Newsmakers: Timothy Geithner on the financial crisis and the government's response.

Dec. 23 2009 7:09 AM

"We'll Be Judged on How We Dealt With the Things That Were Broken"

Treasury Secretary Timothy Geithner on the financial crisis and the government's response.

This conversation appears in Newsweek's "Interview" issue. To read more of the magazine's interviews with the year's biggest newsmakers, go to newsweek.com.

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GEITHNER: It complicates it a lot. But, look, we're not proposing to make the Fed the all-powerful overseer of the entire financial system. We're proposing to trim the Fed's emergency authorities. But the basic principle is that these large, complex institutions need to have a strong set of constraints put on them, designed and applied by the Fed. The Fed got some things wrong, could have done some things better, particularly on the consumer side. But I think basically the Fed was incredibly brave and creative and led central banks around the world away from the dangerous view that this wasn't a serious crisis, and provided a bridge to the government deciding to put the broader economic arsenal to work.

GROSS: Dial back to March: Which of the positive developments that have occurred would you have said would be most surprising?

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GEITHNER: The [GDP] growth is better and strong­­er than we expected, than anyone expected, and the dramatic improvement in the strength of the financial system at much lower cost—trillions of dollars of emergency guarantees done, finished, closed down. By adopting a strategy designed to [shore up financial institutions] with private capital, we achieved much better basic results at a much lower cost to the taxpayer. A lot of the insurance we provided came with explicit fees that are going to generate tens of billions of dollars in returns. The stress tests this spring forced people to raise capital and have a more realistic sense of losses going forward. We're going to have $175 billion of the $240 billion in TARP payments back by the end of next year.

GROSS: There are other costs associated with these efforts, like the weak dollar and the Fed's large balance sheet. Shouldn't we be worried about them?

GEITHNER: I don't see that with the dollar. When fear was most acute, people wanted to be in Treasuries and hold dollars. Even today, when you have moments of darkness, people want dollars. The Fed's balance sheet is larger because it understandably decided to run a monetary policy to break the recession. But there are other costs not captured by what we've discussed. The government will bear losses in AIG, the automobile companies, and in Fannie and Freddie. But the losses there will probably be lower than what people think, too.

GROSS: The biggest downside surprise?

GEITHNER: The [high] level of unemployment rel­ative to what was happening in the economy as a whole. I'm not an economist, but almost all forecasters missed that. And that's hugely consequential, because it's the prism through which most people view basic economic health.

GROSS: What portions of the financial meltdown will the government still be dealing with a year from now?

GEITHNER: This was the worst thing that's happened in 70 years, and it's going to have a tail. Unwinding our stakes in autos, in AIG, and in Fannie Mae and Freddie Mac is going to have a somewhat longer fuse. The transition away from this massive government intervention in the housing market is going to take some time. A year from now, the FDIC will still have a large stock of assets from institutions they've taken over.

GROSS: There's a perception that you regard your portfolio narrowly, as primarily focused on the health of Wall Street, with Main Street a distant second.

GEITHNER: My first and essential responsibility was to fix and reform the financial system. That was necessarily going to be the principal part of what people saw. About half my time from the beginning has been spent on the design of the broader economic strategy. The idea that we did not do much for the broader challenges facing the country is completely unjustified. The Recovery Act itself was not just a sweeping, essential force for growth but included a bunch of targeted investments in education, energy, environment, health care that will have huge long-term benefits.

GROSS: What keeps you up at night? What do you worry about?

GEITHNER: Apart from whether my kids are going to be happy in life? What concerns me is whether we will be able to do well enough on the things that are most important. The hardest thing in governing is to make politically achievable the policies that are economically good, just, and sensible for the country. That's a challenge, partly because of the damage done to the confidence in government and policy in the last two decades, partly because of the populism, and partly because we have to build broad consensus on the Hill in order to do anything meaningful. What countries need in crises the president delivered. He said, this is the plan, and he got it done. But on a range of things that really matter to the future, it requires a coalition to really make legislation happen.

GROSS: On Intrade, the current-events futures market, there's a contract on a Geithner resignation/firing.

GEITHNER: My wife might have created one of those contracts.

GROSS: There have been, and continue to be, calls for you to go. How do you deal with those?

GEITHNER: I spent most of my professional life in this building. Watching the politics of the things we did in the past financial crises in Mexico and Asia had a powerful effect on me. The surveys were 9-to-1 against almost everything that helped contain the damage. And I watched exceptionally capable people just get killed in the court of public opinion as they defended those policies on the Hill. This is a necessary part of the office, certainly in financial crises. I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they're necessary to do and better than the alternatives. We'll be judged on how we dealt with the things that were broken in the country. We broke the back of the worst financial panic in three generations, more effectively and at a much lower cost than I think anybody thought was possible.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

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