”.

Mr Geithner is good under pressure, though. He became a point man for Robert Rubin and Larry Summers during the Mexican and Asian financial crises in the 1990s, and, as president of the Federal Reserve Bank of New York and then treasury secretary (he stepped down in 2013), he was a central player in America’s own crises. Though often overcome with fear, dread and nausea, Mr Geithner seems to thrive in the cauldron of crisis. When the stress of the Asian crisis ebbed briefly in 1998, he took up triathlons to compensate.

Mr Geithner was known for his brutal candour, and as an author, he does not disappoint. At one meeting he realised that John Thain, Merrill Lynch’s chief, did not know the name of his chief risk officer who was sitting next to him. It was, he writes, “an awkward moment”, and explained the sorry state of Merrill’s risk management. Mr Geithner also takes the opportunity to respond to his many naysayers. He describes Neil Barofsky, the self-styled crusading inspector-general of the Treasury’s bail-out programme, as being “untainted by financial knowledge or experience…outraged by every programme, uninterested in context.”

Mr Geithner has been criticised for doing too little to rein in the banks, in particular Citigroup, that he supervised before the crisis, and for doing them too many favours afterwards. He concedes the first point, a bit, admitting that Mr Rubin’s presence on its board “gave Citi an undeserved aura of competence in my mind”. On the second, he is defiant. Saving the financial system was essential to saving the economy, and his book is full of charts and notes that try to prove his point.

Mr Geithner is hardest on himself for failing to persuade the public of this point, blaming his failings as a public speaker and his “empathy mistakes”. He cuts off one liberal advocate who is trying to describe the human costs of the crisis and demands practical advice instead. When people complained that Mr Obama was not doing enough, he responded defensively instead of listening. “You’re only making it worse,” he was told.

Mr Geithner will not convince his most strident critics, but less obdurate readers will find his advice invaluable. Governments should not respond to every financial failure, he counsels, but must be ready to intervene with overwhelming force to keep them from becoming a systemic crisis. An institution that is important, but badly run, should not be allowed to fail if the government lacks the tools to protect other similar institutions. Letting it fail to prevent moral hazard will just trigger more runs, bigger bail-outs and, ultimately, more moral hazard.

Putting such advice to use is no easy task. How can anyone know when the failure of one firm is an isolated event or the start of a broader conflagration? Mr Geithner leans towards the latter, though it makes him, in others’ eyes, the “walking embodiment of moral hazard”. Unlike Hank Paulson, George Bush’s treasury secretary, and Ben Bernanke, the then Fed chairman, Mr Geithner would have used public money to help another bank take over failing Lehman Brothers.

In 2008 he had the right instinct. But taken too far, it affirms suspicions that many firms and markets are “too big to fail”—surely an invitation to future crises. Mr Geithner thinks the financial reforms he helped design will enable his successors to shut down big firms without the chaos of Lehman’s collapse or the moral hazard of bail-outs. Only the next crisis will prove whether he is right.

The original article is linked here.

 

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Written by gregip

May 15, 2014 at 1:08 am

Posted in Uncategorized

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