Exclusive - Timothy Geithner Extended Interview Pt. 4

  • Aired:  05/21/14
  •  | Views: 90,025

Timothy Geithner asserts that it was not possible to deliver a stimulus program that would have been more popular or more effective in the wake of the financial crisis. (10:33)

LET'S AGREE, WHAT'S THE BESTTEST, OF MEASURING THE CHOICE WE

MADE?

LET'S PICK ONE.

>> Jon: OK, WHY DON'T WE LOOK ATIT IN THE FINAL TEST, WHERE ARE

THE BANKS NOW AND WHERE ARETHOSE HOMEOWNERS?

LET'S MAKE THAT TEST.

>> THAT'S A GOOD TEST. THAT'S AGOOD TEST.

>> Jon: SO HERE ARE THE BANKS.

>> LET ME DO IT. LET ME DO MY --

>> Jon: THE BANKS AREPROFITABLE TO THE LEVELS THAT

THEY WERE AT PRETTY MUCH PRIORTO THE CRISIS.

THEY HAVE MORE MONEY INDERIVATIVES THAN THEY HAD BEFORE

THE CRISIS AND THEYARE LEVERAGED TO ABOUT

22 TO 1 INSTEAD OF 30 TO 1.

>> NO, THAT'S NOT QUITE RIGHT.BUT KEEP GOING, DO YOUR --

>> Jon: SO, THEY HAVE REGAINEDTHE AMOUNT OF MONEY

THEY WERE MAKINGBEFORE PROFITWISE, YES?

BASICALLY THEY'RE MAKING THESAME PROFITS AS THEY WERE

MAKING BEFORE AND THE DOW ISUP TO WHERE IT WAS BEFORE,

SO THEY'RELIVING PRETTY FAT AND HAPPY, AND

THE 8 TO 10 MILLIONHOMEOWNERS WHOSE HOUSES ARE

STILL UNDERWATER ARE STILLFACING FORECLOSURE AND THEY

CANNOT GET OUT OF -- AND THEECONOMY, GIVEN THAT DRAG ON THE

HOUSING MARKET, HASN'T RECOVEREDTO THE EXTENT IT COULD BECAUSE

POORER PEOPLE WILL SPEND MORE OFTHE MONEY THAT COMES TO THEM

THROUGH STIMULUS THAN ATRICKLE-DOWN BAILOUT AND SUPPLY

SIDE SUBSIDIES.

>> MAYBE I'M MORE ON YOUR SIDETHAN YOU THINK. BUT,

CAN I GIVE YOU MY VERSION OF THEWAY TO THINK ABOUT IT?

>> Jon: YES.

>> THE ECONOMY TODAY STILLPRETTY TERRIBLE, TO BE HONEST.

(LAUGHTER)>> Jon: YOU JUST WROTE A BOOK

ABOUT HOW IT WORKS!

>> NO, I'M JUST SAYING -->> Jon: YEAH.

>> ECONOMY TODAY STILL NOTTHAT STRONG.

DEEP SCARS LEFT OVER,UNEMPLOYMENT REALLY HIGH,

HOUSING STILL PRETTY BAD. >> Jon: I AGREE.

>> PROBABLY WORSE THAN AMERICANS

HAVE SEEN IN A LIFETIME,TERRIBLE.

>> Jon: SLOWER BOUNCE BACK.

>> OKAY, BUT, THE RIGHT WAY TOLOOK AT WHAT WE DID AND IT'S

IMPACT WAS ECONOMY, AFTERFALLING OFF THE CLIFF,

SHRINKING AT A RATE OF 9% ATTHE END OF 2008 WAS GROWING

AGAIN IN SIX MONTHS, HAS GROWNAT AN AVERAGE OF 2.5% SINCE

RECOVERY STARTED AND BY ANYSTANDARD OF RECOVERY IN

FINANCIAL CRISIS IN THE LAST 100YEARS, BECAUSE WE DID THIS SET

OF PRETTY OFFENSIVE, SEEMINGLYUNFAIR SET OF THINGS, WE HAVE AN

ECONOMY THAT IS, AGAIN,TERRIBLE, HARD, A LOT OFCHALLENGES,

BUT MUCH, MUCH BETTERTHAN IT WOULD HAVE BEEN.

NOW, YOU COULD SAY -->> Jon: BUT THE SUGGESTION IS

IT'S MUCH, MUCH BETTER THAN ITWOULD HAVE BEEN HAD WE DONE IT

SLIGHTLY DIFFERENTLY AND MAYBEWE COULD HAVE MITIGATED --

BECAUSE HERE'S THE THING I WORRYABOUT AND YOU WROTE ABOUT IT IN

THE BOOK AND THIS IS SOMETHINGCALLED "CAPTURE."

CAPTURE IS THIS IDEA THAT THEGOVERNMENT IS BEHOLDEN TO THESE

POWERFUL INTERESTS IN A WAY THATIS TO THE DETRIMENT OF THE

AMERICAN PUBLIC, AND YOU WORRYABOUT IT WHEN YOU WERE AT THE

FED.

YOU REPLACED THE BOARD WITH GUYSTHAT WERE BIG IN WALL STREET AND

GAVE THE PERCEPTION THAT THE FEDWAS NOW SUBJECT TO CAPTURE.

ECONOMIES ARE PERCEPTIVE.

SO YOUR REALITY OF, BUT WEAVOIDED A DEPRESSION, DOESN'T

FIT THE REALITY OF PEOPLE'SPERCEPTION THAT THEY HAVEN'T

AVOIDED THEIR OWN PERSONALDEPRESSION, THAT THEY ARE LIVING

UNDERWATER AND THEY LOOK ANDTHEY SEE THESE BANKS HAVE

CREATED THIS PROBLEM.

>> THAT'S TRUE, BUT YOU'RELIVING IN A WORLD WHERE YOU'RE

ASSUMING THAT IT WAS POSSIBLE TODELIVER A PROGRAM THAT WOULD

HAVE BEEN MORE POPULAR, MOREFAIR IN PERCEPTION AND MORE

EFFECTIVE IN HELPING THE AVERAGEPERSON, AND THAT PERCEPTION IS

BASED ON AN ILLUSION ANDMISREADING OF WHAT --

>> Jon: I WOULD SUGGEST YOU'RELIVING IN A WORLD WHERE YOU

BELIEVE IT WASN'T POSSIBLE, ANDTHAT THE REASON YOU BELIEVE

THIS -- AND I MEAN THIS AS NODISRESPECT BECAUSE I THINK YOU

ARE ATTEMPTING TO TELL YOURSTORY IN THE BEST WAY

POSSIBLE -- BUT I BELIEVE THATYOU'RE LIVING IN THAT WORLD

BECAUSE YOU ARE SURROUNDED BYTHOSE WHO CREATED THIS DISASTER

IN THE FIRST PLACE.

>> LET ME JUST REMIND YOU OF ONETHING.

(APPLAUSE)>> Jon: SUMMERS, THOSE GUYS. BUT

LET'S TALK ABOUT THIS. THEDEREGULATION, THE CREATION

OF COMMERCIAL BANKS BECOMINGINVESTMENT BANKS, INVESTMENT

BANKS BECOMING COMMERCIAL BANKS,THE BANKS BECOMING NATIONWIDE,

ALL THOSE FIRE WALLS BEINGDISSIPATED, THAT IS WHAT MADE

THIS HOUSING CRISISALGORITHMICALLY EXPONENTIALLY

TERRIBLE FOR THE WORLD.

>> I KNOW YOU BELIEVE THAT BUTIT'S NOT QUITE TRUE.

>> Jon: TELL ME WHAT'S WRONGABOUT THAT.

>> I'LL GIVE YOU A SLIGHTLYDIFFERENT VERSION.

>> Jon: ALL RIGHT.

>> I'M PRETTY SURE, COME CLOSER.I MEAN --

>> Jon: YOU'RE ABSOLUTELY RIGHT,I FUNDAMENTALLY BELIEVE THIS.

>> I KNOW YOU BELIEVE IT DEEPLYAND YOU'RE A THOUGHTFUL, SMART

GUY, AND A LOT OF PEOPLE AGREEWITH YOU, BUT LET ME SAY IT A

LITTLE DIFFERENTLY.

>> Jon: OKAY.

>> WE HAD THIS FINANCIAL SYSTEMTHAT OUTGREW ALL THE PROTECTIONS

WE PUT IN PLACE AFTER THE GREATDEPRESSION AND BUILT UP ALL THIS

RISK -- YOU MAY THINK I'M MAKINGYOUR POINT BUT IT'S A LITTLE

DIFFERENT FROM YOUR POINT -- ALLTHIS RISK OUTSIDE THE PROTECTION

AND CONSTRAINTS AGAINST RISK WEPUT ON THE BANKS IN FORMS

THAT MADE US TERRIBLYVULNERABLE TO A PANIC AND

RUN IN INSTITUTIONS LIKE THEINVESTMENT BANKS,

A.I.G., FANNIE, FREDDIE,WHATEVER.

>> Jon: RIGHT.

>> AND THAT HAPPENED BECAUSETHERE WAS A LONG PERIOD OF TOO

MUCH CONFIDENCE, LOST THE MEMORYOF CRISIS, PEOPLE THOUGHT THERE

WAS NO RISK AND THAT'S WHATHAPPENED.

>> Jon: BUT THEN, WHY ALLOWCOMMERCIAL BANKS TO BE A PART --

DOES CITIGROUP NEED A BAILOUT IFTHEY'RE STILL CITIBANK? DOES

BANK OF AMERICA NEED A BAILOUTIF THEY'RE NOT SPECULATING.

>> LOOK AT OUR CELEBRATEDFAILURES IN THIS PLACE, IN THIS

CRISIS. LOOK AT THE GUYSON THE OTHER SIDE OF THE

WALL, BEAR STEARNS, LEHMANBROTHERS, A.I.G., FANNIE AND

FREDDIE, G CAPITAL WAS AT THERISK OF FAILURE, ALL THE OTHER

INVESTMENT BANKS, THEY WERETERRIBLY VULNERABLE TO PANIC

BECAUSE NO CONSTRAINTS ONRISKS, VULNERABLE TO RUNS.

LET'S LOOK AT THEBANKS. YOU HAD A BUNCH OF BANKS

TERRIBLY VULNERABLE TOO.COUNTRYWIDE, WACHOVIA, WAMU,

THOSE WERE MOSTLY JUST SIMPLECOMERCIAL BANKS.

NOW ALL THEM WERE TERRIBLYVULNERABLE BECAUSE NONE OF THEM

PLANNED FOR THEPOSSIBILITY THAT HOUSE PRICES

MIGHT FALL AND WE'D HAVE ATERRIBLE RECESSION.

THE GUYS THAT STRADDLED THE LINETHAT YOU WERE REFERING TO

BETWEEN INVESTMENTAND COMMERCIAL BANKS, YEAH, THEY

WERE KIND OF DUMB IN RETROSPECTTOO. BUT MUCH LESS VULNERABLE

IN SOME WAYS TO THOSE OTHER GUYSON THE OTHER SIDE.

>> Jon: BUT AT THAT POINT,THOUGH, IT'S A REGIONAL CRISIS.

WHEN YOU LOOK AT THE HOUSINGCRISIS OF THE '80s AND '90s,

IT CREATED A RECESSION BUT NOT AWORLDWIDE PANIC.

>> THAT WAS A MILD, QUAINT --(LAUGHTER)

THIS WAS LIKE AN EXISTENTIALTHREAT TO THE COMPANY AND GLOBAL

ECONOMY, MUCH GREATER SCALE.

>> Jon: WHY WAS THE SCALEGREATER?

>> BECAUSE THE SIZE OF THE BOOMBEFOREHAND.

>> Jon: WHAT WAS THE BOOM?

THE BOOM WAS THIS BELIEF THAT ITWAS SAFE TO LEND AND BORROW.

>> Jon: AND SAFE TOSECURITIZE. YOU DON'T BELIEVE

DERIVATIVES PLAYED A PART INMAGNIFYING THE CRASH?

>> I KNOW YOU BELIEVE THIS BUTLET ME GIVE YOU MY VIEW OF THE

REALITY.

THERE WAS A LOT OF FANCY STUFFTHAT PEOPLE DIDN'T UNDERSTAND.

>> Jon: YES.

>> WHATEVER YOU WANT TO CALL IT.

>> Jon: DERIVATIVES.

>> BUT THE MISTAKE THAT WASEXISTENTIAL WAS A MUCH MORE

SIMPLE THING. AND IT HAPPENED INMANY FORMS,

SIMPLE LOANS, THINGS LIKE THAT,IN WHICH WAS IT IS SAFE FOR ME

TO LEND AND TAKE ON LEVERAGEBECAUSE I DON'T THINK HOUSE

PRICES ARE GOING TO FALL, IDON'T THINK THERE MIGHT BE A

RISK OF RECESSION, AND THE OTHERFANCY, COMPLICATED STUFF, SURE,

AT THE MARGIN MADE THINGS WORSE,BUT NOT CENTRAL TO IT.

>> Jon: I WOULD SUGGEST THATTHAT DROVE THE ENTIRE BOOM.

THE GUYS START BUNDLING THIS ANDMAKING THE MONEY.

SO THE SUB-PRIME LOANS, THERE'SA RUSH TO GET ON THAT BUSINESS.

YOU DON'T BELIEVE THE MONEYPEOPLE WERE MAKING IN

DERIVATIVES AND SECURITIESDROVE PEOPLE TO MAKE MORE OF

THESE SUB-PRIME LOANS BUNDLEMORE OF

THEM INTO DERIVATIVES ANDSECURITIES, COLLATERALIZED IT

AND STARTED TO SWELL THIS THINGOUT?

THAT WAS THE BUBBLE!

>> THAT HAPPENED, A LOT OFPREDATORY LENDING HAPPENED.

A LOT OF BAD STUFF HAPPENED, ANDTHAT WAS FOR SURE MAKING IT

WORSE. BUT THAT WASN'T THE CORECAUSE.

THE CORE CAUSE OF THIS WAS AMUCH MORE SIMPLE THING.

>> Jon: WHICH IS?

>> WHICH IS THAT A LEVEL OFCONFIDENCE THAT IT'S SAFE TO

TAKE ON THIS RISK AND LEVERAGEBECAUSE PEOPLE DID NOT ASSUME IT

WAS POSSIBLE FOR THIS COUNTRY TOFACE THE RISK OF A GREAT

COLLAPSE AND RECESSION ANDPANIC.

PEOPLE DIDN'T THINK HOUSE PRICESWOULD FALL, AND THAT BELIEF WAS

FORMED BY A LONG PERIOD WHEREPEOPLE THOUGHT --

>> Jon: BUT AS A GUY WHO'SRUNNING THE FED, DON'T YOU SEE

THAT AND SAY, EXCUSE ME -->> WE DID.

WE DID.

YOU ASKED ABOUT CAPTURE ANDPERCEPTION AND MY EXPERIENCE IN

THIS.

>> Jon: RIGHT.

>> LET ME TELL YOU WHAT WAS MYFORMATIVE EXPERIENCE.

>> Jon: SURE.

>>I WAS A CIVIL SERVANT OFTHE TREASURY ON THE

INTERNATIONAL PART AND I WATCHEDAND GREW UP WATCHING THESE

CRISES HAPPEN AND CAUSE GREATDEPRESSION LIKE OUTCOMES

IN A BUNCH OF EMERGINGECONOMIES. I GREW UP WITH THIS

BASIC SENSE OF FEAR OF THEFRAGILITY OF THE SYSTEM, AND

BORN IN EXPERIENCE BY WATCHINGTHE DAMAGE HAPPEN AND COUNTRIES

FRANKLY SCREW IT UPBY TRYING TO EITHER NOT TAKE TOO

MUCH RISK OR NOT LETTING THEFINANCIAL BURDEN -- ALL

THE CLASSIC MISTAKES, WELLINTENTIONED BUT MISTAKES.

>> Jon: THE IDEA THAT YOUAPPLY THE POWELL DOCTRINE OF

OVERWHELMING FORCE IN TERMS OFRELIQUIDATING AND

RECAPITALIZING THE BANKS.

>> ONLY BECAUSE SCARRED BYEXPERIENCE, IT WAS THE ONLY WAY

TO GIVE PEOPLE A MEASURE OFJUSTICE AGAINST THE RISK OF A

MUCH WORSE OUTCOME.

I UNDERSTAND WHERE YOU THINK ITWOULD HAVE BEEN POSSIBLE TO DO

THAT AND OTHER THINGS, TOO, BUTYOU'RE ASSUMING A UNICORN

BECAUSE YOU'RE ASSUMING SOMEHOWWE COULD GET A WAY TO GET

CONGRESS TO LEGISLATE HUNDREDSOF BILLIONS OF DOLLARS INSTEAD

OF DOING ALL THESE OTHER THINGSAND GIVE THEM DIRECTLY TO THE

HOME OWNER AND THAT WOULD HAVEBEEN MORE EFFECTIVE.

>> Jon: THE ONLY REASON I SAYTHAT IS BECAUSE SOMEHOW A

UNICORN DID APPEAR FOR THE BANKSAND SOMEHOW A MYTHICAL CREATURE

AROSE OUT OF NOWHERE ANDPRESENTED THEM WITH BILLIONS AND

BILLIONS OF DOLLARS --(LAUGHTER)

OUT OF NOWHERE.

>> JON, I AGREE WITH YOU --(APPLAUSE)

>> Jon: SO IF THAT'S NOTMAGICAL THINKING, I DON'T KNOW

WHAT IS.

Loading...