Stress Test: Reflections on Financial Crises
Timothy F. Geithner
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New York Times Bestseller
Washington Post Bestseller
Los Angeles Times Bestseller
Stress Test is the story of Tim Geithner’s education in financial crises.
As president of the Federal Reserve Bank of New York and then as President Barack Obama’s secretary of the Treasury, Timothy F. Geithner helped the United States navigate the worst financial crisis since the Great Depression, from boom to bust to rescue to recovery. In a candid, riveting, and historically illuminating memoir, he takes readers behind the scenes of the crisis, explaining the hard choices and politically unpalatable decisions he made to repair a broken financial system and prevent the collapse of the Main Street economy. This is the inside story of how a small group of policy makers—in a thick fog of uncertainty, with unimaginably high stakes—helped avoid a second depression but lost the American people doing it. Stress Test is also a valuable guide to how governments can better manage financial crises, because this one won’t be the last.
Stress Test reveals a side of Secretary Geithner the public has never seen, starting with his childhood as an American abroad. He recounts his early days as a young Treasury official helping to fight the international financial crises of the 1990s, then describes what he saw, what he did, and what he missed at the New York Fed before the Wall Street boom went bust. He takes readers inside the room as the crisis began, intensified, and burned out of control, discussing the most controversial episodes of his tenures at the New York Fed and the Treasury, including the rescue of Bear Stearns; the harrowing weekend when Lehman Brothers failed; the searing crucible of the AIG rescue as well as the furor over the firm’s lavish bonuses; the battles inside the Obama administration over his widely criticized but ultimately successful plan to end the crisis; and the bracing fight for the most sweeping financial reforms in more than seventy years. Secretary Geithner also describes the aftershocks of the crisis, including the administration’s efforts to address high unemployment, a series of brutal political battles over deficits and debt, and the drama over Europe’s repeated flirtations with the economic abyss.
Secretary Geithner is not a politician, but he has things to say about politics—the silliness, the nastiness, the toll it took on his family. But in the end, Stress Test is a hopeful story about public service. In this revealing memoir, Tim Geithner explains how America withstood the ultimate stress test of its political and financial systems.
From the Hardcover edition.
system became that scene from It’s a Wonderful Life. THERE WERE all sorts of other problems in the system, and they gave rise to a variety of theories purporting to explain the crisis. The problems were so many and so varied that the crisis became a kind of Rorschach test; you could find at least some evidence to support almost any theory that confirmed your prior ideological biases, no matter where you stood on the political or economic spectrum. Some of these problems did contribute to the
an excellent idea,” I told him. THE SENATE tends to be somewhat less majoritarian and partisan than the House, partly because of the sixty-vote hurdle to overcome filibusters, partly because six-year terms give senators at least some relief from the permanent campaign, partly because they represent entire states rather than gerrymandered and often homogeneous House districts. Long before Scott Brown’s election meant we’d need at least one Republican senator to pass financial reform, Chairman
options. Our preferred solution was for Europe to expand the firepower of its rescue fund by using it to leverage the ECB’s balance sheet. The central bank could provide much more aggressive financing, with the government fund protecting it against potential losses. We had done something similar with the Term Asset-Backed Securities Lending Facility during our crisis, jump-starting U.S. consumer credit markets by using a little government money to leverage a lot of Fed financing. The central
events. But even when the Fed’s own bank supervisors and economists analyzed the system, they thought there was plenty of capital in the banks to absorb a substantial increase in losses. These public servants had good incentives to be tough, because a crisis would fall to us to clean up, and they were a talented, experienced, thoughtful group. Even so, they had a hard time coming up with economic scenarios that would generate losses large enough to seriously impair bank capital. One internal Fed
debate was about whether we should hint that we might cut rates in the future, and most of the committee preferred to wait for more evidence that market disruptions were damaging the economy first. “If we took that approach,” I warned, “we’d inevitably be too late.” But the group wasn’t ready to signal that a future rate cut was likely. In our official statement, the committee noted that “downside risks to growth have increased somewhat,” but maintained that increased inflation was still a larger