25 May Geithner’s Stress Test Does Nothing to Relieve My Stress
I have been looking forward to reading the memoirs of Secretary Geithner ever since he left office. I am not a fan of the Secretary’s, but the core of my dislike for his work as Treasury Secretary is very different than the most oft-cited reasons for folks’ disdain. He is an intelligent guy, and no doubt was driven throughout 2007 and 2008 (thinking back to his time at the NY Fed) by an intense desire to right the ship of what was America’s economic catastrophe. I hoped his book would provide a better color or insight as to why they did what they did, and perhaps allow him to shake off a bit of the political lap-dog reputation he earned by essentially never once calling out President Obama. The book left me with a lower view of the Secretary than I had before, though I want to be clear as to why that is, and I want to re-visit much of what took place from 2007 through 2009 so that Geithner’s view on these things can be better digested.
Let’s start off with some of the early turn-offs. His calling of Dinesh D’Souza a “dick” early in the book does not set the tone for a serious tome. But then again neither does his snarky treatment of what he calls the “moral hazard fundamentalists”. He uses the term “Old Testament crowd” over one hundred times in the book. The idea that a serious policymaker cannot see the credible legitimacy to those who fear moral hazard precedence in policies of continued international finance backstops is a tough pill to swallow. Geithner has some legitimate points to make about some of the actions they took during the crisis, but I believe the weight of those points is entirely lost by the dismissive and patronizing attitude Geithner takes towards the other side.
One of the more difficult parts of the book to read is Geithner’s coverage of his years at the New York Fed prior to the crisis. I challenge any reader to tell me they got a different interpretation of Geithner’s version of the story than this: I was worried about excess leverage; I was worried about inadequate transparency in the derivatives market; I was uncomfortable with the lending standards in the housing market; I felt there was too much accommodation in monetary policy; BUT I was the victim of a Wall Street that wouldn’t listen to me, a Fed Chair who had his own ideas, and research I didn’t write telling me that housing problems would have no impact. The entire section is the opposite of the mea culpa I expected. It is a really feeble request for exoneration, or at least it reads that way, and it left me as a reader frustrated and not amused. I mean the amount of times he says that “I warned …” and “I expressed concerns …” and “I knew that …” is just insane. There is no documentation of his prescient but frustrated attempts to prudently save the world. There are lots of contrarian evidences (he voted FOR every single interest rate decrease; his Fed published the paper saying there was little systemic exposure in the economy to housing; etc.). We are to take his word for it that he was a “chicken little” being rebuffed by more powerful forces. His version of the story doesn’t pass the smell test. Geithner faced a Herculean task in this book to try and rationalize his post-crisis decisions; the section of the book focused on rationalizing his pre-crisis decisions is wholly unconvincing and frankly rather insulting.
There are a few little things the Secretary should be called out on. It isn’t a hyper-prevalent theme in the book but any time the subject of Fannie/Freddie came up, Geithner threw in an anecdotal comment about “the efforts the Clinton administration and Greenspan had made to reel in the leverage of Fannie/Freddie”. This is so demonstrably false and contrary to the indisputable testimony of history that one wonders who Secretary Geithner, an intelligent man, thought he was fooling. The book doesn’t so much set any records straight as it does attempt to assume facts not only “not in evidence”, but directly contrary to the evidence. It is unfortunate, because he had an opportunity in the book to defend some of the actions taken by the Fed and the Treasury which, while hyper unpopular, deserve some defense. But things like claiming the Rubin/Greenspan cabal of housing bubble-blowers were trying to rein in Fannie leverage is unforgivably disingenuous.
For Secretary Geithner, the “post hoc” of the stress test plan of 2009 being a resultant financial recovery is indisputable: The good things that happened in late 2009 had to have happened because of what they did in early 2009 (i.e. announce a stress test that would force more capital in still-troubled financial institutions and presumably generate confidence in stronger ones). But he is missing something that warrants attention: The adjustment to mark-to-market accounting made in March of 2009. Let’s say for a moment that Steve Forbes and Brian Wesbury and many others are off their rockers that the strictness of FASB 157 (mark to market requirements) were to blame for much of the financial meltdown, and equally insane to believe that its repeal was the major catalyst to a healing of the nation’s financial system … Wouldn’t their theory still warrant SOME discussion, even if just to dismiss and refute? In a 538-page book I find it painfully disingenuous that this subject doesn’t receive a single word of attention.
If I ever write a memoir I hope I will not use it to “settle scores”, but I imagine it is highly tempting to do so. Geithner has no reservations about using the book to play out his internal feud with Larry Summers, to pick on former FDIC chair Sheila Bair, and yet to reaffirm the impenetrable wisdom of the Holy President Obama at every opportunity (the man who, inexplicably, picked Geithner over Summers). The self-serving nature of this component to the book is unfortunate. I suspect, though I may be disappointed again, that when Ben Bernanke’s book comes out we will not be subjected to so many personal little scuffles and feuds. It is unbecoming.
My final major criticism of the book is the completely fallacious but totally taken-for-granted assertions about Main Street’s innocence in the Great Recession. Secretary Geithner writes over and over again that people were being evicted from their homes “for no fault of their own”. This is just patently false and while I have always understood the political wisdom of saying such nonsense, I am getting tired of it. Five years later can we be honest and admit that the vast majority of people who lost their homes themselves committed some act of financial irresonsibility? Is this seriously even controversial? Since we know it to be true, what is the merit in acting otherwise? Let’s all do a big first step together here and admit the real nature of the societal problem. The secretary does no one any favors by excusing the financial irresponsibility of all the actors in the Great Recession.
There are some fascinating parts of the book that I will briefly mention. The contempt Geithner feels for then-SEC Chairman (and my former Congressman) Chris Cox is not exactly disguised in the book. It seems to mirror the impression I get from Secretary Paulson’s book and other insiders I have discussed this with that they collectively feel Cox’s demeanor throughout the crisis was utterly useless. If, in fact, Cox did close out the famous night-before-Lehman-fell meeting with a speech thanking all the Wall Street firm heads “for their patriotic service to our nation”, I have to say that is one of the most awkward and wince-inducing things I have ever heard. Overall the impression I have been given that Chairman Cox spent the entire crisis as a deer-in-the-headlights is reinforced by Geithner’s book.
Geithner’s admission that he pressured Wachovia and Sheila Bair’s FDIC to take the $1/share offer from Citi (with billions of dollars of FDIC support) over the $7/share offer from Wells Fargo (with no FDIC support requested) is dumbfounding. His reasoning is perhaps worse: He feared that no one would take a government seriously that changed their mind for a better offer? Huh??? Who would take seriously a government that didn’t?
At the end of the day, Geithner’s book does something very important for those of us who are students of the great financial crisis of our day. Most critiques of the way policymakers handled various parts of the crisis impugn motive and make assumptions (sometimes very reasonably). What this book does for me is crystalize beyond any shadow of any doubt that at least Secretary Geithner, and I suspect a great deal of other monetary policymakers, view ongoing financial crises as part of the DNA of a modern economy. They do not believe there are structural impediments that cause boom/busy cycles; they simply believe that full blown financial panics are supposed to happen, and central banks are then supposed to act (whereby once one crisis is resolved policymakers are to wait for the next one to extinguish). I do not merely mean that there will be the natural ebb and flow of a business cycle, a contention against which there should be no argument. I mean that Geithner and his ilk believe in the core of their being that financial crises are part of the deal – they cannot be prevented – and a central bank exists to deal with them when they do. His book reinforces this view from page 1 all the way through. That lens is how the Secretary saw the great crisis of 2008. I do not agree with him on his fundamental premise, but if I did it would not be too hard for me to agree with his underlying conclusion. But there are structural causes for the various crises we have endured as an economic society, and those causes can and should be remedied. Reading Geithner’s book, a man whom I have no doubt is a decent person and faithful disciple of the economic worldview he believes in, I would say that it is safe to conclude that we are a long way’s off from any structural resolution.
P.S. – I would be remiss if I didn’t point out something Geithner says word-for-word on pp. 381-382 of the book, something that I believe tells me all I need to know about the fallacious thinking guiding our Treasury Secretary in the post-crisis recovery period. “The biggest driver of the foreclosure crisis wasn’t underwater mortgages. It was the weak economy. Too many unemployed and under-employed were having trouble making their mortgage payments”. This is the sort of “main street is a victim” mentality that drives most of the post-game commentary on the financial crisis, and in this case I believe that Secretary Geithner actually believes this. He is wrong, and in reality, he is obscenely wrong. Well over 90% of foreclosures came from people with the same jobs they had when they bought their bubble-priced home. People walked from their mortgages because they had negative equity and, well, didn’t care anymore. The modification data bears this out as 70% of people who got mortgage payment relief simply re-defaulted within a year. I don’t mention this to isolate Geithner’s errant thinking, as his narrative is the consensus but mistaken view, but it is telling that our own Treasury head could get something so important, so wrong.
P.S.S. – I would have loved to have spent this review defending some of the unpopular decisions Geithner made that do, in fact, deserve defense. His book forced me to take the review in a different direction.