Stress Test Read online

  This book is the story of the choices we made before, during, and after the crisis. Not every choice was right, but this won’t be an if-only-they-had-listened-to-me memoir, because I supported almost every choice at the time. I couldn’t force our opponents in Congress or our counterparts in Europe to embrace our proposals, but I didn’t lose many policy battles inside the Fed or the Obama White House. We almost always did what I thought was right and necessary, within the very real limits of our authority at the time.

  The financial crisis really was a stress test for the men and women in the middle of it. The usual rhythm at central banks and finance ministries evokes the old line about life as a fighter pilot: months of boredom punctuated by moments of terror. We lived through months of terror. We endured seemingly endless stretches when global finance was on the edge of collapse, when we had to make monumental decisions in a fog of uncertainty, when our options all looked dismal but we still had to choose. If I had learned one thing from previous crises, it was the importance of humility—about our ability to figure out exactly what was going on, and our ability to parachute in with a simple solution. Those were useful thoughts to keep in mind during the cataclysm, but not uplifting thoughts.

  The pressures we faced as first responders obviously paled in comparison to the sacrifices of many public servants, like real first responders or our troops overseas. We didn’t expect medals or combat pay. But we felt an enormous burden of responsibility. And as my daughter Elise once reminded me, Americans at least understood our troops in Afghanistan were fighting for them. They weren’t so sure about us.

  The financial crisis was also a stress test of the American political system, an extreme real-time challenge of a democracy’s ability to lead the world when the world needed creative, decisive, politically unpalatable action. That’s not typically regarded as one of our great strengths, at least not in recent years, when the political news is usually about gridlock and dysfunction. And our interventions certainly didn’t improve the public’s opinion of government or politics.

  Politics is not my life’s work, but it left me with some scars, and I have some things to say about the soul-crushing pathologies of Washington. I witnessed some appalling behavior in the political arena—selfishness and grandstanding, shameless hypocrisy and mindless partisanship. At times, the failures of our political system imposed tragic constraints on our ability to make the crisis less damaging and the recovery stronger. And yet, at the moments of most extreme peril, the system worked. Two administrations—one Republican, one Democratic—managed to do what was necessary to end the crisis, start a recovery, and reform the system, attracting just enough bipartisan support to get a polarized Congress to do its part. A fractious group of policymakers worked together surprisingly well—arguing, agonizing, sometimes agreeing to disagree, but mostly trying to get the right answer, minimizing the time wasted on bureaucratic conflict.

  Today, much of the public is skeptical that government is capable of managing a two-car funeral. Young Americans are reluctant to enter public service, and it’s hard to blame them. But our system passed its stress test.

  I hope this book will help answer some of the questions that still linger about the crisis. Why did it happen, and how did we let it happen? How did we decide who got bailed out? Why didn’t we nationalize the banks, or let more banks fail? How did we convince the left we were Wall Street’s wingmen while convincing Wall Street we were Che Guevaras in suits? Why didn’t we do more (or less) about the housing market? Why didn’t we get more (or less) fiscal stimulus? Why isn’t the economy booming again? And what really happened with Lehman, anyway? Couldn’t we have put out the fire back then?

  This book is not intended to be a comprehensive minute-by-minute narrative of the financial crisis. Others have done that, although their accounts usually end in 2008. And this is certainly not a definitive history of economic policy in President Obama’s first term. It’s a history from one policymaker’s perspective of the events leading to the crisis, the key choices we made during the crisis, the aftershocks of the crisis, and the fight to reform the system. I hope this book can add to the historical record, help correct some misperceptions that have been entered into that record, and give a sense of what it was like in the fire.

  There is another reason I’m writing this book. Financial crises are perilous, and this won’t be the last one. Yet the United States has no standing army for fighting financial wars, no Joint Chiefs of Staff, no War College. It also has no playbook. All financial crises are different, but they have a lot in common, and there are lessons to learn from this extreme one that can help policymakers and the public during the next one. I hope this story can help illuminate them.

  I start with my own education in financial crises during my first stint at Treasury, as I helped former secretaries Robert Rubin and Larry Summers confront a series of emerging-market messes. Many lessons of those crises would guide my approach to this crisis. I then describe my time as a financial regulator at the New York Fed before the boom went bust, discussing what I saw, what I did, and what I missed. I made mistakes during that period, though they weren’t the mistakes most people think I made.

  The heart of the story will be my perspective on the most harrowing crisis since the Great Depression, from its outbreak in 2007 through its resolution in 2009—not only the intense financial engineering that began during my time at the New York Fed, but our debates over the stimulus, the housing market, and the larger economy in the Obama era.

  By the end of 2009, the worst of the crisis was over in the United States, but I still had a few challenges ahead of me. We were deep in the fight for Wall Street reform, our effort to set financial rules of the road that could make crises less frequent and less damaging in the future. Then Europe began to crumble, and I spent much of my remaining tenure urging the Europeans to tackle their crisis more aggressively. We also began a series of budget negotiations over the nation’s fiscal path that nearly ended in catastrophe; our congressional Republican counterparts were threatening to force the U.S. government to default on our financial obligations, a true doomsday scenario.

  These struggles were all echoes of the great crisis. But before I describe all this history, I ought to explain how I ended up in the thick of it. I wasn’t an academic like Ben Bernanke or Larry Summers. I wasn’t a Wall Street titan like Hank Paulson or Bob Rubin. I had more of an accidental path to history.

  ONE

  An American Abroad

  I had an extraordinary childhood, but I was an ordinary kid.

  I was a good student, never a great student. I was a decent athlete, nothing special. I wasn’t particularly ambitious or hardworking. By the time I went to college, I had lived in Africa, India, and Thailand, through wars and coups, but I had little interest in politics, economics, or even current events. I had all kinds of amazing experiences—trips to Kashmir and Kenya, Beirut and Bali—but I rarely stopped to think about them.

  My exotic upbringing didn’t feel exotic at the time. It felt like life. Mostly, it felt like fun. I was lucky to grow up in a big, close, raucous family, with a lot of love and laughter, without a lot of drama. My sister, Sarah, is two years younger; my twin brothers, Jonathan and David, are four years younger. We were too busy playing and exploring to do much reflecting. My early memories are pleasant memories: trekking in Nepal, driving a small Boston Whaler off Cape Cod, dumping colored powder on my siblings during the Indian holiday of Holi. We weren’t rich by American standards, but we were very privileged.

  As unremarkable as my childhood seemed to me at the time, it exposed me to the world, to extreme poverty and vicious inequality, to diverse customs and cultures. My parents, Peter Franz Geithner and Deborah Moore Geithner, gave me this amazing gift of a global education. Even more important, they gave me a constant, generous, unconditional love. They taught me—by example, not by lecture—how to take life seriously without taking myself too seriously. They showed me how helping others can give work
meaning. They modeled humility. They never pressured me to do this or do that, other than to be kind and curious, but they always seemed to have confidence in me, and that created confidence within me.

  MY MOTHER is a musician, a teacher, a bleeding-heart liberal bursting with empathy and optimism. She says she has “up genes”; she got a tattoo of a horseshoe crab to keep her breast cancer scars company. She studied Hindi, Thai, and Chinese while living abroad. She’s an enthusiast who shares her enthusiasm with everyone she meets, who makes lifelong friends everywhere she travels. My father is quieter, more reserved, more skeptical, more conservative in every way. He’s an understated child of the fifties, a nice complement to my mother’s exuberant spirit of the sixties. He’s also a lifelong Republican, although he came of age in the Eisenhower era, before much of his party veered to the far right. He devoted his professional life to global development, not a typically conservative cause, and he voted for President Obama in 2008. But he supported Mitt Romney in 2012, even though I was still working for the President.

  My mother is from a New England family dating back to the Mayflower, with relatives including the architect Buckminster Fuller, the journalist Margaret Fuller, and the novelist John Marquand. Her father, Charles F. Moore, Jr., was, among other things, a newspaperman, vice president of Ford Motor Company, and an adviser to President Eisenhower. Later in life, he served as a town selectman in Orleans, the small town on the Cape where my parents now live. My mother’s older brother, Jonathan, spent his whole career in public service, helping to preserve the Cape Cod National Seashore as a Republican congressional aide, holding influential jobs at the U.S. Departments of State, Defense, and Justice, serving as the foreign policy adviser to Mitt’s father George Romney’s presidential campaign. I remember visiting him during the Watergate summer of 1973, just before President Nixon fired his boss, Attorney General Elliot Richardson, in the Saturday Night Massacre, and he resigned in protest. He was always busy, on the phone, doing consequential things. It made an impression on me.

  My father’s family didn’t come to America on the Mayflower or work inside the American establishment. His father was a German immigrant who settled in north Philadelphia and ran a small business as a cabinetmaker. My father went to a public high school, mostly African American, where he was a star athlete, an excellent student, and his class president, a serious young man with a serious crew cut. The U.S. military paid his way through Dartmouth, where he made Phi Beta Kappa and—even though he was just five-foot-nine—captained the basketball team. He then spent four years as a Navy pilot, flying FJ-3 Furies and other fighter jets off carriers after the Korean War.

  My parents met at Uncle Jonathan’s wedding in 1957; my father, a friend of Jonathan’s from Dartmouth, was the best man. He was also dating the sister of the bride. But my mother, then a freshman at Smith College, was drawn to him. When she heard he had moved to New York a few years later to work for a chemical manufacturing company, she sent him a Valentine from her dorm room. Nine months later, they were married. And they stayed married.

  I was born in a Manhattan hospital on August 18, 1961. My mother says I was a wild and energetic baby, chasing her around our apartment before I could even walk. (To this day, I have a hard time sitting still.) My father soon joined the U.S. Agency for International Development and moved us to southern Rhodesia, which is now Zimbabwe, then to Northern Rhodesia, now Zambia. He took a job back at USAID headquarters when I was four, so we moved again to the Washington suburbs.

  My mother tells stories about my close encounters with cobras, and a cloth diaper stuffed with coins that I used as a security blanket—my first interest in finance, she says—but I don’t remember anything about Africa. I was apparently a mischievous kid. When our dachshund bit me, I tearfully admitted that I had bitten the dachshund first. Somewhat later in my youth, my mother tried washing out my mouth with soap when I cursed, but as my friends and colleagues know, that did not have a lasting effect. One of them suggested the title of this book should be Bonfire of the Profanities.

  When I was six, the Ford Foundation asked my father to help run its programs in New Delhi. I still remember that first shock of India, driving in from the airport, overwhelmed by the heat and the smell, the strange and the awful. We drove to school seeing Brahman bulls wandering the roads, malnourished children—some crippled by adults to make them look more sympathetic—begging at every intersection.

  I went to the American International School, which had an American curriculum, and I did American-kid things like join the swim team and play baseball. But unlike Foreign Service families, who were usually stationed at the embassy compound, we lived with other expats in an Indian neighborhood called Friends Colony. It was a quasi-colonial existence, with drivers, maids, gardeners, and night watchmen, but my parents’ friends were Indian artists, activists, and intellectuals, as well as expats who worked at interesting places such as Oxfam, CARE, and the World Bank. My siblings and I played cricket with our cook’s kids in our yard. We studied Hindi. My mother wore saris and salwar kameez, and sometimes dressed us in Nehru jackets and churidar pajamas. Our swim meets were sometimes held at the national stadium, in a pool full of dark green water, with frogs in the deep end and biting ants all over the deck.

  Still, the contrast between how we lived and how most Indians lived was a constant presence in our lives. We always knew we were separated by fortune from hideous deprivation. I remember once after David had recovered from a broken leg, he handed his crutch out the car window to a disabled street kid. And since the Ford Foundation let us return to the United States every summer, we were always reminded of the wealth gap between America and much of the rest of the world. At a local supermarket in suburban Virginia one summer, I was stunned to see an entire aisle stocked with pet food. It seemed bizarre in a world full of starving people.

  We returned to the United States after I finished sixth grade, when the Ford Foundation asked my father to run its developing-country programs from its headquarters in Manhattan. We settled into a traditional suburban lifestyle in Pelham, New York, a classic bedroom community north of the city. My father took the 5:36 p.m. train home from Grand Central almost every night when he wasn’t traveling, so we could eat dinner together as a family. We attended an Episcopal church on Sundays, although we weren’t very religious. I went to the public junior high school.

  Initially, I felt like a visitor from another planet. I was tiny and scrawny, twenty pounds too light to qualify for Pop Warner football. I didn’t make the basketball team, which was disappointing; my father once got an offer to try out for the Celtics. I had longish hair when that wasn’t cool. I suffered a bit of junior high torture, kids dumping my school binders on the floor, papers flying everywhere. The culture was all new to me. I had never seen All in the Family or Hawaii Five-0. I didn’t know what Pink Floyd was until a friend played me an album. The whole concept of going out with a girl seemed bizarre. Where were you supposed to go?

  But I adapted. I played street hockey and touch football and stickball after school with a great group of kids on my block. I had a paper route. And toward the end of ninth grade, just as I was feeling comfortable in my own country, my parents announced that we were moving to Thailand, where my father was going to run the Ford Foundation’s programs in Southeast Asia. He wanted to be back in the field, not behind a desk in New York.

  There’s some trauma in moving a lot and having to find your place in new environments, but there’s also the thrill of discovery. Bangkok was an incredibly appealing city, full of warm, tolerant, open people. My parents let me explore it on my own, by bus and taxi and three-wheel tuk-tuks. The end of our street was a typical crush of massage parlors and prostitution. Drugs were everywhere, and there was no apparent drinking age. That erased a lot of the allure.

  I went to another American school in Bangkok. I got good grades without much effort. I liked the simple clarity of physics and math, much more than the messy complexity of government a
nd history. I played baseball and tennis with modest distinction, but got cut from the basketball team twice; I served as manager for two seasons, taping my friends’ sprained ankles, until I finally made the team. Somehow, I got elected president of my junior and senior classes; my main memory of that initial experience in leadership was how much I loathed public speaking. I’ve always gotten along pretty well with others, but I’ve never been a great communicator. When I left Treasury for the first time a couple decades later, a colleague would say in her farewell tribute that I spoke “a version of English so stripped down to the essentials that, like modern art, it can be incomprehensible.” I guess I always have.

  For a teenager, I was relatively free of angst, pretty comfortable in my skin. But I had no idea what I wanted to do in life. I remember taking one of those What Color Is Your Parachute? assessments, which concluded that I’d be good at a career in business. I thought: Well, maybe, but it doesn’t sound that compelling. Other than an uncle who worked as a community banker, I had no real commercial influences in my life. I worked during our summers back in the States in Orleans—cleaning up a store on Main Street, then selling clothes at the store—but that didn’t spark any entrepreneurial enthusiasm. I didn’t think much about how I would earn a living.

  I was still generally clueless about the world. My father rarely talked about his development work, even when he took us on trips to visit orphanages in India and hill tribes in northern Thailand, and I rarely asked about it. India and Pakistan had a brief war while we were living in New Delhi, so we had curfews and early lights-out, but I didn’t really understand what they were fighting about. There was a coup in Thailand while we were there, but I wasn’t aware of the cause; my brother Jonathan remembers me consoling him because the coup forced us to cancel a beach vacation.