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On the morning of January 27, 2009, my first full day as secretary of the Treasury, I met with President Barack Obama in the Oval Office. The worst financial crisis since the Great Depression was still raging, and he wanted to put out the fire for good. The banking system was broken. The broader economy was contracting at a Depression-level rate. Consumer confidence had sunk to an all-time low, and millions more Americans were in danger of losing their jobs, their savings, even their homes. The President looked calm and reasonably comfortable after a week in the White House, despite all the bad news he was getting.
I was about to give him some more.
First, I thanked him for coming to my swearing-in the night before, a nice gesture of personal confidence in me. We had met just three months earlier, and I was in many ways an unorthodox choice to lead Treasury. I wasn’t a banker, an economist, a politician, or even a Democrat. I was a registered independent without much of a public profile—and the profile I had didn’t exactly signal Obama-style hope and change. As head of the Federal Reserve Bank of New York, I had spent the past year working with a Republican Fed chairman, Ben Bernanke, and a Republican Treasury secretary, Henry Paulson, Jr., to design a series of spectacularly unpopular rescues of financial firms. I didn’t look like a Treasury secretary, either. I was forty-seven. I lacked gray-haired gravitas. Barney Frank, one of my closest allies in Congress, later observed that when I spoke in public, I looked like I was at my own bar mitzvah.
And I was already politically damaged goods. I had been portrayed throughout my confirmation hearings as a tax cheat, a tool of Wall Street, an enemy of Main Street. Even though I had spent the previous two decades in public service, I was routinely described as a venal investment banker. Some thought I might be the first Treasury nominee rejected since before the Civil War, and I had considered withdrawing before the vote. I was eventually confirmed, by the narrowest margin since World War II; I already felt crushing guilt about the humiliation I was forcing on my family, and the political capital the President had to spend on me.
But now it was time to get to work. I took a seat on a sofa facing away from the Rose Garden, the seat I would take hundreds of times over the next four years. The President sat in his official chair to my right. On the couch across from me was the renowned economist Larry Summers, a former Treasury secretary who had met me when I was a junior civil servant in the department and had helped promote me up the ranks. Now Larry was running the President’s National Economic Council, so we would fight the crisis together. It should have been an exciting moment for me—a career technocrat entering the epicenter of power, alongside a brilliant former boss and an inspiring new president.
It didn’t feel exciting. It felt dark and daunting.
I had spent much of my career dealing with financial crises—in Mexico, Thailand, Indonesia, Korea, and beyond—but this was the big one, the hundred-year storm. Bernanke, Paulson, and I had already engineered a series of emergency interventions for a variety of financial giants, culminating in the Troubled Asset Relief Program (TARP), a $700 billion intervention for the entire financial system. But we hadn’t ended the crisis. The index measuring the risk of corporate defaults was even higher than it had been after the chaotic collapse of the Lehman Brothers investment bank in September 2008, when stock markets crashed, bond markets went haywire, and even supposedly safe money market funds were overwhelmed. Foreclosures were at an all-time high. The economy was shedding more than 750,000 jobs a month.
We had slowed the post-Lehman panic, but the financial system was still frozen. Banks that had overextended themselves during the boom were now in defensive retreats, hoarding cash, depriving businesses of financial oxygen. There was virtually no private credit available for ordinary borrowers who wanted to finance a new car or a college education, much less a new home. We had slipped into a vicious cycle, as the financial earthquake began to ripple through the broader economy. As laid-off workers and other nervous consumers spent less, businesses were laying off more workers and investing less, prompting families and businesses to cut back even more. The crippled financial system was making the recession worse, while the deepening recession was making the financial system worse. Wall Street and Main Street were going down together. I had recently started reading Liaquat Ahamed’s Lords of Finance , a history of the policymakers whose mistakes helped create and prolong the Great Depression, but I had put it down after a few chapters. It was too scary.
The President knew he couldn’t fix the broader economy without fixing the financial system. Banks are like the economy’s circulatory system, as vital to its everyday functioning as the power grid. No economy can grow without a financial system that works, safeguarding the savings of individuals, moving money where it’s needed, helping families and businesses invest in their futures. And ours was still a mess.
“Now that I’m official, I can tell you how bad it really is,” I said.
F OR STARTERS , I told the President, we still had five “financial bombs” to defuse.
By bombs, I meant huge, far-flung, overleveraged institutions whose failure could spark the kind of global panic the Lehman bankruptcy had sparked in the fall. I listed them: Fannie Mae, Freddie Mac, AIG, Citigroup, and Bank of America. They all were much larger than Lehman. All five had received major infusions of government cash to save them from failure; AIG had been rescued three times in four months. But they all were in trouble again, and we needed to make sure they didn’t explode—not to protect them from the consequences of their mistakes, but to prevent another messy failure from ravaging the rest of the economy. The politics would be awful. People hated the idea of government bailouts for mismanaged financial behemoths. But if their creditors or the markets in general lost confidence that any of them could meet their obligations, we’d be looking at a worldwide financial meltdown, and a much deeper economic crisis.
Fannie and Freddie, the Washington-based housing giants that backed most U.S. mortgages, needed the most help. They were quickly burning through nearly $200 billion in taxpayer aid, and without another $200 billion or so—the equivalent of more than three years’ worth of federal education department spending—they risked catastrophic defaults. Even a modest increase in that risk would push mortgage rates higher and home prices lower, intensifying the recession.
AIG was the closest to exploding, and the most egregious financial basket case. But while the century-old insurer had become a three-letter symbol of excessive risk, AIG also had tens of millions of innocent policyholders and pensioners who depended on it, plus tens of thousands of derivatives contracts with businesses around the world. A default on its debts or even a downgrade of its credit rating would reignite the panic.
Citi and Bank of America were the biggest of the bombs, Exhibits A and B for the outrage over “too big to fail” banks; my aides called them the Financial Death Stars. But the world was so fragile, and they really were so big, that if we didn’t want a reprise of the Depression—an obliterated banking sector, 25 percent unemployment, thousands of businesses shuttered—we had to make sure they didn’t drag down the system, even if it looked like we were rewarding the reckless.
That was a lot to dump on a new president’s plate. But the problem was bigger than the bombs.
We weren’t just dealing with five severely undercapitalized firms that could blow up the financial system. We were dealing with a severely undercapitalized system. Even after the TARP investments and our other emergency assistance, it did not have enough capital to cover its potential losses, much less finance an economic recovery. And Larry and I were concerned that our new administration didn’t have enough cash—or enough authority—to repair it.
My former New York Fed colleagues had privately calculated that the banking sector alone might need another $290 billion to survive a bad recession, and as much as $684 billion to survive an “extreme stress scenario.” Those numbers didn’t include the potential cost of stabilizing “nonbank” financial institutions such as AIG. They didn’t include the potential cost of rescuing General Motors and Chrysler, which were also on the verge of bankruptcy. And we had only about $300 billion left in uncommitted TARP funds.
Larry and I told the President we might have to ask for another TARP, at a time when Congress had zero interest in more bailouts.
I couldn’t claim I knew exactly what would work. There hadn’t been a crisis this severe in seventy-five years, and never in a financial system this complex. Repairing our banks and other financial institutions, while necessary, would not be sufficient to fix the economy. That’s why the President was already pushing a massive fiscal stimulus bill—$800 billion in government spending and tax cuts—to offset lost income and wealth, revive demand, and create jobs. The Fed was also expanding the frontiers of stimulus through monetary policy. Financial rescue, fiscal stimulus, and monetary stimulus—along with the President’s efforts to prop up the beleaguered auto and housing sectors—would all have to work together, if they were to work at all.
But stabilizing the financial system was our most immediate problem. A renewed banking panic would quickly overwhelm any fiscal and monetary support we could provide. Larry and I were convinced we had to try to get ahead of the crisis, instead of continuing to chase it from behind. We told the President we had to err on the side of doing too much, even though the public thought we were already doing too much. In an emergency, temporizing half-measures would be riskier than overwhelming force, and ultimately more expensive for taxpayers—not only in dollars, but in lost jobs, failed businesses, and foreclosed homes.
The President took all this in quietly, patiently, seemingly unfazed. His instinct was to move quickly to repair and restructure the entire financial system, not to let it limp along or sweep its problems under the rug. He wanted to be aggressive and comprehensive.
“We need to rip the Band-Aid off,” he said. “I want to do this right, and get it over with.”
I agreed, but with a qualification. There was intense pressure on us to punish the Wall Street gamblers who had gotten us into this mess—to nationalize or liquidate floundering firms, or force bondholders to accept “haircuts” rather than the face value of their bonds. Those get-tough actions would feel resolute and righteous, but in a time of uncertainty, they would damage confidence and accelerate the downward spiral. As we had seen in the panic of the fall, that would hurt Main Street, not just Wall Street. We wanted to avoid the long, sideways drift that Japan had experienced after its crisis in the 1990s, but also the trauma of another Great Depression.
“We do have to rip the Band-Aid off,” I said. “But we have to make sure we don’t break the financial system.”
The President wasn’t sure what I meant, so Larry translated: “What Tim means is, we can’t afford a plan that shatters a fragile system, destroys confidence, and causes the stock market to crash.”
The President’s charge was direct and forceful: Come back soon with a plan to clean up this mess. He wanted to do the hard stuff early, take the pain quickly. “Leave the politics to me,” he said. Just focus on the substance, what will work best, how to restore confidence. He understood the inherent uncertainty we faced, the real possibility that reasonable decisions would produce horrible results, the absence of a perfect or even an attractive option. He made it clear he was willing to take serious risks to try to get this nightmare behind us.
I was impressed. But I didn’t feel very confident.
E VERY FINANCIAL crisis is a crisis of confidence.
Financial systems, after all, are built on belief. That’s why the word credit is derived from the Latin for believe , why we say we can “bank” on things we believe true, why financial institutions often call themselves “trusts.” Think about how a traditional bank worked. Depositors entrusted it with their money, confident it could repay them with interest at any time. The bank then lent out their money at a higher interest rate, confident that everyone wouldn’t want their money back at the same time. But when people lost confidence in a bank—sometimes because of rational concerns about its lending or leadership, sometimes not—they would all want their money back at the same time. The result was a run on the bank, like the famous scene in It’s a Wonderful Life when depositors rush to pull their money out of a Depression-era savings and loan. Confidence is a fragile thing. When it evaporates, it usually evaporates quickly. And it’s hard to get back once it’s lost.
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 or 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. This has happened a lot throughout history, in rich countries and poor ones, in sophisticated systems and simple ones. Human beings are prone to panics, just as we are prone to the kind of irrational confidence (in real estate, or stocks, or seventeenth-century Dutch tulips) that produces the booms that precede panics. And once the stampede begins, it becomes rational for individuals to join it to avoid getting trampled, even though their collective actions are irrational for society as a whole. These panics almost always have brutal consequences—for teachers and construction workers, not just investors and bankers—and policymakers almost always make them worse.
The question facing us in early 2009 was: How can the government restore confidence during a crisis? Part of the answer, while distasteful, was simple. The government can stand behind faltering firms, removing the incentives that turn fear into panic. Banks under siege used to stack money in their windows to reassure depositors there was no need to run; when governments put enough “money in the window,” they can reduce the danger they’ll have to use it. The classic example is deposit insurance, Franklin Delano Roosevelt’s response to Depression-era bank runs. Since 1934, the government has guaranteed deposits at banks, so insured depositors who get worried that their bank has problems no longer have an incentive to yank out their money and make the problems worse.
Of course, the banking system that FDR inherited didn’t have “collateralized debt obligations,” “asset-backed commercial paper,” or other complexities of twenty-first-century finance. In the panic of 2008, insured bank deposits didn’t run on any significant scale, but all kinds of other frightened money did—and in the digital age, a run doesn’t require any physical running, just a phone call or a click of a mouse. By early 2009, the government had put a lot of money in the window through TARP and other emergency measures. We had backstopped tens of trillions of dollars’ worth of financial liabilities. But the financial system was still paralyzed. The markets could see the five bombs. And our crisis response had seemed so inconsistent, with so many policy zigzags and unexpected lurches, that investors and creditors were uncertain we had the capacity and the will to finish the job. Uncertainty is also at the heart of all financial crises. They simply don’t end without governments assuming risks that private investors won’t, taking catastrophe off the table.
The obvious objection to government help for troubled firms was that it rewarded the arsonists who set the system on fire. This objection took two forms. One was a moral argument about justice, what I called the “Old Testament view.” The venal should be punished. The irresponsible shouldn’t be bailed out. The other was an economic argument about incentives, the “moral hazard” critique. If you protect risk-takers from losses today, they’ll take too many risks tomorrow, creating new crises in the future. If you rescue pyromaniacs, you’ll end up with more fires.
Those are valid concerns. And in most states of the world, they’re sensible guides for action. During a typical recession or even a limited crisis, firms should face the consequences of their mistakes, and so should the investors who lend them money. But trying to mete out punishment to perpetrators during a genuinely systemic crisis—by letting major firms fail or forcing senior creditors to accept haircuts—can pour gasoline on the fire. It can signal that more failures and haircuts are coming, encouraging creditors to take their money and run. It can endanger strong as well as weak institutions, because in a stampede, the herd can’t tell the difference; that’s basically the definition of a financial crisis. Old Testament vengeance appeals to the populist fury of the moment, but the truly moral thing to do during a raging financial inferno is to put it out. The goal should be to protect the innocent, even if some of the arsonists escape their full measure of justice.
Our approach did create some moral hazard, although the critics I came to call “moral hazard fundamentalists” tended to overstate our generosity to failed risk-takers. Shareholders in the five bombs had already absorbed huge losses; the leaders of Fannie, Freddie, and AIG had been pushed out; Lehman had ceased to exist. But the larger point, as President Obama later said, was that you shouldn’t refuse to deploy fire engines to a burning neighborhood in order to highlight the dangers of smoking in bed. The President told me to focus on firefighting.
O N F EBRUARY 9, the President pitched his fiscal stimulus bill in Elkhart, Indiana, where unemployment had soared from 5.2 percent to 19.1 percent in just a year. But that night, at his first press conference as president, he emphasized that stimulus was only part of the solution. Credit needed to start flowing again, and confidence in the financial system needed to come back.
“Tomorrow, my Treasury secretary, Tim Geithner, will be announcing some very clear and specific plans,” he said. A reporter asked him to elaborate, but he said to wait a day. He could not have been more generous, or raised expectations any higher: “I don’t want to preempt my secretary of the Treasury. He’s going to be laying out these principles in great detail tomorrow.… I want to make sure that Tim gets his moment in the sun.”
A small team of advisers had been working around the clock with me on a financial stability strategy, but so far we had only a general framework in place. We weren’t actually planning to announce the specifics of our plan. My team had anticipated this problem in an internal memo: “Many details will remain opaque at initial launch. This could create great uncertainty and volatility in markets.” And we had another problem: few of our other colleagues thought highly of our strategy, not even Larry.
But the President went out of his way to express confidence about my debut, even urging the White House press corps to come see me speak.
“He’s going to be terrific!” the President said.
I DOUBTED that.
Treasury secretaries are supposed to inspire confidence. Our signatures go on dollar bills. And I knew that good theater—being clear and calm, conveying an impression of competence and credibility—could be as important to confidence as good substance. But I had always been a backstage guy. I had spent my career behind the scenes. Ever since high school, I had dreaded public speaking. Now I had to perform for the world for the first time, using a teleprompter for the first time. And I didn’t feel great about my message. I had lived through enough crises to know that they’re always unpredictable and blanketed with fog. Americans desperately wanted assurances that things would get better soon, and I wasn’t sure how to project an air of confidence I didn’t feel.
Theater aside, it seemed unlikely that an angry public would embrace anything I had to say after my ugly confirmation fight. And what I had to say seemed unlikely to ease the anger no matter who said it. I would be pledging more government support for financial firms, which was not what a bailout-weary nation wanted to hear. The fact that my framework was so contentious inside our administration suggested it probably wouldn’t inspire wild enthusiasm outside the administration.
Our strategy was also rather novel, which would make it an even harder sell. We didn’t intend to preemptively nationalize major banks, and we didn’t intend to let them fail; both of those familiar strategies would have accelerated the panic, but they would have been a lot easier to explain. The centerpiece of our approach was a “stress test,” which sounded more like analysis than action. Regulators would delve into the books of major financial firms to calculate how much additional capital they would need to survive a truly catastrophic downturn, just as doctors stress-test patients to see how their bodies would respond to strenuous conditions. The firms would then be required to raise enough capital to fill the gap. And if an unhealthy firm couldn’t raise enough from private investors, government would forcibly inject the missing capital.
This was key. The stress test would be more than a rigorous test. It would be a mechanism to recapitalize the financial system so that banks would have the resources to promote rather than prevent growth. We’d give them a chance to prove they could attract the cash they would need to survive a depression without our help. If they couldn’t, we wouldn’t stand by and let their failure trigger a meltdown. We’d rely on private capital whenever possible, but we’d turn to public financing when necessary. The stress test would provide a form of triage, separating the fundamentally healthy from the terminally ill. And by ensuring the system could sustain depression-like losses, we thought we could make a depression less likely.
But I wasn’t ready to provide much detail yet. We hadn’t figured out how the stress test would work. And the rest of my speech was just as vague. I would announce a new program to buy some of the distressed assets that were weighing down banks, while acknowledging that it wasn’t ready. I would promise “a comprehensive plan to address the housing crisis,” with little further explanation. And I would signal that we would not allow any more Lehman-style failures, a crucial commitment designed to prevent an even more chaotic run, but that line was hedged and buried in my twenty-sixth paragraph.
As the President had promised, this would be my moment in the sun. The world wanted to see American leadership. The markets wanted to see a credible plan. The public wanted to see change it could believe in, the “Yes We Can” audacity that had fueled the President’s journey to the White House. And everyone wanted to see if his embattled new Treasury secretary was up to the job. As I took the stage in Treasury’s ornate Cash Room, in front of a profusion of giant flags that made me look like a politician at a campaign event, I knew my reputation was at stake.
It’s fair to say the speech did not go well.
I swayed back and forth, like an unhappy passenger on an unsteady ship. I kept peering around the teleprompter to look directly at the audience, which apparently made me look shifty; one commentator said I looked like a shoplifter. My voice wavered. I tried to sound forceful, but I just sounded like someone trying to sound forceful. Early on, I caught a glimpse of Wall Street Journal financial columnist David Wessel, and I could tell from his pained expression that I was in trouble. The President had raised expectations. I was deflating them.
Stocks plummeted more than 3 percent before I even finished talking and nearly 5 percent by the end of the day—not quite a crash, but not good. Financial stocks would drop 11 percent for the day. After I finished, I sat down with the NBC anchor Brian Williams—my first television interview ever—and saw a graphic on the screen: “Is Geithner’s Neck on the Line?” Williams began by invoking a prominent financial commentator.
“I heard Larry Kudlow say: ‘Geithner was really kind of a disaster,’ ” he said. “Mr. Secretary, that was among the nicer comments I heard from Larry Kudlow.”
Kudlow was not an outlier. I didn’t read the reviews at the time, but the phrase “deer in the headlights” appeared in a lot of them. An actor playing me opened Saturday Night Live by announcing that my solution to the crisis was to give $420 billion to the first caller with a solution to the crisis. The substantive critiques were just as withering. “Someone should have told Treasury Secretary Timothy Geithner that the one thing to avoid at a time of uncertainty is raising more questions,” the New York Times editorial board declared. The widely respected Financial Times columnist Martin Wolf actually began his analysis: “Has Barack Obama’s presidency already failed?”
It was a bad speech, badly delivered, rattling confidence at a bad time. I somehow managed to convince the public we’d be overly generous to Wall Street while convincing the markets we wouldn’t be generous enough. Our populist critics concluded we were more eager than ever to shovel cash to arsonists; former World Bank chief economist Joseph Stiglitz described our plan as “banks win, investors win—and taxpayers lose.” But banks and investors were mostly confused.
“Investors want clarity, simplicity and resolution,” one financial executive told Reuters. “This plan is seen as convoluted, obfuscating and clouded.”
After my speech, a friend emailed me Teddy Roosevelt’s “Man in the Arena” quote about how it’s not the critic who counts, but the man “who comes up short again and again … who at the worst, if he fails, at least fails while daring greatly.” I thought it was a nice hang-in-there sentiment, until my inbox began filling up with variations on the Man in the Arena. Another friend called to say that what didn’t kill me would make me stronger, which I didn’t find all that reassuring, either. I knew I’d have to resign if our strategy didn’t work—and more important, the economy was hanging in the balance. At his daily economics briefing the morning after my speech, the President was not happy.
“How the hell did this happen?” he asked.
He wasn’t trying to put it all on me, but I knew it was all on me. And there wasn’t much I could do or say to reassure him or anyone else. We just had to start laying out details of our plan, and hope we could convince people it was a good plan. I figured that if we did what we said we would do, and it worked, confidence would eventually come back. And if it didn’t work, the quality of our theater wouldn’t matter much.
H ISTORY SHOWS that even modest financial crises cause horrific pain.
One study of fourteen severe twentieth-century crises found that, on average, the unemployment rates in the affected countries jumped 7.7 percentage points. Many of them ended up nationalizing most or all of their banking systems. Financial crises have also been exorbitantly costly for taxpayers. The direct fiscal costs—just the money that governments have spent stabilizing their financial systems— have averaged more than 10 percent of GDP. For the United States, that would have amounted to about $1.5 trillion.
There was nothing modest about our crisis. It began with a colossal financial shock, a loss of household wealth five times worse than the shock that precipitated the Depression. Bond spreads rose about twice as sharply in the Lehman panic as in the panic of 1929. Serious investors were buying gold in bulk and talking about burying it in their yards. Stock markets dropped to more than 50 percent below their 2007 highs.
Naturally, most analysts expected that U.S. taxpayers would pay an astronomical price to repair our financial system, too. Simon Johnson, a former chief economist of the International Monetary Fund, warned that the government’s price tag could be $1 trillion to $2 trillion, “in line with the experience” of other nations. An IMF study estimated the final tab at nearly $2 trillion. “If we spent a million dollars a day every day since the birth of Christ, we wouldn’t get to $1 trillion,” said Congressman Darrell Issa, the top Republican on the House government oversight committee. “And we’re likely to lose far more than that.”
But we didn’t.
Our outcomes were not in line with the experience of other nations, in past crises or this crisis. They were much better. By that summer, we had not only averted a depression, our economy had started growing again. House prices stabilized. Credit markets thawed. And our emergency investments would literally pay off for taxpayers.
Most Americans still believe we threw away billions or even trillions of their hard-earned dollars to bail out greedy banks. In fact, the financial system repaid all our assistance, and U.S. taxpayers have turned a profit from our crisis response, including our investments in all five of those financial bombs. We had been so worried about our limited resources that the President’s first budget included a $750 billion placeholder for a second TARP, but in the end, we didn’t have to ask Congress for another dime.
Of course, our goal wasn’t to earn money for taxpayers. Our goal was to save the families and businesses of America from the calamitous pain of a failing financial system. I hoped we wouldn’t have to spend 10 percent of GDP to fix that system, but everyone I know would have gladly paid that fiscal price to avoid reliving the 1930s. As one of my close advisers, Meg McConnell, blurted out during a tense moment in the crisis, we were not far from a rebirth of Depressionera shantytowns. And no one I know—neither critics who thought we were foolish nor supporters who thought we might know what we were doing—imagined that we would put out the financial fire so quickly and actually make money on our investments.
The recession of 2007 to 2009 was still the most painful since the Depression. At its depths, $15 trillion in household wealth had disappeared, ravaging the pensions and college funds of Americans who had thought their money was in good hands. Nearly 9 million workers lost jobs; 9 million people slipped below the poverty line; 5 million homeowners lost homes. Behind those numbers lies real suffering by real people who didn’t put banks in danger with reckless bets they didn’t understand. I had relatives and friends and relatives of friends who lost jobs and much of their savings, who saw their businesses devastated. Even when they were gracious to me, I could see in their eyes and hear in their voices a sense of: Why couldn’t you protect me from this? Pointing out that the downturn could have been much worse won’t help pay their rent or feed their kids.
But it’s true.
Our unemployment rate rose to 10 percent, but not to 25 percent as in the Depression. By the end of 2013, it was below 7 percent. Our recovery began much faster than was typical in previous crises, and it’s been much stronger than the recoveries of other major advanced nations. Our output returned to pre-crisis levels in 2011; output in Japan, Great Britain, and the eurozone had yet to do so by 2014. We’ve had private-sector job growth every month for the past four years, restoring almost all of the 8.8 million jobs lost in the Great Recession. The stock market has exceeded its pre-crisis peak, so retirement funds that lost $5 trillion during the crisis have gained it back. Many Americans are still suffering, but a lot more suffering has been averted.
And yes, the financial system is alive and flourishing again. That’s partly because of the strategy I helped design and execute, which is why I’m often described as a “Wall Street ally.” The New York Times once did an amusing story about my unearned reputation as a “Wall Street insider.” People still seem to think I cut my teeth at Goldman Sachs. But nothing we did during the financial crisis was motivated by sympathy for the banks or the bankers. Our only priority was limiting the damage to ordinary Americans and people around the world.
During the crisis, we did a lot of things that would be unthinkable in normal times in a capitalist economy. But we kept our promises that our interventions would be as limited as possible. By the end of 2010, the U.S. government no longer owned a piece of any major bank. By contrast, the federal government’s 1984 takeover of Continental Illinois—the seventh largest U.S. bank at the time, a tiny fraction of the size of some of the troubled banks in our crisis—lasted seven years before the bank returned to private control.
Our economy is still reeling from the worst financial crisis in generations. Our jobless rate is too high and income growth is too low. But the U.S. recovery has outperformed expectations, history, and most of the developed world. So far, the prophets of doom who have predicted runaway inflation, runaway interest rates, a double-dip recession, a collapse in demand for U.S. government securities, and other horrors for America have been false prophets. I remember half-joking to the President that we had two types of critics attacking us for failing to produce a stronger recovery—people who were blocking our proposals to produce a stronger recovery, and people who believed in unicorns.
Still, plenty of Americans who don’t believe in unicorns do believe we bungled the crisis. The public despised our financial rescues, to the extent that the President joked at a Washington dinner in mid-2009 that he needed to house-train his dog, Bo, “because the last thing Tim Geithner needs is someone else treating him like a fire hydrant.” And the outrage has endured. Conventional wisdom still holds that we abandoned Main Street to protect Wall Street—except on Wall Street, where conventional wisdom holds that President Obama is a radical socialist consumed with hatred for moneymakers. The financial reform law that we wrote and pushed through a bitterly divided Congress after the crisis, the most sweeping overhaul of financial rules since the Depression, is widely viewed as too weak, except in the financial world, where it is described as an existential threat.
Those perceptions are partly my fault, failures of communication and persuasion.
I’m proud of most of the decisions we made to try to save the economy. And I’m under no illusions that better marketing or better speechmaking could have made those decisions popular. That said, I never found an effective way to explain to the public what we were doing and why. We did save the economy, but we lost the country doing it. As the crisis was winding down, I suggested to my adviser Jake Siewert that Treasury ought to put out a long white paper explaining the rationale behind all our controversial decisions. He grinned and said: “Sounds great. Why don’t you give it a shot?” I remember when I met Barbra Streisand at a White House state dinner in 2011, she told me: “Mr. Secretary, when I see you on TV, I get the feeling you’re not telling us everything.”
I laughed and replied: “You have no idea.”
I can try to remedy that now.
Our response to the global financial crisis is still wrapped in myth and haze and misperception. And I was in the middle of it from start to finish, from boom to bust to rescue to recovery, leading the New York Fed from 2003 to 2008 and the Treasury from 2009 until I left public service in January 2013. Ben Bernanke, my closest colleague when I served at the Fed and then as Treasury secretary, was the only other principal combatant who fought the entire war. This gives me a particular perspective on how we got into the mess, how we got out of the mess, and how we tried to make future messes less frequent and damaging.
This book is the story of the choices we made before, during, and after the crisis. Not every choice was right, but this won’t be an if-only-they-had-listened-to-me memoir, because I supported almost every choice at the time. I couldn’t force our opponents in Congress or our counterparts in Europe to embrace our proposals, but I didn’t lose many policy battles inside the Fed or the Obama White House. We almost always did what I thought was right and necessary, within the very real limits of our authority at the time.
The financial crisis really was a stress test for the men and women in the middle of it. The usual rhythm at central banks and finance ministries evokes the old line about life as a fighter pilot: months of boredom punctuated by moments of terror. We lived through months of terror. We endured seemingly endless stretches when global finance was on the edge of collapse, when we had to make monumental decisions in a fog of uncertainty, when our options all looked dismal but we still had to choose. If I had learned one thing from previous crises, it was the importance of humility—about our ability to figure out exactly what was going on, and our ability to parachute in with a simple solution. Those were useful thoughts to keep in mind during the cataclysm, but not uplifting thoughts.
The pressures we faced as first responders obviously paled in comparison to the sacrifices of many public servants, like real first responders or our troops overseas. We didn’t expect medals or combat pay. But we felt an enormous burden of responsibility. And as my daughter Elise once reminded me, Americans at least understood our troops in Afghanistan were fighting for them. They weren’t so sure about us.
The financial crisis was also a stress test of the American political system, an extreme real-time challenge of a democracy’s ability to lead the world when the world needed creative, decisive, politically unpalatable action. That’s not typically regarded as one of our great strengths, at least not in recent years, when the political news is usually about gridlock and dysfunction. And our interventions certainly didn’t improve the public’s opinion of government or politics.
Politics is not my life’s work, but it left me with some scars, and I have some things to say about 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 tragic constraints on our ability to make the crisis less damaging and the recovery stronger. And yet, at the moments of most extreme peril, the system worked. Two administrations—one Republican, one Democratic—managed to do what was necessary to end the crisis, start a recovery, and reform the system, attracting just enough bipartisan support to get a polarized Congress to do its part. A fractious group of policymakers worked together surprisingly well—arguing, agonizing, sometimes agreeing to disagree, but mostly trying to get the right answer, minimizing the time wasted on bureaucratic conflict.
Today, much of the public is skeptical that government is capable of managing a two-car funeral. Young Americans are reluctant to enter public service, and it’s hard to blame them. But our system passed its stress test.
I hope this book will help answer some of the questions that still linger about the crisis. Why did it happen, and how did we let it happen? How did we decide who got bailed out? Why didn’t we nationalize the banks, or let more banks fail? How did we convince the left we were Wall Street’s wingmen while convincing Wall Street we were Che Guevaras in suits? Why didn’t we do more (or less) about the housing market? Why didn’t we get more (or less) fiscal stimulus? Why isn’t the economy booming again? And what really happened with Lehman, anyway? Couldn’t we have put out the fire back then?
This book is not intended to be a comprehensive minute-by-minute narrative of the financial crisis. Others have done that, although their accounts usually end in 2008. And this is certainly not a definitive history of economic policy in President Obama’s first term. It’s a history from one policymaker’s perspective of the events leading to the crisis, the key choices we made during the crisis, the aftershocks of the crisis, and the fight to reform the system. I hope this book can add to the historical record, help correct some misperceptions that have been entered into that record, and give a sense of what it was like in the fire.
There is another reason I’m writing this book. Financial crises are perilous, and this won’t be the last one. Yet the United States has no standing army for fighting financial wars, no Joint Chiefs of Staff, no War College. It also has no playbook. All financial crises are different, but they have a lot in common, and there are lessons to learn from this extreme one that can help policymakers and the public during the next one. I hope this story can help illuminate them.
I start with my own education in financial crises during my first stint at Treasury, as I helped former secretaries Robert Rubin and Larry Summers confront a series of emerging-market messes. Many lessons of those crises would guide my approach to this crisis. I then describe my time as a financial regulator at the New York Fed before the boom went bust, discussing what I saw, what I did, and what I missed. I made mistakes during that period, though they weren’t the mistakes most people think I made.
The heart of the story will be my perspective on the most harrowing crisis since the Great Depression, from its outbreak in 2007 through its resolution in 2009—not only the intense financial engineering that began during my time at the New York Fed, but our debates over the stimulus, the housing market, and the larger economy in the Obama era.
By the end of 2009, the worst of the crisis was over in the United States, but I still had a few challenges ahead of me. We were deep in the fight for Wall Street reform, our effort to set financial rules of the road that could make crises less frequent and less damaging in the future. Then Europe began to crumble, and I spent much of my remaining tenure urging the Europeans to tackle their crisis more aggressively. We also began a series of budget negotiations over the nation’s fiscal path that nearly ended in catastrophe; our congressional Republican counterparts were threatening to force the U.S. government to default on our financial obligations, a true doomsday scenario.
These struggles were all echoes of the great crisis. But before I describe all this history, I ought to explain how I ended up in the thick of it. I wasn’t an academic like Ben Bernanke or Larry Summers. I wasn’t a Wall Street titan like Hank Paulson or Bob Rubin. I had more of an accidental path to history.