Book Review: Stress Test

stress testTimothy Geithner was President of the Federal Reserve Bank of New York from 2003 to 2009 and U.S. Secretary of the Treasury under from 2009 to 2013. Many people would have loved to be a fly on the wall in some of the meetings that Geithner was in during the financial crisis, the Great Recession, and the recovery. Geithner provides some insights, but he is also overly concerned with addressing his critics, especially those he calls “moral hazard fundamentalists.”

He makes some good analogies, although he repeats the same ones again and again, and I don’t think he addresses the fundamental problems that his critics are trying to get to. Sure, TARP assuaged the market by injecting capital into the struggling financial sector, and the taxpayers made a profit off the program in the end. Perhaps moral hazard arguments in reference to TARP are overblown. However, does this really settle the argument about whether or not the government should be bailing out companies? Should calming a volatile market really be the role of the federal government?

One of the big themes that Geithner emphasizes is that the critics of the policies he was pushing couldn’t offer a better alternative solution. This is a fair point, but again one could argue that it shouldn’t have been the government’s problem to solve in the first place. Geithner keeps coming back to the defense of, “if you don’t like my solution, give me a better one.” He leaves out the other option that should be considered: “this isn’t our problem to solve.”

I do not agree with Keynesian economic stimulus schemes like Geithner, which is why I read this book. I wanted to see his perspective and his justification for how they responded to the crisis. This book has helped me understand their view and have some respect for it. Keynesian economic thought has its validity. However, I am still not convinced that the government should be engaging in Keynesian economic stimulus schemes.

I wonder–as the 19th century economist Frédérick Bastiat would–what is not being seen? What would the economy look like without the bailouts and stimulus packages? By slowing the fall, did we also slow the recovery? President Obama said that he wanted to “rip the band-aid off,” but is that really what they did? It seems more like they pealed it back very slowly, hoping it wouldn’t hurt as much.

While Geithner talks a lot about how he was doing what was best for “Main Street,” his tone suggests more concern for his personal legacy. He wants to be a seen as a martyr who sacrificed everything to save both “Wall Street” and “Main Street.” The problem is, it comes off a bit like, “I am taking away your freedom in order to help you. Aren’t I a wonderful person for making that sacrifice for you?”

Remember what Reagan said, “the nine most terrifying words in the English language are: I’m from the government and I’m here to help.” With interest rates so low and the Fed’s balance sheet so large for such a long period of time, you have to wonder how much help they really were and how equipped they are to be helpful in the future.

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