“WSJ Money: What lessons should people draw about their own finances, based on what we’ve just been through? Timothy Geithner: The basic lesson is you have to be careful with how much you borrow relative to your income and the value of your house or assets. You want to live with a greater cushion against the unknown…
…There’s a risk, however remote, for reasons beyond your control, that you or your spouse will lose a job. You may be a victim of forces beyond your control. The best protection you have against that is not to rely on unemployment insurance, or Congress acting to mitigate the loss of income. The best thing to do is to make sure you are living with a greater cushion of savings, so you can manage through that without having to dramatically affect your quality of life.”, Wall Street Journal Money, June 7, 2014
“I agree and I think most Americans would agree with Mr. Geithner’s advice. However, we Americans and our government do not follow this advice. (I believe Mr. Geithner knows and understands this and therefore is being disingenuous or maybe it’s just his lack of experience…no banking experience, one economics course!!!) Student loans are granted by the government/taken out by students and their parents, without regard to the student’s future employment and income prospects (which can only be inferred, in some respects, from the student’s academic record, major, the university’s reputation, other achievements, and work experience, etc.). And FHA allows first-time home buyers and others (some with credit scores as low as 620 and mortgage debt-to-income ratios exceeding 40%) to borrow nearly 100% of the purchase price of a home (3% down, which can be from a gift or donation). With a low-down payment (non-recourse), low fixed-rate/fixed-payment 30-year mortgage (with no prepayment penalty), tax deductibility of mortgage interest, and capital gains avoidance ($500,000 every two years), the government is practically saying, “You should buy a home with one of our fabulous mortgages”. And our central bankers at the Federal Reserve create monetary inflation (their current stated goal is 2% per year, but it has averaged about 4% over the past 50 years) and inflation expectations are a powerful economic driver that encourages consumers, institutions, and our own government to borrow more and/or speculate on assets like real estate. And to make matters worse, most economists would tell you that if Americans acted more prudently as Mr. Geithner suggests in this article (rather than as they do) our economy, which is built on consumer borrowing and spending (and government borrowing and spending too), would struggle mightily (even more than it has) in the near term. Herein lies the hypocrisy and why the bankers and Wall Street were an easy (but wrong) scapegoat for the financial crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Timothy Geithner: After the Financial Crisis
The former Treasury secretary speaks candidly about lessons learned from the financial crisis—and the ‘scars’ from leftover challenges
By David Wessel
Timothy Geithner Photography by Stephen Voss for WSJ.Money
TIMOTHY GEITHNER SPENT 23 YEARS in government, the last several as president of the Federal Reserve Bank of New York and secretary of the Treasury during and after the worst financial crisis in 75 years. He’s now beginning a new phase of life, having recently become president of Warburg Pincus, a private-equity firm.
Geithner is also drawing lessons—for the nation, for other leaders and for today’s youth—from what he considers the successful effort that he and others led to prevent a repeat of the Great Depression. He calls himself “a really big optimist” about America, but says he worries that the nation’s dysfunctional system puts its future at risk. Geithner, fit and looking younger than his 52 years, recently fielded questions from David Wessel, a contributing correspondent to The Wall Street Journal and director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. Their edited remarks follow:
Q: It has been seven years since the onset of the worst financial crisis in your lifetime and mine. Should we feel good about the way the U.S. government and political system responded?
A: We should feel good about some things, not so good about others.
Q: What should we feel good about?
A: If you look at the record of governments and financial crises over the last century, not to mention the last two or three centuries, it’s a graveyard of mistakes and devastating outcomes, of great depressions following panics. In this crisis, we were ultimately able—though it wasn’t always pretty—to deploy the overwhelming force of the U.S. in a creative way to reduce the risk of a great depression and get the economy growing again remarkably quickly. By that measure, our outcomes were much better than the average. But they could have been significantly better if we had had better tools earlier enough, more political support for more forceful interventions sooner and the capacity to deploy fiscal stimulus for a longer period. We would have had a stronger recovery and healed much more quickly.
Q: In your new book, “Stress Test,” you refer to “appalling behavior” in Washington, to “selfishness and grandstanding, shameless hypocrisy and mindless partisanship.” Did that make the crisis worse, the recession deeper, the recovery more disappointing?
A: It made it harder to fight the crisis as aggressively as we needed to. It made it harder to do things to make the recovery stronger. But I try to tell a more optimistic and fundamentally more hopeful story about what actually happened at the moment of greatest peril: a pretty remarkable degree of cooperation. Not just between a Republican president, initially, and the Democrats in Congress who provided most of the votes, but between the core group: Hank Paulson, Ben Bernanke and me. We were able to demonstrate that we have this unique ability as a country—unique strengths as a country—when faced with existential threat to do what’s necessary to protect people from much worse harm.
There were a lot of heroes in this. And although we had a lot of critics, they were mostly well-intentioned. They had different ideas on what we should do; sometimes they weren’t that feasible or well-conceived. What I never understood was those who were never willing to put politics aside and focus on the pragmatic imperative, or were trying to force us to default on our obligations as a way to shrink the safety net, or were blocking for transparently political reasons things that had long periods of bipartisan support that would have made the economy stronger. Infrastructure is a great example.
Q: Why do you think the whole rescue was so unpopular, so often seen as a bailout of the banks?
A: What’s unique about panics, and most dangerous, is the amount of collateral damage they do to the innocent, to people who had borrowed responsibly, who weren’t overexposed. The banking system is the lifeblood of the economy. It’s like the power grid. You have to make sure the lights stay on, because if the lights go out, then you face the damage like what you saw in the Great Depression or “It’s a Wonderful Life.” More people lose their jobs, more people lose their businesses, lose their homes, their savings, and they’re devastated. There is no way to avoid those outcomes or protect people against those outcomes, unless you keep the lights on. That requires doing things that are terribly unfair and look deeply offensive. It looks like you are rewarding the arsonist or protecting people from their mistakes, but there is no alternative. We didn’t do it for the banks. We did it to protect people from the failures of banks. It’s very counterintuitive and completely understandable that to the average person or the average economist or even many central bankers, it looks like the opposite of what makes sense.
Q: Do you think you might have done a better job of explaining that?
A: When you are in public life, you have to understand that your capacity for being effective depends on doing as good a job as you can at explaining what’s driving your choices, what those choices are and why you make those choices. I was not very good at that. It was not my natural thing. But it was a challenge even for people around us, who were very talented at that. Because inherently, at its core, what it takes to protect people is sort of inexplicable and unfair.
Q: What lessons should people draw about their own finances, based on what we’ve just been through?
A: The basic lesson is you have to be careful with how much you borrow relative to your income and the value of your house or assets. You want to live with a greater cushion against the unknown. There’s a risk, however remote, for reasons beyond your control, that you or your spouse will lose a job. You may be a victim of forces beyond your control. The best protection you have against that is not to rely on unemployment insurance, or Congress acting to mitigate the loss of income. The best thing to do is to make sure you are living with a greater cushion of savings, so you can manage through that without having to dramatically affect your quality of life.
Q: One sometimes hears that the 20th century was the American century, the 21st century is the century of Asia, and we have to brace ourselves for being No. 2. Do you think that way?
A: I don’t. I’m a really big American optimist, even with all of the challenges we face, even with the pressing despair caused by all of our political challenges today. If you look at our strengths as a country, they still look relatively good compared to the challenges Japan faces or China faces or Europe. We could lose that if we are unable to find a better way to govern again. But we are a very lucky country. And this is not to diminish the challenges. I carry the scars of all of the challenges we are left with.
A brief biography of Timothy Geithner before—and after—his most public post.
Timothy Geithner Photography by Stephen Voss for WSJ.Money
Aug. 18, 1961 | Born to a pianist and a government worker.
1985 | Earns a master’s in international economics and East Asian studies from Johns Hopkins University.
1988 | Joins the Treasury Department and later becomes undersecretary of its international affairs unit.
2001 | Becomes director of policy development and review at the International Monetary Fund.
2003 | Is appointed president of the Federal Reserve Bank of New York.
2009 | Serves as Treasury secretary, under President Barack Obama, until January 2013.
2014 | Becomes president of Warburg Pincus to help with the private-equity firm’s overall strategy, investor relations and portfolio management
Q: If you were to put a note in the desk drawer of the Treasury secretary, in an envelope labeled “Open in the event of financial crisis,” what would it say?
A: One, make sure you understand this basic paradox: To contain the risk of panics, you have to be very aggressive. You have to take much more risk than you want to take. And if you do that well, as we demonstrated, you will expose the taxpayer to less risk, and you will be better able to protect people who may lose their homes, their jobs or their savings.
Two, faced with a severe crisis, you want to deploy overwhelming force. You want the force to be large relative to the size of the problem. It looks imprudent. You’re creating moral hazard. People will criticize you for rescuing the arsonist. But if you don’t do it, the outcomes will be much more damaging and tragic.
Q: Can you generalize to crises in other walks of life?
A: Make sure you surround yourself with people who will disagree with you. Make sure you have competition in diagnosis around you all the time. Make that an ongoing, relentless effort. If you do that, and put aside the concerns of how your actions will be perceived and how you will be criticized, you’ll be in a much better position to sort through all of the bad choices you face. It’s really important to make sure people feel they can disagree with you. Most people in positions in government or the military exist in very hierarchical institutions. You need to do a huge amount to lean against the forces of excessive deference.
Q: Where did you learn that?
A: Initially by watching how [former Treasury Secretary] Bob Rubin used to conduct a meeting. He was exceptionally good at it. He also was very good at making sure you had people around the table who were doing the work, not just the people who were the bosses of the people who did the work.
Q: During the worst of the crisis, what did you do to relax? Did you have sleepless nights?
A: I’m such a lucky person in life. I have an amazing wife.
Q: Marry a social worker—is that part of the solution?
A: Yes, it was a good thing. And wonderful kids. And fantastic colleagues. I read a lot. I always did some kind of exercise. Usually, I ran, or I biked, or I swam.
Q: And did you listen to music when you ran?
A: Generally, I thought.
Q: Did security agents trail you when you were in government?
A: When I was in Treasury, they would usually follow me—though not in the pool.
Q: That must be weird?
A: It is a little weird, but you get used to those things. Those guys—the Secret Service—they’re the greatest, and I had great fun with them. Sometimes they came with me, like they came surfing with me once. Not that I was surfing much.
Q: You have two children. After all you have been through, do you recommend they go into public service and into government?
A: There is no risk they are going to do that.
Q: Because they have watched you?
A: Because they have different interests. I think it was hard for them to live through this with me, but I don’t think that’s really what shaped their interests. I was tremendously fortunate in the things I got to do in government. I loved it. I had a group of people around me, some of them pretty young in life, who can attest to the fact that the chance to work for your country in a moment of crisis is one of the most fulfilling, rewarding things you can do.
Q: If you were giving advice to a young person trying to pick a career, what would it be?
A: Decide whether you’re going to choose a cause or a craft. And it’s better to figure that part out than to figure out what sector of the economy is going to grow. And I think, generally, it’s better to have a more modest ambition initially and to try to figure out what would be interesting. What would you learn the most doing, what gives you the most responsibility early, and who are the kinds of people you want to work with? And if you get those things right, you’ll be pretty lucky even if you are working in an industry which has less sizzle and excitement and even less prestige. The path I chose was not a path with much prestige. Most Americans don’t think public service is a cool thing; they haven’t thought that since Kennedy. It was the coolest thing.