Explain your thoughts about, were you surprised, pleased about the decision that Tim Geithner would be secretary of treasury? Why him? Why not somebody like [former Fed Chair Paul] Volcker? What were your thoughts on that?
I remember the president-elect had told me that. I went to Chicago for my job interview just shortly after the election and he said: "Let me tell you where I am here. I've chosen Tim Geithner to be the secretary of the treasury, and Larry Summers is going to be head of the National Economic Council." And yeah, it made a lot of sense to me.
Tim Geithner, if you ask, people will say he's the person you want in a crisis, that going back even to his days in the Treasury Department in the Clinton administration to his work at the New York Fed when he was president there, he's always -- he's sort of known as a cool head in a crisis and in how do you manage a really troubled financial system.
So you could see immediately sort of why the president-elect would go to that kind of a guy when it's the fall of 2008 and our financial system is the thing that's on the line. So it certainly struck me as a very sensible way to go.
And then the Larry Summers-Tim Geithner, there's a lot of firepower there. And it makes a lot of sense. You want the very best in a really difficult economic time.
You did advise early on. You were close to some of the major players. Why did they stop coming to you? Did you feel they were less interested in your input?
Part of this is understandable. When you're in the rush of making decisions -- and so many had to be made in such a short period of time -- there's a natural difficulty of reaching out beyond your inner circle.
On the other hand, from what one can gather, even people who were more formally in the structure, like Paul Volcker, were not brought in.
One interpretation is ... that the White House was much more interested in having well-defined and narrower set of views, get their position well established, and then open up slightly to other voices, but basically after the decision had been made. ...
What's the philosophy that Geithner has that sent him down this path?
I think it was what economists and sociologists call "cognitive capture." He thought along the mind-set of the banks, and if you're a banker, the most important thing in the world is the survival of your bank. Not the banking system, but your bank. That became the issue number one.
They were told: If you let the shareholders, the bondholders go, it will cause havoc, and we'll never be able to raise capital again. Nonsense. Countries have had their financial system go into turmoil. Banks have gone bankrupt. If it's a profitable activity to lend, which it is, money will come in. ...
How surprising is it to you when Obama takes power that he names Geithner as the Treasury secretary, and he brings back [Larry] Summers? ...
He was told that appointing this team would present a problem, because even if they gave the right advice, it will be tainted. People will see it as reflecting the interest of the banks and people who were linked to the deregulation, to the flawed policies. You're bringing in the same plumber that caused the problem. ...
Of course the real risk was that they would not give the right advice, and that would turn out to be the case. I wasn't surprised, because at that point it was already clear where he was getting his advice from, who he was listening to.
The only thing that was perhaps a little bit of a surprise was the disjuncture between "Change you can believe in," the slogan, and the team that was put in place, which was, yes, change a little bit from the Bush team, but only a little bit.
What happened? His Cooper Union speech, his speech that he did to NASDAQ the year before were all very progressive in tone, were very much on the fact that we had gone too far, that we had deregulated markets that need to be dealt with. ... Why the change? ...
Remember, the Cooper Union speech was made during the primary and before he became chosen as the Democratic nominee. It was also done before the collapse of Lehman Brothers, and it was at that juncture that the advice came in very strongly from Wall Street: Don't rock the boat. Don't do anything that would disturb the financial markets, because that will have dire consequences for the economy.
Not a surprise that [if] a majority of your advisers come from financial markets, you see things through the perspective of the financial markets. If you had as your advisers people from the real estate sector, if you had from a group of representatives of homeowners, you would have gotten a very different set of advisers who would say, "The first thing you need to do is to resuscitate the real estate market," or, "The first thing you do is to save homeowners from losing their homes." ...
Despite the fact that he's got [Former Fed Chair Paul] Volcker standing behind him, that [Austan] Goolsbee is his right-hand man, that [Former SEC Chair William] Donaldson is there, that [UBS CEO Robert] Wolf is there, that other people that seem to be more progressive in their attitudes are surrounding him. Why do you think that is? ...
I think there is a growing sense among people in a variety of different fields that his gut reaction is don't-rock-the-boat conservative. That doesn't mean that he's not liberal on many issues, but it's moving in the liberal tradition and a liberal direction in a very slow, step-by-step way. ...
... When did you first get to know [Tim Geithner]? What was his role in the Clinton administration?
He headed up the international side of Treasury and really was one of the key architects, if you will, of the United States government's response to the various global financial crises at the time. He and I ended up working together on some of that.
It's been written that he learned quite a bit from his time in Japan. Did he learn quite a bit that he used later on in this crisis?
Oh, sure. Each one of these financial crises has its own specific elements. They're all unique, but there are certain lessons which do translate. And one of the key lessons, one of the key takeaways was the sooner you act and the greater force with which you act, the better the outcome and the cheaper the cost to the taxpayer.
That's a hugely important lesson. It's very hard to execute in reality, because acting early, while it's clear that it's most effective and cheapest, it's also politically the most difficult, because the pressure hasn't built to the point where there's overwhelming popular demand for you to do some of the difficult things you have to do. But at the end of the day, it's clearly what works best.
I think as [Geithner] was involved with the other countries during that period, you could see that. ...
... There's this argument that the economists that were around Obama during the campaign -- the [Paul] Volckers, [Austan] Goolsbee and others -- were more progressive economists, and that once he got elected he brought into power Summers and Geithner and others, more conservative economists that would look at things in a different way. In fact, [he brought in] some of the team that had been involved during the Clinton years looking at deregulating, and the irony now was that this was the same team that was really looking at re-regulating.
... I can tell you that putting myself aside, the rest of the team that he brought in was an A-plus team. I don't think you could have had a better group to deal with the set of challenges that the president was facing at the time. ...
The riff is that the team would be more passive on pushing the banks too much, compared to folk that would have come in -- the [Paul] Krugmans or [Joseph] Stiglitzes of the world -- who would have come in and said, "This is our opportunity to change the financial system." Is there any truth at all to that? ...
We viewed every decision, and the president viewed every decision, and the secretary viewed every decision through the prism of, what is going to stop this from going off a cliff? How are we going to prevent Depression 2.0 with the least cost to the taxpayer, the least downside risk and the greatest chance of success? ...
There were tons of opinions about what we should do, different courses we should pursue, but I think the question that has to be asked is, "Would the outcome have been any better had we gone down a different path?" I think the answer to that is clearly no.
Different people were advocating that we act much more aggressively. Others were arguing the other side, that we were doing too much. The question was: What's the right balance?
It's not about did you push the banks hard enough. What we were dealing with was a house on fire. How do you put that fire out? If you want to reform the banking system, you do that through the regulatory, through things like Dodd-Frank [Wall Street Reform and Consumer Protection Act], but when you're putting out the fire, you need to put out the fire. It's not about whether you were hard or easy on the banks. ...
It's been reported that you almost didn't take the job, and you had a conversation with the president saying whether it was possible or not to make a difference with "the same old Clinton mafia dominating the upper reaches of policy-making." What was that conversation all about?
Not exactly. I don't want to --
Tell us the truth of it then.
No. The tension the president was always going to have if you are coming into an environment like the one we came in is, we're not going to be able to come in and have great luxury of learning on the job and trying to figure it out. I think the president's view was, "I've got to have some people who can come in and are going to know what they are doing right away because it is such a dangerous moment." And the thing is, if you look, if you go measure an administration by what they were able to accomplish, it strikes me the administration accomplished a great deal right out of the gate, and we did prevent a depression.
Now, that doesn't make 1.5, 2 percent growth and a damaged job market and a damaged real economy any more fun. It's not fun. We've got a long way to go to get out of the hole we're in. But I do think when historians look back, the fact that we did not have a depression and we returned to growth was pretty notable, because the shock that sent us into this recession was bigger and more negative than the one in 1929 that started us into the original Depression. And I kind of think the president's appointments -- and that was his worldview.
How scared on Wall Street were people that there was a completely new administration coming in?
There was a general view that the president-elect was a very smart person and was looked upon really as a source of hope. I think that some of the early nominations that he made were also comforting to Wall Street, such as Tim Geithner. I don't think that Wall Street at all looked upon the new administration coming in as a major threat.
Around [Sen. Obama] during the election were a lot of progressive economists. But then he picks Geithner and [Larry] Summers and holds on to Bernanke. Was that surprising? Explain how it was viewed by Wall Street.
I think that Wall Street viewed Geithner, Bernanke, Summers as a commitment by the incoming administration to balance a centrist view, not leaning way to the left. There were some of the economists -- they don't like to be reminded about it now -- who were strongly urging that the whole banking system be nationalized. That was a view which was I think short-sighted, but it was certainly loudly articulated. ...
Why do you think Geithner got the nod?
I think Geithner got the nod because of his superb performance during the crisis. ...
How different is this new administration and the policies that they're following? ...
... I would say the new administration has significant differences from the prior administration. ... The deregulatory ethos really which had existed for the prior nine or 10 years -- the new administration I think clearly sees the need for an enhanced regulatory system. ...
Was it surprising that in the end there was this turnover on the economic team and in fact that Geithner is the one that still remains?
I don't think so. I mean, actually if you look at the tenure of most of us, it's just about average for this kind of a political appointee. And Tim actually might have a hard time getting a job out there, so he's probably just better off staying where he is. [laughter]
The president has a great relationship with Tim Geithner. … Tim is very good at serving, I think, the president what he needs to make the choices in front of him. So it's not surprising that he's still there.
"Plan beats no plan."
Did that happen quite a bit?
Yeah, I mean, I vividly remember Tim pulling some disparate meetings together, saying: "Look, in a half an hour we have to give the president some solid advice. And we can present different views to him, but that's what's going to have to happen in a half an hour. So let's get to work."
And I would imagine that that kind of a person is very helpful to you if you're the president. So it doesn't surprise me that Tim's still there.
Geithner's the last man standing. A lot of the folks from the economic team have left or were pushed out. What does that say to you?
It certainly suggests that there's a working relationship between the president and the secretary of Treasury, but it is also very consistent with the view of the president wanting to keep markets calm. Having found a secretary of Treasury that has developed a relationship with the banking system, given them most of what they wanted, and the economy still not recovered, one could understand that one wouldn't want to disturb the financial markets at this juncture. ...
Do you think there's real support for that by the president?
I hope so. I think he is, but I think he needs to make sure he's got an economic team that's also committed to that same agenda.
Geithner … is really the last man standing in the Obama economic team. What is it about him that makes him a permanent fixture of this administration?
I think he and the president have a very good working relationship. I think the president values his advice, and it's his job to pick his own advisers.
Do you think the president's been well served by Geithner?
I think you need to look at the objective effects about what's going on with our fiscal situation and our economy and make that decision based on that.
Well, that would--
Not say good things. No, it wouldn't.
The presumption was that if the banks get this money, they will lend it. Small businessmen will get the money. They will hire people. And the economy, which is dependent on consumer spending, will pick up.
It didn't happened.
It didn't happen. Not only that, but I think with the bailouts we propped up a bloated sector, and I think that they're a drag on the economy right now. ...
Other people raise the issue that they drain the best and brightest from our schools?
Now that's true. I'll give you an anecdote: When I was still a chairman at the FDIC, I went to an Ivy League school to give a presentation, and there was a nice reception afterwards for some students. There were five young women standing around me talking, and they were wonderful, bright, ambitious, optimistic young people. And three of the five we're going to go work for Goldman Sachs.
You've got to credit Goldman; they recruit very smart people. But it is that siren song of money and prestige and power. I would like those smart people to go find the next cure for cancer or more ways to do renewable energy, or increase our manufacturing base.
I want the smart people to go into the real economy and do all the things that we need smart people to do there too. It's hurt us. We didn't have a sustainable model. We had a hyperdrive model based on a juiced-up housing market and a juiced-up financial sector. ...
Many of you leave in 2010. The team leaves. Geithner is the last man standing. ... What does it say that Geithner is still there?
I think he's got more stamina than anyone else I know. Honestly, I don't know how he does it. It was an exhausting time, a tense time, and the fact that he's able to stay there and continue to do what he does is remarkable and impressive.
And the fact that the president wanted him to stay on, ... what does it say about Obama's belief in the program and in Geithner?
... In all my interactions with them both, it was clearly quite a strong relationship. They obviously have a lot of respect for each other.
The president did say toward the end there that the results of this financial stability plan, which really was the secretary's plan, which had many more detractors than supporters to say the least, worked in ways that very few would have imagined.
I think that exercise and that result built a tremendous amount of confidence in the secretary. ... We, the secretary, the president set out to put in place a set of plans that would stop the economy from rolling over, help on the employment situation, that would make borrowing more affordable for households and businesses across the spectrum and then would have the least cost to the taxpayer.
On every one of those fronts, I think the results are much better than anyone anticipated. Now, unemployment is still way too high. No one is satisfied with that, and I wouldn't suggest for a minute that we should be. I know no one on the inside is resting on their laurels on that.
But if you take each one of those four criterion, borrowing costs are lower than they've been since well before the financial crisis struck. This is for households, businesses, municipalities, etc.
In terms of the cost to the taxpayer, the IMF [International Monetary Fund] did a study in 2009 or '10, and they examined the 42 systemic financial crises throughout the world between 1970 and 2007. The average cost to taxpayers in each of those situations was I think 13.3 percent of GDP [gross domestic product]. For us, that translates into something like $1.8 trillion.
This will end up costing zero in my judgment. Not a penny. And the programs for the banks will generate a meaningful profit in billions of dollars for the taxpayer. ...
So [presidential adviser Pete] Rouse eventually writes these memos about, I guess after the midterms, his annual memos that he writes, and he wrote that there was deep dissatisfaction within the economic team, and he talks about some of the problems that existed. What were the concerns about the way the team worked? And what do you believe to be the truth?
So what is certainly true is the economics team had [what] we often called the four economics principals: the secretary of the treasury; the head of OMB; Larry Summers, the head of the National Economic Council; and the chair of the Council of Economic Advisers. I think what's true is we were all strong personalities, and strong personalities with sometimes very different viewpoints. And I think we didn't hesitate to hash things out in a very forthright manner.
So that's the basic truth. And it's interesting. I mean, it's the way economists naturally tend to interact with one another. I've learned from my academic colleagues in different fields that their seminars aren't nearly as contentious as ours are, where we just don't hesitate when someone's come to your university to represent a paper, to say, "I think that's wrong, and here's why." And I think that was naturally how we tended to interact with one another.
I think for the most part there was a lot of mutual respect. It sometimes broke down, or sometimes people were mad, and sometimes it did feel like things weren't working quite well. I think the big picture is, for the most part we were incredibly successful, that we got through a lot of important policies, everything from health care reform to financial regulatory reform to the Recovery Act.
I think a time when it did feel somewhat dysfunctional was the fall of 2009. So we'd gotten through the worst. We'd done some extraordinary measures. But the figuring out what more needed to be done there in the fall of 2009 I think was not one of our better episodes, that there was a disagreement about should we do more stimulus? Should we do immediate deficit reduction? I'd say we'd all agree we need to do long-term deficit reduction, and we were all enthusiastic about setting up the bipartisan fiscal commission.
But that question of right then, do we push for another stimulus or do we start to immediately worry about the deficit, that one where we were kind of at loggerheads and we just kept fighting about it in front of the president --
And I remember one time when I think an interviewer said, "So do you ever lose your cool?," and he said, "Why, yes, I lost my cool yesterday with the economics team, where I finally just said: 'OK, I'm tired of hearing this time after time. I'm going to go away now.'"
So I think that was a time when we should have gotten our act together better. I think we did not serve him as well as we should have. I obviously wish we had done a very aggressive, another round of stimulus. And I wish I'd convinced everybody on the team and we could be a united front telling the president this is what needed to be done. I think we didn't necessarily do that as much as we should have, and that didn't serve him well.
It sounds like this president more than any other president ever was involved with the economic debates daily.
But if he had had other sort of views brought in, what do you think the result would have been?
I don't think the result or the outcome of policies would have been different, but it perhaps would have been better if the president had been exposed to more knock-down, real intense debates between economists with different viewpoints.
The way these things tend to work, and not just in this White House, is that you have those discussions and you sort of bring them to the president as "We have concluded." Or maybe there's some argument between this person and that person. In this case, perhaps there could have been more argumentation of that type in front of the president. But nothing was slow-walked.
To give you an example, once [I was] meeting with the president and a bunch of liberal economists. I'm not going to tell you the content of the meeting because that would be inappropriate. But I think the president learned something in that meeting that he wouldn't have if his team sort of filtered it and took it to him that way.
So if I had a chance to do some of this over again, I don't know anyone would listen to me, but I think I probably would have pushed to expose the president to more debates from different parties.
Let's talk about the team. We skipped over that, how the team was chosen. Tim Geithner gets the secretary's job. Why? Why Tim Geithner?
I don't totally know the answer to that.
Maybe you can help us, though, about the way Obama viewed him, how they were simpatico. Is there something going on there?
I don't know. That was -- I wish I could, but I wasn't involved in the personnel decision. That was kind of [Obama-Biden Transition Team Chair John] Podesta and those guys. The campaign people weren't really on the transition stuff.
But why not Volcker? It surprised some of the earlier people that were around.
Look. My goal in life was to be 80 percent Paul Volcker and 20 percent Muhammad Ali. Paul Volcker is my hero, and the guy is amazing, and nobody has more public credibility than him. So I wasn't involved in those decisions. But Volcker is amazing. His advice was amazing. We listened to everything he said. And I wish he'd keep talking more, and we should listen to that. Through the campaign he was more than a voice of reason. He was really quite grounding, because he's seen it all.
And that mind-set that capital markets are good but you can't trust banks any more than you can trust anybody else, you know, you've got to keep an eye, if you're the regulator, you've got to keep an eye on what -- everybody will try to take advantage for their own benefit, so you've got to have strong rules of the road, and you've got to have strong regulators, I think the worldview was proven right by this crisis.
And the understanding and importance of what Wall Street thought -- what was Wall Street's point of view of the decisions, and why that would have been important for the president to weigh?
So I think the connection of Larry and Tim and Wall Street I think is dramatically overplayed. I think poor Tim Geithner, who's never had a job on Wall Street, people always assume that he has. He's been a public servant basically his entire life. So they came at this with an appreciation for how important the financial sector is to the economy and that understanding that we've got to hold this thing together, not because we love Wall Street, but because if Wall Street goes down, the rest of the economy goes down with them. And that was the fundamental idea, and they were people that understood how financial markets worked and what needed to be done to stabilize them.
But very much the focus was always on the overall economy. And you care about Wall Street only because it's kind of the bloodstream of the overall economy.
Some people complained that all these progressive economists were all around Obama during the election, but then he brings in the Clinton team, basically, much more conservative in a lot of ways. …
At a very fundamental level, it's not liberal or conservative economics, it's a matter of getting the credit system back up and running. …
I think where you maybe see a breakdown between conservative or centrist, more liberal economists is in this idea of regulating financial markets.
Sure, there are Democrat, supposedly liberal economists who believe that the fragility of the financial sector is such that if there's too much oversight, if we're not kind of ginger in the way we handle these banks that they'll leave the country, they'll tumble. If there's any kind of a tax on financial transactions, they'll all go to Europe, or they'll all disappear.
That's a problem. We need more economists in powerful places who have a more realistic view of, frankly, the durability of that sector, and what terrible things can happen if there isn't enough oversight.
I mean, if you're all thinking these institutions can police themselves, and you haven't been convinced otherwise yet, then you really shouldn't be hanging around halls of power.
Before we move on … this idea that Geithner was taking sort of the idea that perhaps we would nationalize Citigroup and then slow-walking the parts of the policy he didn't agree with. Was the president being slow-walked?
The president was never being slow-walked. Whoever said that just got it wrong. Was the president as exposed to as many good, knock-down, drag-out debates about this stuff as he should have been? With hindsight, maybe not enough. But he was apprised of the options, and nothing was slow-walked.
One of the things that has come out is [Obama senior adviser Pete] Rouse's memo in which he said that there was a problem in the economic team, that [National Economic Council Director Larry] Summers was heavy-handed, that talks of constant relitigation. Relitigation kept on coming up over and over again, causing delay in making decisive decisions. Did Rouse get it right?
I think Pete has a point, definitely, but it's been misunderstood as if Larry was somehow feet-dragging or delaying the process.
What was happening at that time was the economic team was largely thinking about the importance of another round of stimulus. And the political team was starting to wonder, is that something we can do at a time when this stuff isn't as beloved as you economists might want it to be among our public.
So what could have happened? What should have happened?
As an economist, I think we should have built on some of the momentum that was coming out of the Recovery Act. I suspect the unemployment rate would be considerably lower now if we had.
But there were very clear political constraints, particularly as we're moving up towards the midterm and after that, which was very much seen as a vote against government spending.
But then you've got the other side of it, which is the fact that Obama's being blamed now for the unemployment figures.
So did the political team get it wrong? Because the reality is maybe this is going to come back to bite them, and Obama could lose his job, specifically because of this point.
It's not up to the political team to say, "Here is what the unemployment rate will look like a few years from now, sir, if you take the economists' advice." It's up to them to tell the president how these policies are playing out in the minds of the electorate.
I think what was going on at that period where members of the team are being accused of argumentation and feet-dragging is more like we recognized that we needed another dose of stimulus to build on some of the momentum of the Recovery Act, which was already beginning to fade, while the politics were pushing in a very different direction.
... Why? It seems to be to some extent that they were kicking the can down the road because of fear that they could create havoc within the market by looking into things too deeply. ... There was non-transparency, and to some extent one of the reasons for it is because they weren't asking for the material that they actually could have gotten their hands on. What was going on there? ...
... It was increasingly apparent that the deregulation environment that had been created by some of the same people who were now in jobs of responsibility, of supervising, advising the president-elect, they had created a system with a lack of transparency that made it very difficult to manage.
It was interesting that the role of ideology in economic models play in all this. Many of the economists who advised them believe that markets ... could manage risk, that the bank officers could manage risk on their own. They were very reluctant to have government interfere because that would interfere with the efficiency of the market.
What was so striking is that it should have been apparent that markets have repeatedly not managed risk. Markets just weren't invented in 1990, '95. We've had banks for a very long time, and banks have repeatedly mismanaged their risk.
But things have gotten worse because with the very large bank there is a problem economists call "agency," that the bankers, those who run the organizations, are rather distant from the shareholders and the bondholders. Their interests are quite disparate, and we've seen that. The bankers have done very well even though the shareholders and the bondholders have not done that well. ...
You look at the "too big to fail" banks, and you look at their incentive structures. They know that they're too big to fail, so if they gamble and win, they walk off with the profits. If they lose, they had a pretty sure bet that the taxpayer would pick up the losses. ...
Tell me in more detail. So you're on the yacht? Why do you decide to call him? Where do you go on the yacht? What else is going on?
So we had really just docked on the yacht. It was the morning we were going onto the boat, and I wanted to call him before he started his day with his family for his birthday, and so I just called him and said: "Hey, Barack, I wanted to wish you a happy birthday. Hope you're going to have a great day, but I just want to talk to you about something." And for the most part until this time, I was a fund-raiser. We talked a little about business and family and other things, but I would have said that I was one of the key fund-raisers. And then I would say that birthday kind of flipped the switch, where I moved from being a fund-raiser to I would say one of his key economic advisers. I would portray it that Austan [Goolsbee] was really his economic guy and I was his financial markets guy, and the three of us started talking very often since that day.
And I called him and said, "Listen, I know that the debate today has been all about the war and foreign policy, but I'm telling you it feels to me like we're going to go back to the Clinton time where it's all about the economy, and let me give you my reasoning." And I started telling him that UBS is going to show big losses, a couple hedge funds may be liquidated, and you're going to start seeing -- it feels like there could be a bit of a contagion of a real deleveraging going on. Everyone is long housing and commercial real estate. Consumption at this country is 70-plus percent of GDP [gross domestic product], so you could see that psyche change a little.
And we started having a good conversation. He said, "You know what?" At that point, "Hey, Robert, we need to talk; we need to get you involved with Austan." And from that day on we started talking very, very often. I don't know if it was once a week, three times a week, five times a week, e-mailing back and forth, but from that time on we started talking about the markets and the economy nonstop. And then, obviously, the next big thing was the Lehman situation.
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