The financial crisis of 2008 caused such an enormous upheaval that future historians will long be asking: Who caused it? Who fixed it? Could it have turned out better?
Recently, two key players looked back: Former Treasury Secretary Timothy Geithner wrote Stress Test, Reflections on Financial Crisis, and Massachusetts Sen. Elizabeth Warren wrote A Fighting Chance.
The two reached opposite conclusions. Geithner believes the bank bailout proved its worth. Warren remains outraged that wealthy bankers have not been jailed.
So should the financial system’s “rescuers” get our thanks for preventing a Second Great Depression, or our disdain for allowing a heist to go unpunished?
Let’s look at the fantasy debate that Geithner and Warren might have, using words from their books. At the end, please vote for the winner. But first, here’s a little background on our debaters.
Each chose to build a career around public service rather than personal wealth. Warren started out as an attorney. She might have joined a high-priced law firm, but instead became a professor, studying the impact of bankruptcy law on the poor and middle class.
Geithner had opportunities to make windfalls on Wall Street. Instead, he chose to earn a salary at public institutions such as the International Monetary Fund, the Treasury Department and the Federal Reserve Bank of New York.
In November of 2008, when the crisis was at its white-hot peak, their career paths crossed in Washington. Geithner was preparing to become treasury secretary. And Warren was assuming her role as chairwoman of the Congressional Oversight Panel to watch over TARP, the Troubled Asset Relief Program. Congress had just passed the $700 billion package to shore up the crumbling banking system.
Geithner explains the mindset he was in as he headed to Congress to beg for TARP’s passage.
GEITHNER: “The world was burning. What more was there to discuss? … This was not the time to focus on punishing the arsonists. It was time to focus on putting out the fire. … As long as TARP could be used to recapitalize the system, I just wanted Congress to pass it as fast as possible.”
Warren says it was wrong to focus on keeping banks whole, rather than on helping the millions of workers losing jobs and homes.
WARREN: “As soon as TARP was set up, tens of billions of dollars started flowing to the giant banks … but that didn’t keep credit flowing to the small businesses, and more and more of them were shutting down. At the same time, the tide of foreclosures just kept rising … TARP seemed to be doing precious little for small businesses or families in trouble.”
Geithner often compares the events of late 2008 to war, wildfires and crashing planes. He says taking focus away from implementing TARP to mete out punishment would have been foolish.
GEITHNER: “A lot of firms that didn’t deserve saving still needed to be saved … [That’s because] nothing is more dangerous during a panic than the sudden liquidation of a major institution … Even if we couldn’t prevent an ugly crash, I wanted to explore ways to put ‘foam on the runway’ — anything to mitigate the damage.”
Warren was appalled by Geithner’s references to “foam.”
WARREN: “The Treasury foreclosure program was intended to foam the runway to protect against a crash landing by the banks. Millions of people were getting tossed out on the street, but the secretary of the Treasury believes that government’s most important job was to provide a soft landing for the tender fannies of the banks. Oh Lord.”
Geithner says homeowners and workers gained much more by having the financial system stabilized than they would’ve had by spending time on prosecuting bankers.
GEITHNER: “Old Testament vengeance appeals to the populist fury of the moment, but the truly moral thing to do during a raging financial inferno is to put it out. The goal should be to protect the innocent, even if some of the arsonists escape their full measure of justice.”
Warren doesn’t buy it.
WARREN: “No perp walks. No mass indictments … Where were the armies of auditors, seizing hard drives and poring over the financial statements?”
Geithner says he can understand his critics’ indignation, but they can’t appreciate the terror he felt while staring into a financial-system abyss.
GEITHNER: “The overwhelming burden of responsibility combined with the paralyzing risk of catastrophic failure; the frustration about the stuff out of your control; the uncertainty about what would help; the knowledge that even good decisions might turn out badly; the pain and guilt of neglecting your family; the loneliness and the numbness.”
Looking back, Geithner feels validated: Banks repaid their bailout money and depositors did not stage bank runs. The economy began growing in the summer of 2009 and Congress passed a sweeping financial reform package.
GEITHNER: “Our unemployment rate rose to 10 percent, but not to 25 percent as in the Depression … The stock market has exceeded its pre-crisis peak, so retirement funds that lost $5 trillion during the crisis have gained it back.”
Warren concedes the bailout did not become a fiscal catastrophe, but says bankers learned only that they can be reckless without risk.
WARREN: “The government eventually recovered the money it put into Citibank and the other banking giants. But at the time those deals were struck, no one knew what the future held, and the risks were all on taxpayers.”
And the rewards turned out to be meager for most, she says.
WARREN: “The American people were told that the bailout would make it possible for banks to start lending to small businesses again and to help relieve the foreclosure crisis. But once those no-strings-attached checks were distributed to the big banks, that promise evaporated like a tiny ice cube in the desert. ”
So now that each of these key figures has made a case, you can decide: Who was more persuasive?