NEW YORK — Former Treasury secretary Timothy Geithner, at the center of the response to the financial meltdown in 2008, defends pursuing policies that bailed out some of those who had gotten the country into trouble in the first place. When "the plane's on fire and smoke is filling the cabin," he says, the focus has to be on landing it safely.
But in an exclusive interview with USA TODAY, he also says Americans deserved stronger law enforcement action — and he backs efforts to hold more bankers and others accountable. "How could you argue the opposite?" he asks.
In his new book, Stress Test: Reflections on Financial Crises, published today by Crown, Geithner details the frantic efforts behind the scenes to keep a crippling recession from becoming an even more devastating depression. Now 52, he was at the center of the action, first as president of the New York Fed, then as head of the Treasury Department.
In the interview, he discusses the best and worst decisions made during those tumultuous years and his biggest personal failing — his inability to explain effectively to Americans the risks ahead and policy choices being made. He offers some advice to his successor for when the next crisis inevitably strikes. "Use overwhelming force, and plan for a long war," he says.
Questions and answers have been edited for length and clarity.
Q: You write, "We saved the economy, but we lost the country doing it." You mean the suspicion that the banks got bailed out, but ordinary people didn't?
A: If you look at what we faced, it was a classic financial panic, something Americans hadn't seen since the Great Depression. There's no memory of that, no understanding of that, no experience of that. And in a classic financial panic, you have to do the opposite of what seems intuitive, what seems to make sense, what seems fair. Because to protect people from the risk of mass unemployment, you have to make sure you keep the financial system running, stable, t! o protect their savings, to make sure people can borrow, businesses can stay open. But that means to do that you have to do things that look deeply unfair. It looks like you're rewarding the arsonists, the people that were central to helping cause the crisis.
Q: The most frequent criticism of you is that you were too cozy with the Wall Street banks.
A: It's a perfectly understandable criticism, again because Americans had not seen anything like this in their lifetimes. How could you convince them that it could have been dramatically worse? ... It's like you're in the cockpit and the plane's on fire and smoke is filling the cabin. And you've got a bunch of people on the plane — you've got some terrorists, or you've got some people who built the plane or didn't design the fire system right — and people want you to come out of the cockpit and put them in handcuffs or beat them up. And it's understandable, but you've got to land the plane safely if you want to protect people from the risk of catastrophe.
When you land the plane, then you can figure out how to hold people accountable and make the plane safer in the future. But first you have to land the plane. That's the just and necessary thing to do.
Q: When I interviewed Massachusetts Sen. Elizabeth Warren a few weeks ago about her new book, she said some bankers should have gone to jail. Should they?
A: I have a lot of respect for Elizabeth, although we didn't agree on everything, sort of understandable. And I think that's a really important question. ... I didn't get to make those choices. That wasn't my responsibility. I think it's really important that we build a system — and I think we've created a much better system than we had before the crisis — where there is much clearer rules of the game, less of the Wild West where anything is possible, with enforcement authorities that have the resources to go after and punish and deter the kind of behavior that was so damaging in this crisis. And there was a lot of terri! ble behav! ior. And I think Americans deserved a stronger enforcement response.
Q: Should there be more enforcement action now against some of the people who helped bring about this crisis?
A: First of all, of course there should be. How could you argue the opposite? But you have to talk to the prosecutors across the country about this. ... They're gradually trying to build a record of actions.
Q. Elizabeth Warren's book is called A Fighting Chance, but it was originally titled Rigged. Is the American system rigged?
A: I guess I would say it a little differently. I mean, if you look at our country today – and we're an enormously lucky country, a very fortunate country. But if you look at the levels of poverty in this country, if you look at the long period we've had of almost no growth in the median income for many Americans, if you look at the rise of inequality, or you look at the basic inequality of opportunity many Americans face – think of it, if you're born in the United States today, how well you do in life, the quality of education you get, the quality of health care you get, depends a lot still on the color of your skin or whether your parents were poor.
That's something fundamentally that all Americans should be worried about. And to make more progress on that basic, core sense of hope and opportunity, you have to have a government that rediscovers some capacity, a Congress that rediscovers some capacity to do things that can make a difference in the lives of ordinary Americans. And today Americans have understandably, they watch what's happening in Washington: frozen, damaged, paralyzed debate; people who enjoy fighting more than they do solving problems. They've lost confidence in the ability of our government to provide that. So we have to figure out some way for Washington to earn back that confidence.
Q: Did the financial crisis make that inequality worse?
A: Oh, absolutely. One reason financial crises are so unfair and devastating is because the damag! e they ca! use falls disproportionately on the relatively poor, people of modest income. They are deeply unfair. Before the crisis we had rising inequality, poverty, no growth in the median income, and the crisis made those things dramatically worse. Now we're gradually healing the damage from the crisis, but there's a lot of damage left over. And you need to produce an economy growing more quickly over a longer period of time to try to repair that.
Q: What was the best decision you made during the financial crisis?
A: The most important thing we did was to have a Federal Reserve using overwhelming force. President Obama got the Congress — and he was excellent in making these tough, hard decisions quickly in the fog of the crisis — to get Congress to put in place a level of stimulus, tax cuts and benefits, to the American people on a scale larger than what was done in the Great Depression in relative terms and then to find a way to restructure and recapitalize the financial system very aggressively and very quickly. Because of the scale of that support — dramatically different strategy than used really by any country in the last 100 years — we took a situation where we had a financial shock that was five times greater than happened in the beginning of the Depression, and we got the economy growing again in six months.
And again, the recession was still tragic in its damage, and we're still living with the scars of that. But the force of that response, which was very creative — parts of it seemed unfair. It was messy at times. But it was very effective in preventing the most important thing, which was to protect people and the global economy from the risk of a second Great Depression.
Q: The worst decision?
A: The worst thing we faced was in the fall of '08. If you think about what September felt like, think about Lehman (Brothers) weekend, when the United States of America, the most powerful country on the planet, faced a classic financial panic with what were terribly weak ! tools, a ! very weak fire station, until Congress was scared enough to give us bigger authority. The worst part of the crisis was when we were watching the fire burn. We knew that there was a risk that it would get out of control, and we at that point, until it was possible to go to Congress and convince them to give us more authority, had limited tools to act.
Q: That's not really a mistake you made, though. Is there one?
A: I wasn't the best – I mean, I wasn't hired really to be the PR person, to be the explainer. It wasn't my natural talent. And that was hard because perceptions matter a lot, and I was not able to help give people a better feeling for what the risks were and what our choices were at that time, and of course that's something I very much regret.
Q: Let's look ahead. Will we face a financial crisis like this again?
Financial systems are inherently risky, and there's no chance we've banned the risks of crises from the face of the planet, because what produces crises like this in some sense is also paradoxical. That usually what happens is you have a long period of confidence when people feel more comfortable they're going to keep their jobs, that their house prices will rise, their savings will rise in value. And what happens in that context is people take more risks, to lend more and to borrow more. That sense of confidence, that belief that is the underpinning of most crises, or booms in borrowing, is something you can't regulate away. What you can do is you can make sure you force the financial systems to operate with much thicker shock-absorbers against risk, and make sure you have a strong fire department that's available for when things fall apart.
I think the things we did in the crisis — however messy and imperfect — they have a very good chance of providing a long period of relative stability and resilience in our financial system. But we're going to face the risk in the future again of a severe crisis, and I hope that if you give people a better feeling! for the ! choices we made, a better feeling for how to make decisions in the fires of a crisis, that our successors will be able to use the strength of the United States to do a better job of protecting people from the damage that can cause.
Q: Where will the next crisis come from – from here, from abroad?
The thing about crises are that they're what you can't see, what you don't expect. Usually in the world we live in today, everybody's got a long list of risks that they worry about, think about every day. That's not really what hurts you in the end. What hurts you is the unimaginable, or the thing where memories faded. ... It doesn't mean that you're powerless to protect people from that. It just means you have to constantly keep out what I call the forever war, this basic challenge of how to make sure you're limiting risks where you can. And you keep the fire station powerful enough to come in and protect people. You're not going to eliminate the risk of crisis by eliminating the fire station. It doesn't make fires less likely.
Q: When that next crisis comes, what's your advice to your successor?
A: Overwhelming force as quickly as you can on a massive scale. If you do that – again, it seems counterintuitive – if you do that, you're much more likely to protect people from mass unemployment, much more likely to get the economy growing again, much more likely to end up costing the taxpayer less money, and in some ways, you're more able to force the restructuring you need.
If things are too fragile, it's hard to force the restructuring you need to make the system stronger. You should use overwhelming force and plan for a long war because these things are hard and they take a long time to heal. Don't stop too soon.
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