Tim Geithner’s *Stress Test*

I quite am enjoying this book, which I find to be readable and also one of the best introductions to the history of America’s financial crisis.  The argumentation is conceptual throughout, though it should be recognized this is indeed an apologia.  Gretchen Morgenson offers some critical remarks on book in this regard.  Here is one good bit from that review:

…he fails to answer one of the most crucial questions about the crisis: How did he and his regulatory colleagues at the Fed, with their army of researchers and high-powered economists, miss the immense and obvious buildup of risk in the financial system that led to the crisis?

See Felix Salmon’s remarks too.

I also found Stress Test to be a good story of an American public servant, but perhaps a kind of career which is becoming increasingly rare.  Geithner writes:

Larry once said he could envision me as the managing partner of a law firm, or running some big institution, if only my credentials weren’t so thin.

There is also this:

When I left Treasury at the end of the Clinton administration, my colleagues put together tongue-in-cheek recommendations for my next job; for instance, Rubin suggested I could be Larry’s biographer.  Greenspan proposed “first assistant to the deputy to the managing director of the Asian Monetary Fund,” his wry way of celebrating its nonexistence.

You can buy the book here.


Gretchen Morgenson: a case of hindsight bias?

She's an old-fashioned green eyeshade Republican. Mickey Kaus's second cousin Charles Lane played a million of them in the movies, like Mr. Potter's accountant in It's a Wonderful Life:


Does the book explain how to use software to do your taxes??

Cheap shot. More nonsense from the anti-market crowd just like today where Krugman decided to break Godwin's law with his routine rabble against bankers.

We need to stop facilitating the freaking geniuses doing it to us.

Geniuses like Bernanke, Paulson, Geithner, Greenspan, CEO's and economists at the TBTF banks, et al could not see that the US experienced GDP growth while real household incomes stagnated; that housing prices soared while household disposable income flat-lined; that individual savings rates relative to incomes fell to zero while debt levels tripled.

Anyhow, Hank Paulson was the UST guy that put on most of it.

Cheap shot, load and lock: He is a tax cheat who got away with it because the regime's only use for the IRS is to silence right-wing political opponents.

PS: I'm a market crowd guy. The housing bubble/financial crisis was not a market event. It was an attempted (by the almighty state) paradigm-shift gone horrfically wrong.

I don't completely agree on TBTF, TARP, the Temporary Liquidity Guarantee Program, unlimited FDIC insurance for transaction accounts, etc. FDIC-insured depositors were always protected. The so-called bail-outs possibly preserved for a (compared to the American people) limited number (both individual and institutional) of investors in TBTF debt and equity several $$$ trillions, but the zero interest rate regime has cost John Q. Citizen-saver $$$ trillions of dollars. Maybe, that's why the recover has been so weak.

For your consideration another cheap shot from a different source (Chris Whalen, Institutional Risk Analytics - 6/14/09): "Sheila Bair and her colleagues at the FDIC are the only regulatory agency in Washington that is still trying to obey the law. The Fed and OCC, on the other hand, have bought into the Paulson/Geithner/Bernanke scheme to subsidize the large zombie banks — and do so without authority from the Congress."

"The FDIC Chairman was doing her job while the rest of these spineless weasels, these duplicitous, traitorous villains were selling out the taxpayer to subsidize the bond holders of the large banks — the clients of PIMCO, BlackRock and the rest of the Buy Side. Following Paulson’s lead, Dugan and Geithner are simply representing their clients and future employers on the Sell Side."

They are still interfering with the markets.

Bankers, lobbyists and politicians blew up the economy. Then, they bailed out each other. Then, they created even more laws/policies/regulations impeding economic growth and misallocating capital. The Fed, FDIC, FHA, FHLMC, FNMA, HMDA, HUD, SEC, UST, et al created “administrative” (e.g., housing, but also equities, bonds) markets with prices affected by government policies, not free market forces. Then, the lying rats blamed the “market.”

Bill Gross of PIMCO: “Fed merry-go-round: inflate stocks til 2000. Then inflate housing til 2007. Then inflate stocks ‘til 2014. Then inflate housing again.”

Refer you to John Taylor: the Federal Reserve followed a rules-based policy for 18 years. You did not see abnormal Federal Funds rates bar during the period running from the fall of 2002 to the fall of 2004. See the Case-Shiller 10-city index. Home prices grew increasingly detached from nominal incomes from 1997 onward, not 2002 onward. Nor is it true that ill-considered central banking is necessary to inflate equity prices; you had a bodacious bubble in 1928-29, in spite of the gold standard.

Refer you to Megan McArdle's chum Mindles Dreck on the subject of Mr. Gross: "Bill Gross is always talking book". Caveat lector.

I see a lot of sour grapes coming from the usual suspects on the left about this book; Krugman, Delong, etc. The fact of the matter is the bailouts represent absolutely brillaint and elegant policy making. Too Big to Fail is successful banking policy - it WORKS. It's the free market solution and the right one.

Hmm, perhaps I don't know what free market means then. I thought it meant that if you make bad decisions and you go bankrupt then you don't get bailed out. Aren't bailouts socialism?

Not at all because TARP was completely paid back, it was just an emergency loan. Too Big to Fail works and doesn't hinder the banks competitive nature.

But what about the moral hazard introduced by the knowledge that the banks will have to get bailed out in order for the system, as it exists today, to work? Could this escalate to the point that the next crisis, or maybe the fifth crisis from now, is so big that the system can't be patched together? In other words, it might have worked this time, but why will this always work?

Side note: hey jpa...stuff it.

The moral hazard scenario is way overblown - it's been 6 years since the financial crises and the US economy is running victory laps. We just don't see a relapse in sight. Your view also presumes the managers of the banks did not suffer any consequences which is absurd, bonuses and pay were WAY below normal levels during the time period of the crises. It's just absurd to say moral hazard isn't an issue, the crises represents significant lost income for many financiers and they will not be looking to repeat it.


Please do not feed the trolls. He is obviously baiting people, and you fell for it.

>How did he ... miss the immense and obvious buildup of risk in the financial system that led to the crisis?

He wrote an entire book, and he does not answer this question? This is the only question this corrupt, useless man should be asked for the rest of his life.

It's a little silly to claim it was easy to see the crisis coming - honest mistakes were made by some of the large banks but they were acting largely responsibly given the circumstances.

Which is one way he could have answered the question. Instead of ignoring it completely.

The crisis was easy to see coming--although the magnitude was not for the average layman. (Mike Burry ran the numbers; it was clear to him.) Back in 2005 and 2006, we regularly talked about the bubble with my mother over the kitchen table at breakfast when the Case Shiller index was published in the NYT. You could tape the index to the fridge across the room and see the bubble. For example, see it here:

See it now?

Scott Sumner says he can't identify bubbles; but my mother could! It's really easy. You can't need a top 3% income to afford the median house. The logical consequence of that was that 47% of houses would eventually stand empty!

Binding constraint analysis would be a welcome addition to economics pedagogy. Such analysis will show valuation anomalies in the economy. Indeed, if I were a PhD student today, I might be inclined to write a "Book of Ratios" by way of thesis. (Actually, I'd write "The Three Ideologies", but that's another story.)

In any event, the economy is governed by a number of relationships which can move within ranges but which are linked over time. For example, rents and mortgages cannot forever grow faster than incomes; debt cannot grow faster than income forever; the S&P 500 cannot exceed a certain percent of GDP; corporate profits cannot exceed a certain percent of GDP; oil consumption will not sustain over 4.5% of GDP, etc. There are a bunch of these, and once incorporated into existing macro models, would show where these models fail. That is, binding constraint analysis can show turning points in the economy.

You can’t need a top 3% income to afford the median house.

The market for real estate is now global, if you do not take this into account you cannot understand how the real estate market functions today - AND WORKS. It is not a bubble.

As someone who bought a house in 1980 and then in 1985, I could see the coming bubble in 1998 when everyone was doing cash out refis and I was being told I was an idiot for paying off my mortgage as fast as I could when I could refi and pay less and go on vacation and get rich faster because by having only $20K in equity, every $20K increase in my house price would double my wealth.

I grew up in the 50s and 60s when debt was at best a necessary evil.

By 2000, Alan Greenspan was arguing that fraud was impossible in a market because bankers would never lend my money to bad credit risks and lie to me that my money was perfectly safe. But then in 2010 Greenspan was blaming me for lending my money to high risk borrowers and then expecting government to bail me out when I should have known I was being lied to, deciding that he did not want to be wrong like he said he was in 2009.

Your mother likely grew up with the same pre-70s and definitely pre-80s view of debt and saw the ever rising debt everywhere as a sign of bad things going on.

Getting freaking serious. The banks knew full well that the MBS and CDO products they were producing were garbage. People should have gone to prison - including all of the management at Countrywide.

In retrospect, the banks have one regret. They should have asked for more when the sucker was there with the checkbook.

Doesn't matter- the sucker is still there holding the checkbook.

Geithner, and Paulson before him, responded to the financial crisis in textbook fashion. Criticism of either for their response is misguided; the criticism, if any, rightly belongs to the textbook. I suspect we will encounter more financial crises; indeed, I often guarantee more in my comments here at MR. I would hope that knowledgeable people, people like TC, would devote more attention to the textbook, less attention to the personalities.

Geithner, and Paulson before him, responded to the financial crisis in textbook fashion.

Charles Calomiris' complaint was that they threw the textbook away and took to mad improvising. "This isn't that difficult".

Nouriel Roubini and the economist I was lunching with at the time were struck dumb by the initial TARP scheme (some sort of auction process as a conduit for the treasury to by assets the banks wanted to unload), which Mr. Kashkari et al abandoned after a few weeks. Paulson's explanation to members of Congress about why he wanted this scheme was gnomic ("This is about winning...").

I always mentally compare Roubini with Taleb. Taleb gets way to much attention whereas Roubini, probably with much more to offer, is relatively not as publicly visible.

Taleb is a finance professor who had (as of 2008) a very limited corpus of scholarly publication. His was a guru hustle.

Roubini was atypical among economists because he had worked for the IMF and knew something of financial crises from the inside. He proved wrong on a number of questions, but the disaster scenarios he offered (10% decline in gdp and a 70% decline in equity prices) were within normal range for a country undergoing a crisis of this sort.

Indeed. I agree.

The Felix Salmon review of Geither's speech was dishonest. TurboTim seems indeed a liar, but his speech was actually quite prescient, to wit, note this passage that Felix ignores:

Geither's speech of 2004, is right on point on concentration, which was the key to the 2008 Panic:

The economies of scale inherent in certain activities have led to a significant degree of concentration in some markets. A relatively small number of dealers account for a very large share of the over-the-counter derivatives business, with higher degrees of concentration in specific markets such as interest-rate options. Two institutions dominate the government securities clearing business. The growth in the size of government-sponsored mortgage entities creates a high degree of concentration in a market with very large systemic implications. Concentration has benefits, but it necessarily increases the vulnerability of the system to an operational or financial disruption in a single institution, or the decision by a single institution to exit a particular business. Moreover, to the extent that the same set of firms play dominant roles in multiple markets, this concentration can also give rise to linkages between markets that are not apparent in normal circumstances and that could potentially affect how the financial system functions in conditions of acute stress.

"Geither’s speech of 2004, is right on point on concentration, which was the key to the 2008 Panic"

He was President of the New York Fed from '03 to '09 when these imbalances were created in the 1st place FFS!!

And you're calling the pyromaniac fireman prescient

That's rich.

So what. The problems did not occur in the areas that he identified as risky. AIG was the only casualty in the derivatives market (and that happened on credit default swaps not interest rate swaps and probably happened because they were completely incompetent), there was never a problem dealing with government securities clearing and the big mortgage problems do not appear to have been at Fannie or Freddie.

And further - if Geithner believed, as I believe, that the derivatives market is a colossal disaster waiting to happen, why did he subsequently do nothing about it?

The GSE's were as bankrupt as Lehman.

@Joe Smith-- I think problems did not occur in Freddie and Fannie, as TurboTim predicted in 2004--since the government stepped in, in 2008, and took them over. So again I think Tim was right on prescient. Not that I think he's honest. And I think we should have let everything fail in 2008, to liquidate as Andrew Mellon suggested in 1929, for the long term health of the system, to avoid a Japan-like zombie economy, but that's another story.

The textbook response to financial crisis is two-fold: stop the run (on banks) and stop the value of assets from plummeting. Techniques may vary but the two-step response is always the same. Stopping the run usually means flooding the market with liquidity (i.e., money), while stopping the value of assets from plummeting usually focuses on financial assets. Few object to the first response, more and more are finding fault with the second. Mian and Sufi believe the recovery has been so slow because the focus should have been more on housing rather than (almost) exclusively on financial assets. Many of those who objected to intervention to stop the value of housing from plummeting did so because of essentially moral hazard reasons: that "saving" homeowners with over-leveraged homes would encourage the behavior and, besides, wouldn't solve the dilemma of the imbalances in the housing market. It's best to let the market do its magic. Mian and Sufi might respond that financial assets should be subject to the same scrutiny, including moral hazard and letting the market correct imbalances. Those who support the focus on financial assets might argue that they are a special class whose value has a disproportionately large effect on the entire economy. I might ask: is intervention focused on financial assets because they are so important or is it because those who hold financial assets are so important. Those who question the response of Geithner, and Paulson before him, are essentially asking whether the textbook response is the best response.

I might be a bit naive, but given all his colleagues seem to think that he was an intellectual lightweight who was out of his depth, shouldn't everyone have been told he was an intellectual lightweight out of his depth?

What are the profit-making opportunities, I wonder, in known the Fed is run by an intellectual lightweight who is out of his depth? Not as many as you might think I would guess. After all, he is not likely to fail in a predictable way.

From the excerpts:Geithner, Larry, Rubin, Greenspan.

Why does it seem like the American economy was in the hands of a small club of pals?

No. Rubin left office in 1999 and Summers in 2001. They may have crossed paths, but they never worked together prior to 1993 (when Greenspan was 67 years old). They grew up in different cities, attended a somewhat different array of schools (Summers and Rubin each got a part of their schooling at Harvard, Greenspan did not), have quite different domestic histories, had dissimilar sorts of employment before holding government office, and are not at all contemporaries (Greenspan being half a generation older than Rubin and a full generation older than Summers). Their fathers followed different careers as well. The two respects in which they are alike is that they had a well-to-do upbringing and they're all Jews. Greenspan's an oddball (friend of the impossible Ayn Rand) and Lawrence Summers is famously obnoxious. I bet they do not even like each other.

I know this messes up y'all's really subtle point, but Geithner is not at all Jewish. His mother is a Mayflower descendant, and his father wasn't Jewish either.
Hank Paulson isn't Jewish either. So the gang that saved this nation from a second Great Depression, and they did exactly that, isn't quite as Jewy as you'd like.

Barney Frank is though, and his help in getting mark-to-market rules corrected in 2009 counts him as one of the saviors too. But then he's gay so which of those secret societies do we need to 'notice' with him?

I do not know why you're attributing other people Jew thing to me.

As for Frank, he (at the behest of his boy toy Herb Moses) sabotaged efforts in 2005 to induce improvements in the accounting practices of the GSEs. Gregory Mankiw predicted these entities were time bombs, but a critical mass of Congress ho's would not listen. Then Frank was responsible for the 'reformed' regulatory architecture of the financial sector, which was composed by holding bull sessions between financial sector lobbyists in his office. It's a fine Democratic Party piece of work: hopelessly complex, deferential to casino bankers, and laden with opportunities to grant 'waivers'. It needs to be junked and replaced.

Barney Frank is only a hero to those who admire what you scrape off your shoe.

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