As its title suggests, Timothy Geithner’s book, "Stress Test," is stressful reading. The former treasury secretary returns the reader to the terrifying days of the 2007-2009 financial crisis. Those memories on their own are bad enough, but Geithner’s contemporaneous thoughts and words are the really scary part.
Geithner, a man who does not sit still, was a fierce advocate for more government action during the crisis — more bailouts, bigger government guarantees and new programs. “No more Lehmans” is the book’s anthem. Anything to let the markets know that the government would not let private financial institutions fail or even stumble. Geithner’s defense of his motives for acting, however, is more convincing than his defense of the substance of those actions.
Many pages are dedicated to decoding the acronyms of the actions the government took (all with Geithner’s enthusiastic support) — TLGP, AMLF, CPFF, TAF, TALF, TARP, TSLF, HAMP, HARP, PPIP, and the list goes on. Much of the rest of the book is a lament for the tools the government did not have. “Neither the Fed nor the Treasury had authority to inject capital into troubled institutions except Hank [Paulson]’s new power to invest in Fannie and Freddie. We had only limited tools to defend against a run on firms outside the commercial banking system,” he writes. If only the government had more tools — or better yet, carte blanche — to save the financial system.
Thanks in part to Geithner’s cheerleading, Congress expanded the Treasury’s authority during the crisis. But even the $700 billion Troubled Asset Relief Program wasn’t enough for Geithner: “Congress had given us only $700 billion to spend — a big number, but by no means an overwhelming number compared to the troubled assets in the banking system.” He wanted the government to stand behind the whole financial system.
Sheila Bair, then-chairwoman of the Federal Deposit Insurance Corporation, did not share Geithner’s enthusiasm about system-wide guarantees. Geithner needed her agency to act, but Bair did not respond well to his not so gentle overtures. Geithner characterized her reluctance to take the extraordinary step of guaranteeing all the debt in the financial system as a parochial defense of her agency’s Deposit Insurance Fund and a reckless adherence to principle without due concern for “avoid[ing] Armageddon.” Although clearly not intended this way, the story of Bair’s hesitance to sign U.S. taxpayers up for all the risks in the financial system was a refreshing interlude in an otherwise painful tale of incessant government-funded rescues.
With Geithner’s lobbying efforts, the Dodd-Frank financial reform law expanded regulators’ crisis tools. As a conversation recounted by the special inspector general for the Troubled Asset Relief Program reveals, however, Geithner wants government officials to have an even freer hand than that afforded by Dodd-Frank.
As Geithner told the special inspector general, while Dodd-Frank gives the government “better tools,” and reduced the risk of failures, “[i]n the future we may have to do exceptional things again” if the shock to the financial system is sufficiently large. In Geithner’s view, the nature of those “exceptional things” should be up to the discretion of the regulators in the heat of the moment.
Geithner’s passion for government intervention knows no borders. In 2012, he worked hard to convince the Europeans to design and implement large government rescue packages. The bigger and bolder, the better. Government bailout evangelism, however, may not be his strong suit. He undiplomatically observes, for example: “The mistakes by the Europeans — and their belated and often ineffectual attempts to imitate us — provided a pretty good advertisement for our crisis response.”
But Geithner’s book is not a good advertisement for the crisis response. Instead, it is the story of the government’s attempts to undermine market discipline, a much tougher kind of love than that shown by Geithner and his colleagues during the crisis. That Geithner acted the way he did in the crisis is not surprising. Market discipline is painful, and watching it unfold is difficult for someone with the ability to intervene and an inability to sit still. That is why we need to take steps to credibly constrain the government’s power to intervene, to make bankruptcy the only out for a failed firm, and to discourage shareholders, creditors and executives from running for government cover in times of trouble. Dodd-Frank didn’t take these steps; so much work still remains to be done.
"Stress Test" is, for the most part, a well-written book, aside from its unsophisticated political commentary and overused war and first-responder analogies. And one can admire Geithner for his tenacity, dedication and hard work in the midst of tremendously trying circumstances. But "Stress Test" still leaves me hoping that the next time a crisis comes, a Geithner protégée is not in charge at Treasury.