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.