Things could have been much worse. Maybe.
Just as today’s economists and historians continue to trade blows about the Great Depression’s causes, we can be confident that future commentators will be providing diametrically-opposed explanations of the Great Recession that began unfolding in 2007. Hence it’s not surprising that some of those who were closest to the policy epicenter of the maelstrom are anxious to get their version of events on the record. Former Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Hank Paulson came out with books soon after leaving government service.
Now it’s Timothy F. Geithner’s turn.
Having served as the head of the Federal Reserve Bank of New York and then Treasury Secretary during the Obama Administration’s first term, Geithner’s Stress Test: Reflections on Financial Crises focuses its readers’ attention upon how he and others reacted to the waves of successive crises that made their way through the American economy in 2008 and 2009.
Stress Test is written in the regrettably chatty, forced-informality manner of too many memoirs by politicians and public officials in our age of excessive casualness, selfies, and perpetual adolescence. For all that, however, Geithner does make a sincere effort to explain himself and his actions — even if his account won’t convince everyone.
Judging from this text (but also from other books written on the financial crisis by other players), Geithner comes across as an intelligent, decent man who found himself dealing with incredibly difficult problems in an environment full of Zeus-sized egos inside the self-referential bubble of Washington, D.C. “I wasn’t,” he writes, “a banker, an economist, a politician, or even a Democrat” (1). Indeed Geithner stresses over and over again his independence. The Left, according to Geithner, saw him as “Wall Street’s wingmen” while Wall Street thought he and others were “Che Guevaras in suits” (20).
Nevertheless it’s clear from the tone and substance of many of Geithner’s remarks that he has far less time for those who question what might be called the center-left outlook that has dominated America’s mandarin class from the New Deal onwards (and even before). Though Geithner confesses that policy-makers should be much more humble when it comes to what they can know about what ails an economy of trillions of dollars (18), Geithner finds difficult not to dismiss anyone who questions the scale of government’s expansion into the economy since 2008 as ignorant, unreasonable, or worse.
Given that he self-identifies as socially liberal, economically moderate (by which he means, as far as one can tell, a mild Keynesian), and “pragmatic above all” (241), that suggests Geithner has a less-than-positive view of about half of America. But that, I suspect, is hardly uncommon among America’s Washington-based technocracy.
I use the word “technocracy” because I think this is what best characterizes Geithner’s view of finance and the economy. It implies a top-down approach to the economy in which politicians and public servants imagine that, through a series of interventions, they can direct the economy towards the goals they have chosen beforehand. It’s characteristic of the neo-Keynesian mindset that continues to dominate the economics profession and most government officials.
Among Geithner’s regrets is that America did not engage in even more stimulus after 2010. Nor does he seem especially worried by high levels of government debt, despite the considerable evidence which suggests that, once above a certain level, it tends to act as a brake on the growth that Geithner says has not been fast enough since 2008. Nor does he seem interested in understanding why steady majorities of Americans remain so opposed to the Affordable Care Act, or generally skeptical about tax increases and resistant to more government-spending.
At the same time, Geithner can’t help but acknowledge his awareness of how the financial crisis and the government’s response accentuated the citizenry’s already significant mistrust of America’s political class. He mostly attributes this to normal people being bewildered at what was happening and wondering (rightly) why irresponsible banks were bailed out at everyone else’s expense.
Geithner rightly condemns the irresponsible lending-practices and leveraging-levels of banks before the crisis. While he believes the bailouts were economically necessary, he acknowledges there was something profoundly unjust about them. Yet Geithner seems reluctant to concede the widespread fiscal irresponsibility of so many Main Street people (such as those who took on mortgages they really couldn’t afford), let alone the failure to hold accountable those politicians and policy-makers whose decisions also contributed to the crisis.
Part of the problem is that the systematic absence of accountability only enhances the moral hazard problem that played such a pivotal role in causing the financial crisis. The good news is that Geithner does regard moral hazard as a problem. Nevertheless he tends to label anyone who expresses serious and on-going concerns about moral hazard and its institutional and systematic causes as a “moral hazard fundamentalist” — a term coined by one of Geithner’s mentors, Larry Summers, whose presence looms large throughout this book.
Whenever that particular f-word is deployed today, it is more often than not a way of avoiding engaging with your opponents’ arguments. Absent, however, throughout Stress Test is any substantive reflection about how to minimize the moral hazard problem. In some respects, it is simply assumed to be part of life in today’s modern economy. Yet the truly insidious nature of moral hazard is such that the wealthier you are and the more connections you have to the political class, the more you can assume you will be bailed out. That hardly seems just — a point acknowledged by Geithner but which he seems at a loss, like many people, to know how to address.
Most revealing, however, about Stress Test is that Geithner concedes towards the end that, after all the various interventions, stimuli, bailouts, TARPs, and new regulations, America’s job-market is in a miserable state, poverty has increased, and the country is more politically and economically divided than ever before. Here one can’t help but be reminded of Amity Shlaes’s marvelous account of the Great Depression, The Forgotten Man. Shlaes pointed out that, within five years of the New Deal’s beginning, America was back to the same unemployment levels and stagnation from which the New Deal was supposed to rescue the United States.
Things, Geithner argues, could have been much worse. Maybe. We will and can never know. But if Stress Test tells us anything, it is that while many well-intentioned people work in government service, any serious effort to reduce poverty and realize justice in the economy is going to require fresh minds unencumbered by the weight of decades of career-enhancing adherence to neo-Keynesian tools and neo-Keynesian assumptions about the economy’s inner-workings. Until that changes, I’m afraid, we can safely expect more of the same.
Samuel Gregg is Research Director at the Acton Institute and author of Becoming Europe: Economic Decline, Culture, and How America Can Avoid a European Future.
