Stress Test

  I had a long history and a good relationship with Mario Draghi, and I kept encouraging him to use the power of the ECB to ease those tail risks. “I fear Europe and the world will again look to you for another dose of smart, creative central bank force,” I wrote to him in June. Draghi knew he had to do more, but he needed the support of the Germans to do it, and the Bundesbank representatives on the ECB kept fighting him. They didn’t have a plan to save Europe, but they knew what they were against. They took a strict interpretation of the limits of the ECB’s legal authority, and they opposed anything that could create moral hazard, which included just about any strategy that had a chance of calming the crisis.

  That July, Draghi and I had several conversations reminiscent of my talks with Ben Bernanke in January 2008, when Ben decided he would rather be hung for his own judgments than the judgments of the Fed’s inflation hawks. I told Draghi that there was no way any plan that could actually work would get Bundesbank support. He had to decide whether he was willing to let Europe collapse.

  “You’re going to have to leave them behind,” I said.

  Draghi knew that. Credit spreads were blowing up again. The world was no longer confident the eurozone was viable. Germany was threatening to cut off the Greeks, who had failed to meet their austerity commitments—partly because of foot-dragging, but mostly because it’s hard to reduce your debt-to-GDP ratio when your GDP is crashing at a 7 percent annual rate. On July 26, 2012, a Citigroup report concluded there was a 90 percent chance that Greece would leave the euro within eighteen months. And other weak countries in Europe seemed likely to follow.

  That day, toward the end of a speech at a London investment conference, Draghi uttered twenty-three words that would prove to be a turning point. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said. “And believe me, it will be enough.” Draghi had not planned to say this, but he was so alarmed by the darkness expressed by hedge funds and bankers at the conference that he ad-libbed an unequivocal commitment to defend Europe. Markets were delighted. At the time, though, I was worried that Europe would again undercut a commitment to action with caveats and Old Testament backsliding. The words were welcome, but the ECB didn’t have a specific plan to back up Draghi’s statement.

  A few days later, I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible—even desirable—strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed, because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.

  I found the argument terrifying. Letting Greece go could create a spectacular crisis of confidence, regardless of what Europeans committed to do afterward. It wasn’t clear why a German electorate that hated the Greek bailouts would feel much better about rescuing Spain or Portugal or anyone else. And the flight from Europe, once it got momentum, might be impossible to reverse.

  After Sylt, I stopped in Frankfurt to see Draghi. He was reassuring, in the sense that he recognized how bad the situation was and knew the ECB would have to deliver. But it wasn’t clear yet what they were actually prepared to do. When I got back to Washington, I told the President I was deeply worried, and he was, too. The U.S. economy was still growing steadily but modestly; a European implosion could have knocked us back into recession, or even another financial crisis. As countless pundits noted, we didn’t want that to happen in an election year, but we wouldn’t have wanted that to happen in any year.

  Two days after I saw Draghi, the ECB laid the groundwork for a program it announced in early September called “Outright Monetary Transactions,” where it committed to buy the sovereign bonds of eurozone countries in secondary markets. The program was essentially a “Draghi Put,” a promise to put a floor under bond prices in European countries, lowering their borrowing costs and making it clear they would not be allowed to default. Draghi did not consult Merkel and Schäuble in advance, but they supported him publicly, even though the Bundesbank’s ECB representative voted no.

  The announcement of the new bond-buying program—and Merkel’s vital support—persuaded the markets that the Europeans were serious about keeping the eurozone intact. The risk indicators that had been deteriorating that summer all started moving in the right direction. The mere existence of the program soothed doubts about the European firewall, building confidence that troubled countries would avoid default; so far, it has never been used. When central banks and governments take catastrophic risk off the table, markets become investable again.

  But Europe’s commitments were still messy and incomplete. They had no real plans to build a common European deposit insurance system. They could not agree to pool together their resources to support a substantial Europe-wide program to directly recapitalize their financial system like TARP. Any assistance from the European rescue fund or the ECB’s new bond-buying program would come with politically perilous conditions. A chaotic bailout of Cyprus in 2013, and new European bank resolution plans announced later, would remind creditors that haircuts were still very much on the table.

  By the end of 2013, unemployment in Spain would be 26 percent, and over 50 percent among young people. Greece’s budget would be back in balance, but its unemployment rate would be 28 percent. Overall, unemployment throughout the eurozone was 12 percent, far worse than in the United States, and growth was stagnant, a testament to the dangers of financial turmoil and misplaced austerity. There was a lot of needless suffering behind those numbers. The mistakes by the Europeans—and their belated and often ineffectual attempts to imitate us—provided a pretty good advertisement for our crisis response. But they had a harder challenge. A currency union without unified fiscal policies, banking policies, or political representation was not ideally situated to handle a monumental emergency. It was more proof that the American system, for all its faults, had a lot of strengths we took for granted.

  CAROLE AND I went to an Election Night party at Neal Wolin’s house, but we went home early so we could watch the results in private. We could tell from the gloomy anchors and frequent commercial breaks on Fox News that it was going to be an excellent night, a gratifying validation of the President’s work. My liberation from Washington was imminent either way, but a Romney victory would have been a depressing coda to four tough years.

  Romney had framed the election as a simple question: Are you better off than you were four years ago? For most Americans, the answer was yes. While 2 percent growth was disappointing, it was a lot better than −8 percent growth. Adding fewer than 200,000 jobs a month was better than losing more than 750,000. The budget deficit was shrinking at the fastest rate since World War II—actually too fast, when we still needed stimulus—and the stock market was up 75 percent since Inauguration Day 2009. Romney had vowed to repeal health care reform and financial reform, and embraced his running mate Paul Ryan’s approach to slashing government spending. A majority of voters were not moved by that vision.

  We didn’t have much time to celebrate, because we had more fiscal deadlines looming, which meant more negotiations on Capitol Hill. The first huge deadline was the “fiscal cliff” of January 1, 2013, when our two-year extension of the Bush tax cuts would expire, and the “sequester” from our 2011 budget deal would start slashing federal spending across the board. Then a few weeks after the cliff, Treasury would again bump up against the debt limit, raising the specter that Republicans would again try to use the full faith and credit of the United States as a ba
rgaining chip. And I was worried about expectations in Congress. Democrats were in no mood to make concessions after President Obama’s decisive victory, which they saw as a powerful electoral mandate for Democratic policies. But Republicans still controlled the House, and they saw their own reelections as vindication of their own policies. It was frustrating that we still had to negotiate over demands that a majority of the American people had rejected, but congressional elections had consequences, too.

  Reviving Private-Sector Job Creation

  Monthly Change in Total Private Nonfarm Payrolls

  When President Obama took office, we were losing more than 750,000 jobs per month. The Recovery Act, our financial stability efforts, and our other support for the economy stopped the free-fall in 2009, and job growth began again in March 2010. Over the past four years, the United States economy has created more than 8 million private-sector jobs.

  Source: Bureau of Labor Statistics (seasonally adjusted).

  We definitely did not want a stalemate to send the country over the cliff. The Congressional Budget Office estimated that the resulting tax hikes and spending cuts would push the economy back into recession in 2013, killing about 1.5 million to 2 million jobs. President Obama had vowed not to extend the upper-income Bush tax cuts again, but we wanted to keep the tax cuts in place for household income below $250,000 a year. We also wanted to avoid the sequester, which took a meat-axe approach to budget cuts, but we made it clear we were willing to use a scalpel, proposing about $400 billion in health care savings over ten years and even a modest reduction in Social Security benefits. At the same time, we proposed more short-term stimulus to protect the recovery, including another extension of the payroll tax cuts and additional infrastructure investments.

  For a while, Speaker Boehner wouldn’t engage, except to say that all the Bush tax cuts should be extended, and that our proposals were “job killing.” One problem for Boehner was that many House Republicans still believed we should just capitulate to their demands; another problem was that they couldn’t agree on their demands. Theoretically, they wanted entitlement cuts, but Medicare and Social Security are popular, so they wanted us to be the ones to propose the entitlement cuts. When we did, they just demanded more, without saying exactly what they wanted. And on taxes, we had the same problem we had before. There was no way to do a bipartisan deal without tax hikes as well as spending cuts, but Boehner couldn’t get his caucus to support tax hikes, even though inaction would produce enormous tax hikes.

  As the cliff approached, we moved a bit toward Boehner, but he couldn’t move toward us. He walked out of the talks in mid-December, then announced that House Republicans would pass his “Plan B,” extending the Bush tax cuts on all income up to $1 million a year, but with no spending reforms. But his caucus wouldn’t even agree to raise taxes on only the top 0.2 percent, so he had to withdraw the legislation on December 20. It was now clear to everyone that Boehner couldn’t get a majority of his caucus to support anything; he famously recited the Serenity Prayer during the backbench revolt against Plan B.

  We spent the next eleven days negotiating an alternative to the cliff with Senate leaders. While far from optimal, the deal did some good things and avoided disaster. We preserved the Bush tax cuts for families earning up to $450,000 a year but restored the higher Clinton-era rates above that, raising about $600 billion in new revenue and making the tax code more progressive. We also extended unemployment benefits, along with many of the Recovery Act’s tax credits, including relief for the working poor and college students. Senate Republicans would not agree to any additional stimulus, and the deal only delayed the dreaded sequester for two months; it did not even address the debt limit. But it was a truly bipartisan agreement, and at 2 a.m. on January 1, the Senate overwhelmingly approved it, 89–8. Eric Cantor immediately announced he would oppose the deal, and two-thirds of the House Republican caucus followed his lead. But to his credit, Boehner voted yes, as did almost all of the Democratic caucus, keeping the country from plunging over the cliff and into recession.

  Now the President needed to figure out a way to raise the debt limit and avoid the sequester, but it looked like he would get to enjoy those challenges without me. The President was about to nominate Jack Lew, his chief of staff at the time, to be his next secretary of the Treasury.

  “Congrats on avoiding the cliff—and triple if you manage to get out before debt limit,” Larry wrote to me. “I will be impressed if you pull that off.”

  In fact, we started dealing with the debt limit while I was still at Treasury. And our way of dealing was to make it clear there would be no more deals, so a congressional faction could never again extort concessions by threatening to force the U.S. government into default. On January 14, 2013, the President laid down the gauntlet, saying he wouldn’t negotiate over the debt limit. The Republicans had to choose whether they would let America pay its bills or whether they preferred to crash the global economy.

  They backed down a few days later. Boehner announced that the House would pass a clean three-month extension of the debt limit, postponing the next fight over the country’s full faith and credit. The Republicans would focus on the fight over the sequester, which was still two months away. My last day would be January 25, so those fights would no longer be my fights.

  In his congratulatory note about the cliff, Larry added a gracious valedictory about my “very successful run,” neatly summing up the previous four years in a very Larry way.

  “We are back to worrying about bubbles rather than panics and inflation as much as deflation,” he wrote. “Treasury remains a juggernaut. Europe is pretty under control. Regulators can’t blame the lack of statutory authority for their next fuckup. Unemployment more than halfway back from peak to normal. Some predicate for tax reform. And lots of yahoo nonsense avoided.”

  MY STAFF made a funny video for my departure from Treasury, starring my son Ben as me. The first scene had a faux President-elect Obama trying to persuade me to take the job, as I argued that I was unqualified, that I cursed too much, that I wouldn’t be able to sell my house because of my ugly bathroom tiles, and so on.

  “People will say all kinds of crazy things,” I protested. “After the bailouts we did, they’ll probably think I’m in the pocket of Goldman Sachs!”

  “That’s ridiculous, Tim,” a Treasury staffer playing the President replied. “Nobody would say that about you.”

  The next scene featured a typical meeting in the secretary’s small conference room, with various members of my team reporting in deadly serious tones that markets were crashing, unemployment was rising, the eurozone was dissolving, we were defaulting on our debt, there were nine new requests for me to testify before Congress, and the latest draft of our housing white paper was up to 914 pages. Jenni LeCompte then explained that she had been managing the various exit profiles the media were writing about me.

  “The common theme that seems to be emerging is that you are a very bad person who loves banks and hates America,” she said. “We’re pushing back on that.”

  Scene three was mostly an accumulation of my stock phrases: I don’t think that’s the right way to think about it. Plan beats no plan. Life is about alternatives. I’d choose pain now over pain later. Un-fucking-believable. He’s got an excess of conviction relative to knowledge. Hope is not a strategy. No fucking way. The film concluded with President Hillary Clinton—well, another Treasury staffer playing her—in the Oval Office on January 21, 2017, saying she needed me to stay at Treasury for just six more months. Or possibly a year.

  “With Europe still in trouble and another debt ceiling standoff coming, how can you leave?” she asked.

  But no, I was really leaving. After twenty-five rewarding years of public service, after four exhausting years as Treasury secretary, it was time, to use another of my stock phrases, for someone else to have that privilege. I was proud of what we had achieved in the President’s first term. Things were not perfect but things were much bette
r. I did a bunch of farewells, including one at the New York Fed, because we had been way too busy to do one when I left in January 2009. My successor, Bill Dudley, said I would finally have time to sit for my official portrait.

  “The good news is that Tim is a little bit older, so now his portrait will look more appropriately central-banker-like, rather than the somewhat more boyish version that we all remember when he was here,” Dudley said.

  Departures are times for taking stock, and for all my concern about our uneven recovery, the contrast with the terrifying free fall the President inherited four years earlier could not have been starker. The economy was growing, house prices were rising, and credit was flowing through the repaired pipes of the financial system. The Fed in Washington had done a farewell for me in January 2009; that was the event where Jeff Lacker joked about giving me the New York Fed’s Maiden Lane vehicles, since they wouldn’t exceed our $25 gift limit. By the time Ben Bernanke hosted another farewell for me in January 2013, taxpayers had already made a $23 billion profit on our investments in AIG, and were projected to make more than $2 billion on Bear Stearns—definitely above the gift limit.

  Overall, after widespread predictions of trillions in losses, the U.S. government’s financial interventions were in the black. Every major program turned a profit except the auto rescue and, of course, our foreclosure prevention programs, which were never supposed to be recouped. Taxpayers would end up making $24 billion on TARP’s bank investments alone. At the Fed dinner for me, I asked Rubin, who had been very dark about the economy throughout my time in office, how he felt about having bought so much insurance against the risk that we might fail.