For nine years, first as president of the New York Federal Reserve Bank beginning in late 2003, when he was only 42, and then as Treasury secretary though President Obama's first term, Geithner had a key role in keeping the country's financial system afloat. In fact, Geithner was chosen to head the New York Fed precisely because of his involvement as a more junior Treasury official in dealing with financial crises in Japan, Mexico, Russia and several Asian and South American nations during the George H. W. Bush and Clinton administrations.
Nevertheless, the crisis that began in 2007 was unprecedented in many ways, and Geithner and other policymakers — including Fed Chairman Ben Bernanke, his predecessor at Treasury, Henry Paulson, and other officials in the Obama administration — were uncertain what was happening and what their responses should be.
Geithner lays out those uncertainties and explains how the decisions were thrashed out. Often, he says, there were no good options, only "least worse" ones. Sometimes others in the administration, including Lawrence Summers, the brilliant economist and a former Treasury secretary himself, would poke holes in a Geithner idea. But if they had no alternative, just skepticism, Obama let Geithner go ahead. There's a chapter titled "Plan Beats No Plan."
Sheila Bair, chair of the Federal Deposit Insurance Corp., with her own legal mandates, often went her own way, to Geithner's distress. He explains those disagreements, however, and is careful to give her credit when he believes it is due.
Geithner writes frankly about his own uncertainties and shortcomings, including his awkwardness as a public speaker, his boyish appearance and! a lack of knowledge of the fine points of economics. He was astounded to be offered the Fed job. When President-elect Barack Obama approached him about running Treasury, Geithner said he wasn't the best person for the job and suggested several others who would be better. From the tone of the book, you know he was not just being modest. But he was the best under the circumstances because he understood what could cause a financial panic, how devastating one could be and what was essential to stop one.
"A financial crisis is a bank run writ large, a run on an entire financial system. People lose confidence that their money is safe — whether they're stockholders or bondholders, institutional investors of elderly widows — so they rush to pull it out of the system, which makes the money remaining in the system even less safe, which makes everyone even less confident," Geithner writes.
No modern economy can grow without a functioning financial system, and in 2008 worldwide financial markets seized up when Lehman Bros., an investment bank, collapsed. Lehman did business with thousands of other institutions and tens of thousands of customers. Once it filed for bankruptcy, no one could be sure how its losses could affect all those other institutions. So investors began pulling out as the panic spread.
Earlier books have described much of what happened that September, but Geithner was present for all the frantic meetings, the thousands of phone calls — and in the case of Lehman, the failure to find a buyer that could keep it alive. New problems cropped up almost weekly, if not daily. He explains each in easy-to-understand language and what the issues were that shaped the responses.
"After Lehman, I lost whatever minimal tolerance I might have had for letting moral hazard or political considerations impede our efforts to attack the crisis," he writes. "We had to do whatever we could to help people feel their money was safe in the system, even if it made us unpopular, even if it helpe! d individ! uals and institutions that didn't deserve help."
It certainly made the Fed and later the Obama administration unpopular for, as many livid critics put it, bailing out Wall Street fat cats while ignoring Main Street and millions of homeowners facing foreclosures. An understandable desire for Old Testament judgment, Geithner calls it.
"I never found an effective way to explain to the public what we were doing and why," he says. "We did save the economy, but we lost the country doing it."
When Geithner was confirmed after a bruising fight over his taxes from several years earlier, he had no other senior officials to help him and had to bring in people from elsewhere. (A personal disclosure: During that period my daughter, a career Treasury employee, regularly traveled with him to foreign meetings.)
To a remarkable degree, Obama supported Geithner despite the public outcries, and often when there were opposing voices among White House advisers, including Summers, the president backed Geithner. When Geithner wanted to resign to return to his family, Obama simply wouldn't let him go.
His wife, Carole, had opposed his becoming secretary, and so had his daughter, who was in high school. His son, a few years younger, clearly was unhappy about it as well. And when he was home or on a vacation with his family somewhere, he always had a cellphone at his ear, Geithner writes.
I saw him at the New York Fed in the midst of Bernanke and Paulson's effort to get Congress to approve $700 billion to fund the Troubled Asset Relief Program, or TARP, after Lehman had tanked. Geithner looked absolutely exhausted.
Another form of stress came later, what Geithner calls "the soul-crushing pathologies of Washington." "I witnessed some appalling behavior in the political arena — selfishness and grandstanding, shameless hypocrisy and mindless partisanship. At times, the failures of our political system imposed traffic constraints on our ability to make the crisis less damaging and the reco! very stro! nger. And yet, at the moments of most extreme peril, the system worked. … Our system passed its stress test."
The remaining stress test was literally a stress test. In the spring of 2009 Geithner realized that the most serious reason the financial system was still under so much strain was that no one trusted the banks' statements about their condition, how bad their losses were. So he had the idea that Federal Reserve experts should examine the 19 largest financial institutions and subject them to a stress test: What would happen if the economy really tanked?
It took months to execute, and there was great skepticism that the scenarios would be really tough. They were, though, and in the end the tests showed just how much more capital the institutions needed. Several had to raise more capital, but only one, GMAC, was in deep trouble. The market accepted the results and began to improve.
There were other struggles, including the financial reforms in the Dodd-Frank financial regulatory overhaul legislation. Again, there are plenty of skeptics, but oversight of the institutions big enough to threaten the financial system is significantly better now and the capital requirements keep going up. There could be another crisis someday, of course, but what Geithner and his colleagues did has made one far less likely.
John M. Berry covered the economy for 40 years, including 25 at the Washington Post. Currently he writes for The International Economy magazine.
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