Book Review 

Stress Test: Reflections on Financial Crises, by Timothy F. Geithner

Stress Test is an autobiography about Timothy Geithner a valuable guide to understanding how to tackle future financial crises. Personally I was drawn to this book because I wanted to gain a deeper and more fundamental understanding about what happened during the worst financial crisis since the Great Depression.

This book is overly technical at times (which is where I did dose of a bit, if I have to be brutally honest with you) and occasionally a bit long winded. It is nevertheless of interest to layman and economist alike. Although, as I will explain later, I think Geithner leaves a few important parts out. One could also argue that it´s problematic for the author to write impartially about an event that he himself helped shape. This book then, should not be read as the be all and end all when it comes to the Great Recession. Instead it is fascinating enough for what it is, a firsthand account of economic crisis management and a sneak peek into the corridors of power when said corridors were in danger of being overrun by a pitchfork wielding mob.

The reader who isn´t interested in learning about how a young boy grows into a man and then becomes president of the New York Federal Reserve, can skip the first few hundred pages. I would however, urge you not to. For a man who was, at the time, blamed for being a Wall Street insider appointed exclusively to bail out the big banks and financial institutions, Geithner is surprisingly likeable and has in fact never worked for Wall Street. I believe him when he says that he entered public service out of a desire to do good things and I also think that a lot of the criticism levelled at him was because he was an easy scapegoat.

One of my gripes with the book is the chapter titled “Leaning against the wind”. In it Geithner recalls the early noughties, when he fought for increased regulation and oversight of the burgeoning financial industry. This was a time when the markets were booming, the banks were gorging on cheap credit and no one was even slightly worried about a downturn. Geithner was concerned about the banks not managing their risks prudently enough and not having enough capital to weather tough times. He laments the lack of effective tools at his and his colleagues’ disposal as well as the general unwillingness of people to stop dancing as long as the band kept playing. I don´t doubt Geithner´s integrity but I can´t shake of the feeling that the chapter is mainly a way for him to wash his own hands of guilt. If the crisis had struck a few years after he left office I don´t think he would have put quite as much energy into telling us of his valiant rearguard actions.

The part about the fall of Lehman brothers and the global panic that ensued is just as awful as we all remember it being at the time. Unless you are a really young reader, that is. The fall of Lehman brothers and the subsequent crisis is depicted in all its shocking, cataclysmic, depressing and deeply disturbing glory. Page after page after page of bleak reading about jobs being lost, homeowners being foreclosed and companies going bankrupt. It was against this dismal backdrop that Geithner, with some reluctance, became the seventy fifth secretary of the treasury. The ship he inherited from former Goldman Sachs CEO Henry Paulson was rapidly sinking and in an acute shortage of lifeboats. Just like the violin band that played to keep the people on the Titanic calm, Geithner emphasized the importance of the banks having “money in the window”, to prevent popular panic and bank runs en masse. Drawing on experience from previous crises, among them the Mexican one of 1994, Geithner recognized banks fundamental function as the circulatory system of the economy and the importance of keeping them afloat. Although Geithner himself sees the CEOs of the big banks and financial institutions as partially responsible for the crash, he abhors the kind of vigilante justice that many people felt the situation called for. Bailing out the banks with taxpayer money was a necessary evil and letting Wall Street die a painful death would have greatly harmed Main Street, according to Geithner. This, I believe, is what he sees as a great injustice, that people wanted to apply Old Testament justice to the big banks without seeing events from a systemic perspective. I somewhat sympathize with this view, even though I fully understand many people’s anger and indignation, especially those who became victims of the crisis through no fault of their own. The TARP program and the subsequent bailouts will remain a hotly contested topic for some time, I believe. What I don´t buy, however, is Geithner’s rather strong dislike for Massachusetts Senator Elizabeth Warren, who helped found the Consumer Financial Protection Bureau. This was one of the few good things that came out of the crisis, yet Geithner seems to regard Warren as a populist pouring gasoline on the bonfire of the public’s fury.

After the TARP program and after the banks had been bailed out the long fight for reform of big banks and financial institutions began. This part of the book is both maddening and slightly depressing at the same time. Reading between the lines one could argue that the bailout was a bit too effective and that the willingness to undertake ambitious reform disappeared once the worst of the crisis was over. Geithner tells of how the Obama administration fought against those who opposed reform, mainly republicans in congress and the financial sector. The ensuing gridlock wreaked havoc on an already shaky domestic recovery. The Dodd-Frank legislation that came out of all the tough negotiations was essentially a watered down compromise that left no one happy, least of all Geithner and progressive firebrand Elizabeth Warren.

The magic bullet to stop the crisis was the so called stress test, which Geithner and his staff devised to restore confidence in the market and analyze which banks were in danger and needed help. The plan was to develop worst case scenarios for banks and financial institutions, such as a drastic fall in GDP or a large rise in interest rates. These would determine if they had sufficiently large reserves of capital to weather the storm.

Throughout the book I sympathize with Geithner. He is no wolf of Wall Street with a pinstripe suit and a gold watch, but rather a humble and honest man who believes in public service and doesn´t love his country to the detriment of the rest of the world. The chapter about Greece and Europe were, being a European myself, especially painful. Ultimately his book is fascinating and well worth a read since it offers insight into one of the most dramatic periods of the twenty first century as well as financial crises in general. One thing that still bothers me however, is that I don´t think Geithner covered all the fundamental causes of the crisis, which is why I also recommend you to read Aftershock by Robert Reich. Expect a review of that book shortly.