Review of Tim Geithner’s Stress Test: Reflections on Financial Crises

This may be the truest account of the global financial crisis. Geithner is no scintillating story-teller, but his tale is gripping. In 2008 we were on the brink of a depression. Geithner was at the eye of the storm. Together with Ben Bernanke and Hank Paulson he was one of a trio of policy-makers who are responsible for pulling off an historic escape act.

Critics forget that politics is the art of the possible. Geithner, Paulson and Bernanke would be the first to admit that almost every policy action was a second or third best solution. Any meaningful criticism must take account of political and practical constraints. The treatment of Lehman Brothers is an extreme case in point. With hindsight, the failure of Lehman looks necessary in order to scare the body politic into underwriting the far greater liabilities of AIG and supporting Paulson’s demand for $700bn in TARP money, no strings attached.

I recommend reading the Epilogue – which describes the eventual outcomes – before starting this book. One of the ironies in policy-making is that the best public servants rarely get credit. Not only did Geithner, Paulson and Bernanke save us from catastrophe, they were right on all the major calls. It was right to aggressively ease monetary policy and counteract the widespread financial panic with the Fed’s balance sheet. Their opponents who pontificated about moral hazard and inflation will be damned by history – persistently low inflation and profound risk aversion are the legacies of 2008.

On fiscal policy, Geithner also wins hands down. American output recovered faster than Europe’s and the UK’s, it’s budget deficit improved more rapidly, and US GDP growth has been far better than the average post-banking crisis recovery. On any measure, America’s outcomes have been superior.

There is also a bizarre inconsistency in all the post-crisis hullabaloo from both left and right. The policy-makers who supposedly bailed out Wall Street, actually turned a huge profit on their interventions (only Warren Buffett, perhaps unsurprisingly, predicted this at the time). History cannot fail to observe that these policy-makers sold insurance to the private sector at the height of a panic. And they priced it right. Their policies succeeded, and were profitable for the taxpayer.

Despite an understandable desire to redress prevailing misconceptions, there are honest admissions of substantial errors of judgement. Geithner’s decision to appoint Dick Fuld, the maniacal CEO of Lehman brothers, to the board of the New York Fed, reflects particularly poorly. Indeed, if there is a striking institutional weakness at the heart of Fed policy it is precisely the conflict of interest in the structure of the New York Fed, where Geithner was president. It seems obvious that a board populated with the biggest egos on Wall Street should not elect the president of their principal regulatory body.

The timing of this book is also apposite. Transcripts of the FOMC minutes from 2008 and 2009 are now available. So we can check the veracity of Geithner’s account. They tell a similar story: he recognised early on the threat of a credit crunch, he was dismissive of “moral hazard” in the face of growing financial panic, and he saw through the threat of inflation from a temporary spike in commodity prices.

Intriguingly, many reviews of this book reveal a deep antipathy to Geithner and his colleagues. In fact, he deserves our gratitude.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

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