There are a lot people could learn from the book “Stress Test” by Timothy Geithner, the former U.S. Treasury secretary who helped shepherd the country through some of the darkest days of the financial crisis. If only they would listen.
The very nature of a dogmatic position is that it is insensitive to new information and analysis, no matter how relevant. This is what we have seen so far in quite a few of the reactions to Geithner’s book. His most ardent detractors on the left and the right have cherry-picked certain remarks to reinforce their pre-existing narrow views.
This is unfortunate — not because Geithner’s book is perfect, far from it, but rather because his behind-the-scenes narrative adds quite a few data points to inform the debate on two issues central to the global financial crisis and its aftermath: the proper scale and scope of the government’s role in guiding the economy through cyclical, structural and secular changes, and the extent to which the regulatory and political structures are co-opted by financial institutions. The incentives to constructively advance this debate should be strong, given the still-incomplete recovery from the crisis, the associated human suffering and the importance of avoiding a repeat.
Geithner elucidates the operational, institutional and political constraints under which policymakers functioned, explaining why imperfect compromises were struck. He reminds us how a fragmented crisis-management authority, together with the lack of a sense of urgency among those who had forgotten what crises are like, hindered the initial response. He illustrates how the difficulties of global coordination sometimes undermined key decisions.
Geithner argues, for example, that in a severe crisis, there is no better alternative to immediate government support aimed at preventing banks from shrinking all at once and starving the economy of credit — even though, by its very nature, the approach may seem overly indiscriminate and, much worse, also reward some people responsible for the crisis. He also illustrates the uncanny ability of banks to navigate the political process to their advantage even in their most vulnerable moments. In doing so, he explains why it is so difficult to punish banks in the midst and in the aftermath of crises that they created.
Admittedly, Geithner’s is far from a definitive analysis of the crisis. If policymakers are to draw useful lessons, much more needs to be done to establish counterfactuals — that is, to show what would have happened had a different course of action been taken. Although there has been some good research on what could have happened if the United States had adopted more aggressive fiscal stimulus, other key areas remain underexplored.
What, for example, would have happened had U.S. authorities moved more forcefully on housing finance and reform (something that Geithner regrets not doing, and that economists such as Atif Mian and Amir Sufi have convincingly argued should have been done)? What if banks benefiting from government support had been subjected to significant windfall profit taxes once they started to recover (an omission that, even today, seems strange and unfortunate to me)? What if global policy coordination hadn’t faltered so badly after the April 2009 summit at which the Group of 20 developed and developing nations agreed on common priorities in addressing the world’s financial and economic ills (after all, the positive example of this one event was so powerful)?
In the absence of answers to such questions, it will remain hard to conduct a more constructive debate, let alone achieve political consensus on what more should be done now, not only to overcome the residual damage from the last crisis but also to reduce the risks of future ones. In the process, youth and long-term joblessness will remain too high and inequality of income, wealth and opportunity will worsen.
Mohamed El-Erian is chief economic adviser at Allianz, chairman of President Obama’s Global Development Council and the former chief executive officer and co-chief investment officer of PIMCO. He wrote this article for Bloomberg News.