Elizabeth Warren only makes a few cameos in Timothy Geithner's new book, but the spirit animating Warren's crusade against Wall Street haunts his account from cover to cover.
The former Treasury Secretary's book "Stress Test" —a technocrat's defense of the bank bailout against the pitchfork-wielding masses—recounts the financial crisis and the White House's response to it.
"Stress Test" takes a few direct jabs at Warren, whom he describes as "one of our most ardent and eloquent liberal critics"—right before slamming her. "Her criticisms of the financial rescue, if well intentioned, were mostly unjustified, and her TARP oversight hearings often felt more like made-for-YouTube inquisitions than serious inquiries," Geithner writes. "She was worried about the right things, but she was better at impugning our choices—as well as our integrity and our competence —than identifying any feasible alternatives."
Geithner's more sustained attack, however, is on the kind of populism Warren has come to represent on the left, which he describes as "the Old Testament view" that "[t]he venal should be punished. The irresponsible shouldn't be bailed out." He cites the appetite for "Old Testament vengeance," "Old Testament justice," "Old Testament impulses," "Old Testament populism," "Old Testament cravings," and so forth, no fewer than 18 times.
To Geithner, such impulses are the antithesis of his worldview—one that he believes relies on empiricism, pragmatism and reason. His "Old Testament" crowd, by contrast, is driven by blind emotion, intuition and animalistic "cravings" for heads on stakes. "You could take [Goldman Sachs CEO] Lloyd Blankfein into a dark alley and slit his throat, and it would satisfy them for about two days," former President Clinton told Geithner, as he recounts. "Then the bloodlust would rise again."
But Geithner, too, admits he was driven by emotion—predominantly a sense of terror that the country was on the brink of a financial apocalypse. "I had a sick feeling in my stomach," he writes, recalling a dark moment in the summer of 2007. "I knew what financial crises felt like, and they felt like this."
"[Warren] was worried about the right things, but she was better at impugning our choices—as well as our integrity and our competence —than identifying any feasible alternatives."'
Given everything that was at stake, he argues, it was far more dangerous to be too stingy than too generous towards teetering banks that were too interconnected and, yes, "too big to fail." "It would be easier to correct the mistake of doing too much, I argued, than to escalate too slowly, let the situation burn out of control, and have to correct the mistake of doing too little," Geithner writes. The fact that the bailout goes against the public's base, "Old Testament" instincts and impulses is in fact a feature, not a bug.
"This is the central paradox of financial crises: What feels just and fair is often the opposite of what's required for a just and fair outcome," Geithner writes. His parting rejoinder to his liberal critics: Taxpayers ultimately recouped their losses from the bank bailout.
It's a direct riposte to Warren's own account of the same events, which she details in her newly released book. In "A Fighting Chance," the Massachusetts senator rips into Geithner for kowtowing to big banks again and again. "Million of people were getting tossed out on the street, but the secretary of the Treasury believed that government's most important job was to provide a soft landing for the tender fannies of the banks," she writes, seething at Geithner's explanation for the slow rollout of Treasury's foreclosure programs.
Geithner does acknowledge, though in a limited way, that the administration fell short on housing. "I wish we had expanded our housing programs earlier, to relieve more pain for homeowners," he says towards the end of the book. But he simultaneously insists there were essentially no other good options at the time. Geithner recalls one exchange with Warren in which she "seemed taken aback" when he asked her what they should do instead on housing. He dismisses the biggest idea that she and other liberals were pushing for—principal reduction—as expensive and limited in broad economic impact.
"We didn't want to spend tax dollars helping borrowers who could afford to stay current without our help, but there were also real fairness issues, as well as political issues, around using tax dollars to help neighbors who got in over their heads," he writes.
So when it came to failing banks, it was better to err on the side of doing too much. "It was impossible to design an effective rescue for the intended beneficiaries—the people who lived and worked in those countries—without some collateral beneficiaries," he explains. While Geithner brags about the fact that the bailout made taxpayers money, Warren points out that her oversight panel "found that Treasury had gotten a raw deal for the American people" when it came time to returning the borrowed money. "The closed-door negotiations had yielded only 66 cents for every dollar of value that Treasury was entitled to," she writes. That's not to mention the immense risk that taxpayers assumed on behalf on the banks—and the enormous built-in subsidies -- that the bailout gave to the banks as well.
Ordinary homeowners didn't get the same benefit of the doubt from Geithner, though, because their individual suffering doesn't pose the same systemic risk; better not risk wasting taxpayers' money. He acknowledges making "empathy mistakes" with suffering homeowners that kept him from "listening patiently to their stories and feeling their pain," but insists that political and legal "constraints" tied the government's hands. "We knew that a few outrageous stories of aid to reckless speculators and scam artists could cripple support for our entire housing program," he writes, adding later: "We had an obligation to protect the integrity of the program."
"This is the central paradox of financial crises: What feels just and fair is often the opposite of what’s required for a just and fair outcome."'
In reality, the government's reluctance to act more forcefully on housing and jobs have fueled its own slow-motion economic crisis, prolonging that pain for millions of ordinary Americans and forestalling our recovery. Treasury's loan modification program has helped only a fraction of the homeowners it was intended to reach. While Treasury, the Federal Reserve and Congress took truly unprecedented measures to avoid a financial collapse, fears of wasting taxpayers' money has arrested efforts to help the broader economy.
"Larry warned us that we were so worried about 'false positives,' providing aid to the undeserving [homeowners], that we would allow too many 'false negatives,' denying aid to the deserving. He had a point as well," Geithner admits. He also undervalued the real impact that mortgage relief would have on the broader economy, as Atif Mian and Amir Sufi explain: "The evidence is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.
Geithner played a supporting role in other missed opportunities to ease the pain for ordinary Americans. He admits that being a cheerleader for deficit reduction wasn't exactly the best strategy for sustaining fiscal stimulus to get Main Street going. "I had some sympathy, probably unwisely, for a plan floating around Congress to create a bipartisan deficit reduction commission," he writes. "I just thought, perhaps naively, that our willingness to hit the brakes in the future would give us a better change to persuade Congress to let us keep our foot on the gas pedal now."
Geithner pushed the president to move ahead with his plan to overhaul entitlements and the tax code, as well as additional spending. By the time he realized what the Republicans were demanding, it was too late.
Geithner and a colleague "argued we should refuse to concede anything in exchange for a debt limit increase, but the White House did not believe that was a realistic position," he writes. "In an austerity moment, even our Democratic allies were afraid to vote for a bill that would make them vulnerable to charges they were pro-debt." The 2011 debt-ceiling deal resulted in nearly $1 trillion in immediate cuts, sequestration, and three years of Congressional foot-dragging.
"Premature austerity didn't kill our recovery, but insufficient stimulus definitely sapped its strength," Geithner admits.
Geithner tempers his regrets, however, with a lingering sense of resignation. "Still the financial crisis left tragic pain and suffering in its wake. Financial crises always do," he writes. In a recent interview with The New York Times, he muses on the "Too Big to Fail" institutions that brought down the system in the first place:
"'Does it still exist?' he said. 'Yeah, of course it does.' Ending too-big-to-fail was 'like Moby-Dick for economists or regulators. It's not just quixotic, it's misguided.'"
"We knew that a few outrageous stories of aid to reckless speculators and scam artists could cripple support for our entire housing program."'
Ironically, one of the few post-crisis developments that seems to leave Geithner hopeful is the creation of the Consumer Financial Protection Bureau, Elizabeth Warren's brainchild, which he describes as "the most important new U.S. regulatory body since the Environmental Protection Agency." Warren, he says, "was really smart and innovative about consumer protection, with sophisticated ideas about reform," he recalls.
On that matter, the respect is mutual. "Secretary Geithner and I had had our differences," Warren writes, "but when the consumer agency came under attack by the Republicans, he had our back."
"I had a complicated relationship with Warren," Geithner explains.