Stress Test

  We were fortunate that things stabilized as rapidly as they did, but it wasn’t an accident. We had put the lurches and zigzags of 2008 behind us, finally deploying overwhelming force to stand fully behind the financial system, finally removing the catastrophic risk of another Lehman or another WaMu. We had defused the bombs of Citi, Bank of America, Fannie, Freddie, and even AIG. We had made a credible commitment through the stress test to recapitalize the system to survive Depression-like losses, through government force if necessary, which made a depression less likely. We had created a new backstop for the credit markets and a public-private fund to buy troubled assets. And by making the system investable again, we had reduced the burden of the rescue for the taxpayer. We had resisted pressure to liquidate firms or nationalize them prematurely, even though some smart people thought we were temporizing.

  Jeremy Stein, who had joined Larry in pushing for more proactive federal intervention, told Lee and Matt Kabaker that summer that the banking system had been in better shape than he had thought, and that we had been right to let the stress test play out.

  “We were wrong,” Stein said. That was gracious of him, but the market’s response to the stress test took us by surprise, too.

  Our financial repairs would not have turned things around by themselves. They worked in conjunction with the Fed’s aggressive monetary stimulus through QE1 and our aggressive fiscal stimulus through the Recovery Act; they were all necessary, and they were mutually reinforcing. They put a floor under home prices, equity markets, and the economy, breaking the vicious cycle of housing losses, financial losses, and economic losses chasing one another down the drain. They helped restore confidence so families and businesses could begin to spend again, so it no longer seemed necessary and rational to hunker down in preparation for the apocalypse. Our international work also had a powerful effect on the global economy, restoring trade finance, preventing the competitive currency devaluations and protectionism that had worsened and prolonged the Great Depression.

  Extraordinary Commitments, but Not for Long

  Government Commitments During the Financial Crisis

  Our direct commitments to the financial system—a combination of guarantees, capital injections, loans, and other support—totaled nearly $7 trillion at their peak. The aggressiveness and design of our response helped us end the panic and exit those programs remarkably quickly, with a positive return to the taxpayer as well as a tremendous boost to the economy.

  Sources: Federal Deposit Insurance Corporation, Federal Reserve Board, and U.S. Treasury Department.

  We began to see a few cracks in the relentless media negativity about our work. Axelrod once emailed to say that the right-leaning New York Times columnist David Brooks had just told him I was the “unsung hero” of the administration. “Start singing!” Axelrod wrote. Brooks did write a nice column that chronicled some of the greatest hits from earlier in the year—a New Republic essay titled “The Geithner Disaster,” a Wall Street Journal survey of forty-nine economists who gave me a failing grade—before concluding that “the evidence of the past eight months suggests that Geithner was mostly right and his critics were mostly wrong.”

  Nevertheless, the dominant story at home was unemployment, which broke into double digits in October. The air was thick with populist recriminations, many directed at me, contrasting our purported generosity to Wall Street with our alleged indifference to Main Street. An eclectic mix of conservative Republicans and liberal Democrats in Congress and in the media began calling for my resignation. Barofsky fueled the fire in November with another tendentious report suggesting we should have haircut AIG’s counterparties, a report that never explained how we could have used the threat of default to extract concessions without crashing the global financial system and triggering a second depression. Barofsky acknowledged in his report that our fears that violating AIG’s contracts would have accelerated the panic were “certainly valid concerns,” but that didn’t interfere with his condemnation.

  I would appear at sixty-seven congressional hearings during my tenure as secretary, and one of my more memorable exchanges occurred with Kevin Brady, a Texas Republican on the Joint Economic Committee, after Barofsky’s report came out. Brady began with a barrage of talking points about how America was bleeding jobs since the passage of the stimulus, when in fact the stimulus had slowed the bleeding; how our out-of-control spending had blown up the deficit, when in fact we had inherited a record deficit; how the world was preparing to abandon the dollar as its reserve currency, which was simply false; and how business investment was down because of fear about health care reform and tax increases, rather than the epic financial crisis we had just endured.

  “The buck, in effect, stops with you,” said Brady, a former U.S. Chamber of Commerce executive. “Conservatives agree that as point person you failed. Liberals are growing in that consensus as well.… Will you step down from your post?”

  I was usually disciplined about letting congressional bluster wash over me, and I started my reply with my usual attempt at calming civility. “Congressman, it is a great privilege to serve this President, and I am very pleased to have a chance to address the range of concerns you gave.” But I decided not to let his rant go unanswered.

  “I agree with almost nothing in what you said,” I continued. “I welcome the advice you’re providing, after you left this President an economy falling off the cliff, the value of American savings cut almost in half, millions of Americans out of work, the worst financial crisis we have seen in generations.”

  Brady mocked my observation that before the stimulus, the economy was disintegrating, while after the stimulus, the economy had started growing.

  “That created several quadrillion new jobs, is that right?” he scoffed.

  “Congressman, it is just a basic fact: A year ago, this economy was falling at the rate of six percent,” I replied. In fact, it had been more than 8 percent, but we didn’t know that yet. “We were losing between half a million and three-quarters of a million jobs a month, and that process was accelerating, not slowing, until the President of the United States took office.”

  Brady seemed frustrated that I was responding with facts. He did not respond in kind.

  “Mr. Secretary, the public has lost all confidence in your ability to do the job,” he declared. “It is reflecting on your president.”

  Your president. That said it all. I tried to explain how our tough choices had helped avert disaster, how eight years of Republican irresponsibility had made our job harder, how President Bush had inherited a $5.6 trillion ten-year surplus before leaving President Obama an $8 trillion ten-year deficit. But to the Tea Party wing of the Republican Party, anything “our” president did was anathema.

  “You have to take responsibility for your decisions,” Brady continued.

  “I take responsibility for anything I am part of doing,” I replied. “What I can’t take responsibility for is the legacy of the crisis you bequeathed the country.”

  “This is your budget! This is your bailout! This is your stimulus!” he shot back.

  “I take full responsibility for those with great honor and pleasure,” I said.

  It was around that time that Sandy Weill, the former Citigroup CEO, was quoted saying that I needed to lighten up. He said I looked like I needed a massage and a vacation.

  THE RECOVERY Act had provided vital fiscal stimulus, and it would continue to pour money into the economy in 2010, but it wasn’t big enough to fill the gaping hole the crisis had torn in U.S. output, or the brutal contraction in government spending at the state and local levels. We needed even more stimulus.

  Every member of the President’s economic team agreed about that, although Christy Romer and Jared Bernstein—and sometimes Larry, too—were the most vocal. We devoted most of our meetings that fall to strategizing about how to design our next round of stimulus. We all knew that after the early Keynesian successes of the New Deal, FDR had abandoned fiscal expansion too
quickly, helping to kill a fledgling recovery in 1937 by trying to balance his budget while there was still mass unemployment. None of us wanted to repeat that mistake and cause a double-dip recession. We all wanted to keep trying to offset the historic drop in private demand. I wasn’t enthusiastic about every line item of the Recovery Act, but its major components—tax cuts for workers, a temporary expansion of the safety net, aid to cash-strapped states, and investments that would put people to work on roads, sewer plants, and medical research—were pulling us back from the abyss.

  Unfortunately, “stimulus” had become a dirty word in American politics. With unemployment in double digits, this yawning gap between the perception and the reality of the Recovery Act was probably inevitable. The stimulus was a jobs bill passed at a time when jobs were vanishing; our insistence that it was preventing much worse pain, while true, was not compelling to people in acute pain. Republicans were calling for massive and immediate spending cuts, trying to reinvent themselves as deficit hawks, feeding on public unease with trillion-dollar deficits and impatience with the pace of recovery. Many Democrats were also reluctant to support anything that could conceivably be described as “stimulus” in a thirty-second attack ad. And the public was dubious of the idea that when families and businesses were tightening their belts, those of us in government should borrow more money from China so we could loosen ours.

  In our internal debates that fall, we did not spend much time arguing over a massive “second stimulus.” Rahm and the President’s legislative staff made it clear there was no appetite for that on the Hill. So we focused on a more modest but still significant mix of extensions to Recovery Act programs and proposals for new tax cuts and infrastructure spending. I thought the most plausible and responsible legislative strategy was to pair proposals for short-term stimulus with proposals for medium-term deficit reduction—the Saint Augustine approach of fiscal chastity, just not now. I thought requesting “naked stimulus,” more money without offsetting cuts or a credible plan to reduce deficits down the road, would be a waste of time and political capital. But Larry warned that even appearing to embrace deficit reduction during such a severe downturn would be seen as a 1937-style embrace of austerity, conceding the battle over Keynesian economics without a fight. He made the somewhat prescient argument that we would end up getting cuts we didn’t want, but not the stimulus we needed.

  In those internal debates, I was usually the fiscal hawk, arguing that we had to show the world we would address our unsustainable long-term fiscal path even as we pushed for more near-term stimulus. I told Larry that winter that we needed to get ahead of the fever that was building for austerity. I thought we should try to frame the debate by proposing a long-term fiscal plan, including entitlement reforms to put Medicare and Social Security on more sustainable paths. He said that would be a dumb validation of austerity arguments, needlessly alienating our Democratic allies, and a waste of time, since Republicans would never go along. And I had some sympathy, probably unwisely, for a plan floating around in Congress to create a bipartisan deficit reduction commission. It seemed like it was worth a shot.

  But I was not an austerian. I was an Augustinian. I did not want to hit the economic brakes. I just thought, perhaps naïvely, that showing our willingness to hit the brakes in the future would give us a better chance to persuade Congress to let us keep our foot on the gas pedal now. I remember early in the administration, Larry was appalled by a White House event where the President ordered $100 million in budget cuts, which Larry saw as economic malpractice at a time of vanishing aggregate demand. But while the theater of the event was pretty transparent—$100 million was a rounding error in the federal budget—I thought it made sense to express solidarity with Americans concerned about government waste, even though I thought we needed to do more short-term stimulus.

  I believed that progress toward a long-term plan for deficit reduction was important, but I never thought it was a higher priority than economic growth; in fact, I didn’t think we could reduce future deficits without reviving the economy first. The Great Recession’s shriveling of tax revenues and increases in temporary safety net spending were primary drivers of our current fiscal imbalance. When the unemployed had jobs again and businesses had profits again, they would pay more taxes and require less help from the safety net, and near-term deficits would shrink again.

  The turnaround of the financial system and the remarkably quick return to economic growth did make me more confident than I should have been about the economic outlook. I believed the worst was behind us, and I told the President that. I took too much comfort from Fed forecasts consistently projecting growth rates between 3 and 4 percent. But the President did not stop pushing for us to do more for the economy. And we continued to push for more stimulus in every budget and every fiscal negotiation. We didn’t get as much as we wanted, but that wasn’t because we embraced austerity, or because the President pursued health care reform instead of “focusing on jobs.” I never saw his other priorities get in the way of his focus on the economy.

  The problem was in Congress. By late 2009, Republicans were holding up the extension of unemployment benefits during the worst recession in seventy-five years. They opposed small business tax cuts that had, until that point, been central to their agenda. After complaining that the Recovery Act didn’t include enough infrastructure, they began opposing infrastructure. And the idea that conservative Democratic senators in states such as Arkansas, Indiana, and Nebraska would have embraced big spending proposals if only the President had used his bully pulpit to crusade for them is fantasy. We would squeeze several modest stimulus bills through Congress in 2010—including tax cuts for small businesses and state aid to protect teaching jobs—by offsetting them with equivalent budgetary savings over ten years. But we never got more than a few Republican votes for any of them. Naked stimulus would have been a nonstarter. And legislation that can’t actually pass Congress can’t stimulate the economy.

  The President stopped using the s-word in 2009, and he would talk more about deficit reduction in 2010, a rhetorical pivot that angered some liberals. He was a Keynesian, but he didn’t see the point of belaboring Keynesian arguments that the public wasn’t buying. He would also create a bipartisan fiscal commission, after Senate Republicans blocked an effort to create one through legislation. He would appoint former Republican Senator Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles to co-chair the commission, which was assigned to recommend policies to cut the deficit to below 3 percent of GDP by 2015.

  Somehow, we convinced the left that we were committed to austerity and the right that we were runaway spenders. As usual, our policies were in a political no-man’s-land. Nobody seemed to think we were striking the right balance.

  BY THE fall of 2009, our housing policies were probably even less popular than our fiscal policies.

  One of every eight mortgages was in foreclosure or default, a disaster for suffering families as well as communities blighted by abandoned homes. And some of the initiatives the President had launched in Arizona in February to try to reverse the slide were off to an embarrassingly slow start. The HARP program, designed to help 4 to 5 million borrowers refinance their mortgages, had helped refinance less than 100,000 homes in its first six months. The HAMP program, our effort to reduce the mortgage payments of another 3 to 4 million homeowners at risk of foreclosure, had facilitated less than 2,000 permanent loan modifications. It had produced temporary relief for another 360,000 homeowners, but a thicket of problems related to mortgage servicers was blocking their path to permanent relief.

  This mess quickly became Exhibit A for progressives who believed we cared more about Wall Street than Main Street. I held a bunch of meetings with angry Democrats—in Speaker Pelosi’s office, Senate Majority Whip Dick Durbin’s office, and all over the Hill—who derisively questioned the depth of our commitment to help homeowners. Elizabeth Warren, one of our most ardent and eloquent liberal critics, devoted a
series of hearings to the start-up difficulties of HARP and HAMP, as well as her larger problems with TARP.

  “The people who funded the bailout, the American taxpayers, are bombarded with news that the Wall Street firms that benefited from TARP assistance are reporting windfall quarterly profits … while unemployment remains close to 10 percent, loan defaults continue to rise, and the foreclosure crisis has no apparent end in sight,” she said at a hearing in October. I thought she put the dilemma quite well.

  The next day, Warren stopped by my office. I told her we were as frustrated as she was at the glacial early pace of our housing efforts.

  “At some point, you should tell me what you propose we do,” I said.

  Warren seemed taken aback. To her credit, and to my surprise, she admitted that she hadn’t really thought about what specifically we should be doing differently. But she promised to think about it and get back to me.

  A few days later, she called back with three ideas. One was reasonable but modest. Another we were already working on. The third was large-scale principal reductions, which we didn’t think would be a cost-effective use of our limited resources. Housing was an impossibly complex issue that didn’t lend itself to simple solutions, and the limitations of our housing programs were a lot easier to identify than they were to fix. We were under intense pressure to improve these programs—not only from our many critics, but from the President, who was deeply dissatisfied with our early results, and constantly pushed us to do better. He often sent us the heartrending letters he had received from families facing foreclosure; they clearly haunted him. We were dissatisfied and frustrated, too. Some of our programs were stumbling out of the gate. Others weren’t ambitious enough. We would keep looking for ways to expand their power, reach, and effectiveness throughout the President’s first term.