How does Tim Geithner change his mind?
For me, the most interesting part of Liaquat Ahamed’s Tim Geithner exit interview is this bit:
LA: You spent thirty years working on economic statecraft both internationally and domestically. You’ve been involved in just about every major financial crisis of this era, starting with Japan, the Asian crisis, Mexico, 2008, now the euro crisis. Each one seems to be worse than the other. What lessons have you learned from dealing with all these crises? You alluded earlier to the idea of taking political costs upfront. Can you amplify on that?
TG: Well, they’re all different in their contours and causes. But they usually have this common feature, which is a huge increase in leverage in the financial system. When the shock hits or the tide turns, as people bring their borrowings down, it puts enormous pressure on the economy as a whole. These things tend to reinforce each other, amplify each other. The financial deleveraging feeds on the economic weakness, the economic weakness forces more financial deleveraging, and you have this vicious spiral.
And I think what we have all learned from history, mostly from mistakes that we and others have made is that confronted with that, you need to apply a lot of force, with a lot of speed across the full spectrum of the policy tools we have. Which means monetary policy has to be very aggressive. You need to make sure that fiscal policies are very supportive of growth so you’re compensating for the huge collapse in private sector demand. And you need to be incredibly aggressive in making sure that you recapitalize the financial system. If you do those things incrementally, where you do one but not all three, then you’ll be left with much more damage. You have to do all of them. None of them is effective individually.
That line about the “mistakes that we and others have made” is about as close to an apology as we’ve seen from Tim Geithner, for anything that he’s done. It doesn’t go nearly far enough, of course. As the president of the New York Fed from 2003 to 2009, he sat on the FOMC, happily signing off on Alan Greenspan’s bubble-inflating policies, and also ran the most important of the many institutions charged with regulating American banks and reining them in when they got too ebullient. Clearly he did badly in both respects.
But the most obvious case in which Geithner has done a complete U-turn from his former views is that of Indonesia. The great Australian financial journalist Peter Hartcher explained this very well back in 2009, when Geithner took over as Treasury secretary. He quoted former Australian president Paul Keating explaining in a nutshell exactly what Geithner did wrong: “Tim Geithner was the Treasury line officer who wrote the IMF program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.” With hindsight, Geithner did the exact opposite of what he is now prescribing in the event of a crisis:
Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
Geithner thought Asia’s problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.
The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.
But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans – Thailand, South Korea and Indonesia – all had sound public finances.
The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.
But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.
Keating continued: “Soeharto’s government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century.”
Indonesia in 1998 had a problem not dissimilar to what we saw in the US 20 years later: a sudden credit crunch afflicting a country whose government finances were fundamentally sound. Geithner’s solution, now, is for the government to “be very aggressive” spending money, and for the central bank to provide its own monetary support, all in the service of “compensating for the huge collapse in private sector demand”. But that’s not what he thought in 1998, when he forced the Indonesian government to cut spending and raise interest rates — precipitating a recession much larger than anything the US saw during the financial crisis.
Now that Geithner is going to write a book, I very much hope he goes as far back as Indonesia, and covers his two-year tenure at the IMF as well, rather than glossing over those episodes on the way to the juicy stuff about the more recent crisis. For one thing, it will be fascinating to see when and how his mind changed on such issues. And for another thing, it’s conceivable that the book might shed light on the how this consummate career government technocrat thinks — and thereby shed light on much of the system of global governance.
For Geithner has always stood foursquare in the center of economic orthodoxy, wherever it might be at the time. He’s no bomb-thrower, and will never think of himself as someone who speaks truth to power, in the way that the likes of Sheila Bair and Neil Barofsky do. Rather, he epitomizes power: yesterday, for instance, he rejoined the Council on Foreign Relations, the American perma-Davos on Park Avenue, where the great and the good mingle self-importantly and (mostly) in smug and well-cushioned secrecy. There he will work closely with (and was probably recruited by) Bob Rubin, setting up Advisory Committees and Workshops and Independent Task Forces and Plenary Sessions and Invitation-Only Roundtables, all the while mingling with the bankers and policymakers and politicians who might delude themselves that they’re working for the greater good, but who are convinced that the rest of us just couldn’t handle being exposed to what goes on behind the CFR’s expensively-paneled doors.
Geithner’s book would never be so indiscreet as to reveal what happens at meetings of, say, the Group of 30, which he joined in 2006. But if I have any hope for it, it’s that we’ll somehow be able to read between the lines to understand just how the international technocratic consensus reshapes itself over time, even as its practitioners remain certain, at any given time, that they’re advocating the clear best course of action. Geithner — just like his mentors Rubin and Summers — is not a man given to much self-doubt, except perhaps when it comes to his political skills on Capitol Hill. He’s a thoughtful and intelligent man, but at the same time he seems never to worry very much about the unavoidable uncertainties inherent in all economic policymaking. Given how spectacularly wrong he was in Indonesia, I’ll hold out just one hope for Geithner’s book: that it might explain how his ilk exhibit the pre-eminent skill of global technocrats — the way that they can hold two diametrically opposed views at two different times, without ever even realizing that they’ve changed their mind.