Sunday | December 17, 2017
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Geithner: The right person at a bad time

Tim Geithner offended almost everybody during the 2008 financial crisis and its aftermath. The former U.S. Treasury secretary enraged liberals when he rescued the banks, then failed to stop them from paying bonuses. He angered conservatives when he backed new restrictions on bank activities in the Dodd-Frank Act. He disappointed other regulators by letting creditors of failing institutions off the hook, fearing imposing losses would start global bank runs.

Americans at large also felt let down. Geithner couldn’t convince them saving Wall Street instead of Main Street made sense. Half the country thinks he was a “wingman for Wall Street,” as he writes in his new memoir, “Stress Test.” The other half sees “Che Guevara in a suit.”

The truth is Geithner, acting in concert with Federal Reserve Chairman Ben Bernanke, managed an impossibly difficult situation pretty well. To prevent a full-blown panic, he was willing to do the opposite of what seemed fair. That was brave. Give the man his due.

Considering that Americans were days away from being unable to withdraw their money from ATMs, the economy was shedding 750,000 jobs a month and $15 trillion in household wealth vanished, avoiding a much greater disaster was quite an achievement. Geithner understood letting ill-managed banks fail would spread fear and cause credit to collapse, making it impossible to buy a home or a car, pay for college or meet a small-business payroll.

It turned out he was the right person at the right time ... He focused on fixing problems and all but ignored the politics.

He cut his teeth overseas as a Treasury official helping manage crises in emerging markets ... He was in Japan when that country’s real estate bubble exploded; he watched as it swept its banking problems under the rug and became a study in what not to do. That gave him the confidence to challenge powerful people, including his mentor, Larry Summers. As chairman of President Barack Obama’s National Economic Council, Summers wanted to nationalize Citigroup. Geithner said it would be unhelpful to engage in “showy, populist head fakes.”

His idea for stress tests on banks was important in restoring confidence. Banks that failed would have to raise fresh capital and, if they couldn’t, the U.S. would forcibly inject the needed funds. The exercise calmed the markets and helped restore the supply of credit. ...

Geithner’s record before and after the emergency isn’t unblemished, either. He failed to see how overleveraged and undercapitalized the banks were as a housing bubble inflated right under his nose. As the New York Fed’s president and chief regulator of the largest banks, he had the power to intervene.

After the crunch, he failed to deliver effective help to distressed homeowners, as he admits. Today, he is too dismissive of the unresolved too-big-to-fail problem, arguably the worst part of his legacy as the architect of the bailouts and shotgun mergers that let the biggest banks get even bigger.

Yet, the U.S. recovery came more quickly and was stronger than Europe’s. Like Japan, the euro area delayed fixing its sick banks and is paying the price with higher unemployment and slower growth than in the U.S., where output returned to pre-crisis levels. The government even made a profit on the bank bailouts.

It could have been worse — much worse. Future presidents would do well to keep a Geithner by their side.

— Bloomberg View


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