In the end, are you disappointed at all about what you all were able to do with that period of time, in the period of time that you were there?
Well, of course you'd have to be. The unemployment rate is still terrible. And as much as I can try to say, well, it would have been much worse had we not taken the actions that we did, and I believe that deeply, I wish we could have done more, because it's terrible for people who are suffering.
So you can take a little bit of solace from the things that you did accomplish. And I think when the history is written about what this president accomplished in terms of health care and financial regulatory reform, and stopping what so could easily have been another Great Depression, I think history will be kind to him.
But for the American people, absolutely I wish we had done much more so that today the unemployment rate was down to a normal level and we were growing like gangbusters.
... You were on the crisis management team. ... What did that mean?
We were asked to put together the financial stability plan. What were we going to do to stabilize the banking system, reopen credit markets, and get credit flowing again? Remember, at the time markets were falling hundreds of points a day. If you step back, the overwhelming objective was to stabilize the economy, turn the economy around. ...
Many people were saying we're headed toward the second Great Depression, and that was a very real fear and a real possibility. So our piece of it was how do you stabilize the financial system? Not because anyone had any great love for banks. It was all about making sure that we stopped things from going off a cliff. ...
... The public's perception is often very different than the realities on the ground. Your team and the president need to define the programs, the answers to questions in a way that the confidence levels remain high so that you don't go down on the slope. ...
It was tremendously complex, and each individual problem was complex in its own right. The combination of them was kind of like three-dimensional chess. ...
Early on, the president said, "Look, we are going to have to make some very difficult, unpopular decisions, but we're going to do things in a way that we think has the best chance of success, even if those decisions are going to be unpopular."
So we -- and this includes the secretary and others -- started to figure out what each of the necessary elements was going to be and make sure that each of them worked with the others.
One of the great challenges we have in all this has been explaining what we did and why we did it. I've reflected on that, tried to figure out why is it so difficult, and the only thing I can come up with is that there's no magic bullet, there's no silver bullet, there's no one big thing we can point to and say, "We did X, and that's what turned things around."
It actually was a series of programs and plans and policies designed to feed on each other and reinforce confidence across the board.
For instance, we had a plan to get capital back into the banks. It involved the stress tests and a capital backstop that we made available. We had a plan to deal with reopening credit markets. Something on the order of 40 or 50 percent of all credit before '08 was generated by these markets. The third thing we had to focus on was how do we deal with the legacy assets, the old loans that were on the books and clogging up the system.
If we left out any of those three, our judgment was that the whole plan would fail. So you had to have detailed plans to deal with the banks, you had to have detailed plans to deal with reopening credit markets, and detailed plans to deal with the legacy assets.
We announced the broad outlines of our plan in I think the second week of February , and continued to fill in details each week after that until the markets finally saw all the details and saw how it all fit together. I think when the markets realized that, confidence began to come back.
You can look at price charts of various instruments that indicate the health of the system, and you can see the announcement effect each time we put out details, how things would bounce off of that. That confidence started to feed on itself, and at a certain point it took hold. That's when the fever broke.
So, Austan, let's start with the present day, and then we will go back in the past. So the president is out there campaigning again. What's he dealing with out there, and what will he be dealing with out there on the Main Streets of America?
I think looking back at the response to the crisis, most economists surveying the data that we now have of what the conditions were recognize that was the worst six-month period in the history of the GDP [gross domestic product] data that we have on record. And we were very close to going into a depression in the sort of the technical sense of big downturn, big financial crisis, collapse of the financial system so you don't get out of it. You go down, and you stay down.
I think compared to that, history is going to look back and say it was a pretty significant accomplishment to have avoided it. But that said, because the response to the crisis spanned the end of the last administration and the beginning of the next one, there were a lot of either missed handoffs or things that we had to deal with. So we establish what ends up being a pretty successful rescuing of the financial system. But we do that in a way, from the outset, that doesn't have, in my view, enough tough conditions.
So when President Obama comes in, we are being asked: "Why don't you restrict them? Why don't you require them to do A, B and C?" And the answer is because they already have the money. So we're constantly trying to impose conditions after they have already gotten the handout.
... What do you think the public needs to hear from [the president] to better understand why so much was done that was important? ... What do you think he has to accomplish out there on the campaign?
... I think no one's better at this than the president. ... I think he has a lot to be proud of with respect to what he accomplished in the first handful of years of this administration. ...
The challenge is it is a very hard message to deliver, that we've accomplished all this. It's not nearly as much as we wanted to accomplish with respect to employment, although that's heading in the right direction, but without us, it would have been so much worse.
[Ranking member of the House Financial Services Committee] Barney Frank [D-Mass.] has that wonderful saying, that "It would have been worse without me" is not a great bumper sticker. It's true. You wouldn't get out there, I don't think, and say, "Independent studies suggest that there would have been 8.5 million fewer jobs."
It may be true and highly relevant, but people don't care about that. They're like, I don't have a job, or my brother doesn't have a job, or my neighbor doesn't have a job. So it is a hard message to deliver. ...
... Any part of this story that you think is essential to understand if you want to understand what you guys went through, what was accomplished?
... Some of the decisions that we had to make, that the president had to make, the secretary had to make, that were deeply unpopular and ... that people are to this day deeply angry about, those decisions were only made in the interest of what's best for the economy, Main Street, businesses, households. Everything we did, ... we viewed it through that prism.
I think if we could go back and correct some things with hindsight, I wish we had figured out a better way to communicate that that's what was driving us. ...
How is this possible when Obama was considered such a reform kind of guy, a guy who was a president for the people? The expectations for him were much different. Why do you think this administration got caught in basically coddling with banks and bailing out the banks, and not bailing out Main Street?
Well, they inherited the bank bailout, and it was already in place. The real question is, in the wake of the bank bailout, why hasn't there been the kind of hard pivot to remaking the financial industry? And I think that's still a very troubling question. There needs to be. And we're seeing the president articulate more and more concerns about income inequality, about the damage done by recklessness to the economy. And my hope is that it takes hold, that beyond rhetoric it becomes real policy.
Again, I don't believe reform is too late, because the fact is, the country is still hurting deeply. I mean, we've got the lowest ratio of wages to GDP since the Great Depression, 24 million people out of work; the foreclosure disaster continues each and every day. So therefore, in many respects, the political ballast for real reform still exists today, even though a lot of revisionists would want to wish away the truth of what happened in the crisis, and although Wall Street has more power than it had clearly in the wake of the meltdown of September of 2008.
... June 2009, the president is going to announce a package of reforms that eventually becomes the Dodd-Frank [Wall Street Reform and Consumer Protection] Act. Coming up to that point, you believe the FDIC is going to have resolution authority.
What happened there?
We got blindsided.
It was the story of my life.
Actually, the president asked me to come to a meeting with him and Tim and Larry to talk about the AIG bonuses. This was probably a couple months before. There was all this adverse publicity about these huge bonuses being paid out.
What was the president saying in the meeting?
He was clearly upset. He was really concerned that this had happened. ...
I think the whole country was upset about that.
Yeah, and rightfully so. So I told him at that meeting, "You need resolution authority for non-banks like AIG because with our resolution authority, we can repudiate these employment contracts. ... You can fire them. You can pay what you want to pay. You can figure out who you need to keep and who you don't, but you have no legal obligation to give them their jobs or pay them their bonuses."
The president liked that, and I think that was really the start of serious decisions about including resolution authority as part of the package of reforms that the White House would request.
Where were Geithner and Summers on that?
They were agreeing, and the early iterations of the white paper had basically an FDIC resolution mechanism in it.
It got changed. We didn't see the final draft until that meeting. We got it basically when the press got it.
Yeah, and I was flabbergasted when I saw it was not the FDIC process. It was a bailout process.
I was being put on the spot. I was asked to appear with all the regulators at a big press conference unveiling this thing. I had not seen it beforehand. I didn't agree with what was in it.
What was in it that upset you?
First of all, it didn't make the FDIC the resolution entity. Basically the Treasury Department would run it and decide who was going to be the resolver and all that. And I didn't really care for the non-banks, but for the banks and the bank holding company, it was really important for us to get that.
Because what good does it do me to have Citibank if somebody else has got the Citi holding company? It doesn't. They're all intertwined. So that was a problem.
But it was more. We had pushed for very tight prohibitions on bailouts. We didn't want any more one-off bailouts, and that language was lost. And there was a lot of flexibility to do what we thought were essentially bailouts in capital investments and all the things that we think in retrospect would have been better to do something else.
So they got unhappy with me. Tim got unhappy with me. I didn't say anything at that point, but when Barney Frank asked me to testify later about the bill, I gave him my honest views.
I thought there was too much flexibility for bailout authority, and both the House and the Senate ended up rewriting the resolution authority to make it more aligned with what we had suggested. So we ended up winning that battle.
But I was just blindsided. The president didn't know. The president thought that everybody had seen this thing and signed off on it. I talked to Rahm Emanuel afterwards. They had no idea that Treasury hadn't shown it to us until that meeting. ...
As far as you could tell, the president understood the issues?
That's right. I think he wanted to end bailouts. He wanted a bankruptcy-like resolution process that would impose accountability. I think that's what he wanted. I don't think that's what he got in the white paper that was unveiled that day.
But you'd have to get into the weeds to really pick up on how the thing had been restructured to really allow continued bailouts, which was unfortunate. It was not what the president wanted. ...
When Lehman happens, that weekend, are you involved in telephone conversations with the campaign?
Yeah. I was involved in some conversations with the campaign. … I don't recall being on phone calls with the candidate then, but certainly the economics team was talking and trying to figure out what was coming down in real time.
Yeah, I mean, when you're in campaign mode like that, what you're trying to do with your team members is figure out what's going on here that's going to ripple through the economy in ways that people need to hear the candidate talking about.
So obviously, he can't go out and say, "Something's happening and I don't know what it is, but it sounds pretty bad." We have to try to give him some authoritative understanding of how this is breaking. And that's what we were trying to figure out.
How were both your bosses at sort of taking that in and turning it out and developing policy and being able to define it for the public?
I thought then, and I think even more so now, that President Obama has a pretty uncanny ability, nothing I would ever have expected for a Constitutional lawyer, to understand and explain the complexities of financial markets. When we used to brief him during these daily economic briefings early on in the administration, he actually wanted pretty granular information about yields on credit default swaps.
I remember once [former Federal Reserve Chair and Chair of President Obama's Economic Recovery Advisory Board] Paul Volcker joined us for a meeting in the Oval about this stuff, and afterwards he said to me, "I've never seen a president get into that level of economic minutiae about this stuff." And the reason was because the president, he was building an argument from the bottom up. He really wanted to understand what was going on in financial markets. Basically, his prescription was going to flow from a pretty deep diagnosis.
... President Obama comes in, is inaugurated. What are the expectations as far as Republicans in Congress about what to expect, the feelings about him and his team, especially when it comes to dealing with the economy and the economic crisis?
Right. Well, following President Obama's inauguration, we had heard a lot during the inauguration activities as well as during the campaign about him really wanting to be a uniter, not a divider, wanting to work across the aisle to do what was best for America. And I remember the first big issue that we encountered was the stimulus. And President Obama had proposed a $787 billion stimulus. I was new on the leadership team at that time, too.
So during those first days, [there was] a lot of discussion about, OK, so how are we as Republicans going to approach the new administration, and what are our views on the stimulus? And there was a real desire to find a solution, to see if there might be some common ground where we could work together to move something forward. And we decided to invite President Obama to come down and meet with the House Republicans, and "Let's have a discussion about the stimulus." And he accepted our invitation. He came down and met with all the House Republicans.
It didn't go quite as we had expected. The sense that we got really was President Obama saying: "This is my plan. This is my proposal." And instead of really looking for that opportunity to maybe work in a bipartisan fashion or find some ways that he might be able to incorporate some of our ideas, it was really more of President Obama trying to convince us that this was what we needed to do, and that we just needed to support his package.
Then around that same period, there was a meeting down at the White House where the Republicans and the Democrats were again discussing the stimulus, and that was when President Obama let it be known that he had won the election, and that clearly sent the message that, you know, we were in the minority and he was the new president, and he had the majorities in the House and Senate, and [he] really left us with the impression that he was going to do what he wanted to do.
So this is the Jan. 27 meeting where he comes up to Capitol Hill to meet with the Republican caucus?
And you're co-chair at that point, right? Of the caucus?
I'm vice chair of the conference, mm-hmm.
So tell a little bit more of that day. He walks in the room. What's it like? What does he do, your first impressions?
You know, he's the new president. This was the first time that many of our members on the Republican side were meeting the president. He was graciously and warmly welcomed by the conference, you know? We were very pleased that he would take the time to come and talk with us about the stimulus. And he spoke extemporaneously about the stimulus. He walked us through it [in] probably 15 or 20 minutes, just his thought process and why he was advocating these policies. And then he opened it up for questions.
And it was really during that Q&A, as the members stepped forward to the mic and asked some pretty, I think, appropriate questions about the amount of money that we were spending, the debt that we'd be taking on and the desire by the Republicans to enact more pro-growth policies and to look at the tax cuts and how we might be able to enact some policies that would encourage the small businesses in this country, because we know that they're the economic engine of America -- that was more the direction that we were wanting to go at that time -- and I don't ever remember him saying, you know, "OK, we'll take a look at that." It was more just defending his proposal as is.
You'll not be surprised to hear that there's a different opinion about that meeting from the other side, so let me ask you your reaction to it. The story has been reported -- and Democrats will talk about it -- is that before that meeting on the same day, before the president arrives, the speaker [John Boehner, R-Ohio] gives a little speech to everyone and says, "Hey, I'm not voting for this thing, and I'm hoping that in fact the rest of you are pretty much onboard here," and that in fact the Republicans, this was the beginning of what the Democrats feel was a refusal to approve anything that came from the administration. What's your memory of that event? Did that event happen in that way?
That's interesting. I was around the leadership table; I was in the room, and I don't ever remember the speaker making that comment.
What did the speaker talk about before the president arrived?
I remember it being, you know, we're going to -- we were going to be welcoming, respectful. "The president is coming to talk with the House Republicans at our request. It's an opportunity for us to ask him some questions. Let's have a dialogue about the stimulus. Let's hear what he has to say."
So there was no talk of the fact that there are not going to be any votes coming from the Republican caucus for this.
No, that all -- as I remember it, that all came after that meeting.
Why did it happen? What happened after the meeting, and why? Why the coming to heads about decision making on any -- because, I mean, all of the big policies that were pushed through, there were very few, if any, on most of them, Republican votes.
Right. Well, it was disappointing that the administration was not willing to work with the Republicans on this, on this proposal. We went into it believing that there might be an opportunity to find some common ground. And then it just -- it seemed like it fell apart, that it was more: "This is what I'm proposing. Take it or leave it." And our biggest concern was the debt that we were adding, the amount of spending that would be in that bill, and this approach of just continuing the record borrowing, the record spending, another bailout, rather than really looking at pro-growth policies that we believe would help the free market and the entrepreneurs and encourage that entrepreneurial spirit in America, which is also important to economic growth.
You had front row seats to a very important part of our history. Describe how you saw this president changed, what he learned, how he learned things, and how he changed over the time that you worked for him.
I wish I could give you a more sexy answer, but I don't think he really has changed all that much. It may be because, at root he's basically just a very smart pragmatist. I think he has a great capacity to take in information and recognize the lay of the land and what's possible, what isn't.
So if he's changed, it's that he recognizes just how much more narrow the partisan politics of today's Washington have made his options. In December 2008, he was very reasonably thinking big and imagining ways in which this crisis could be an opportunity for even transformative economic policy on investments.
In 2012, with the level of partisan dysfunction, he's got to realize something else. But the core of the man, to me, I don't think he's changed all that much. …
Where are we now, and what do you think the legacy of the way you guys and President Obama dealt with the crisis is going to be?
I think history will look back and say, that was an insightful way to do it. I think history will look back and people will still be mad 50 years from now [about] how did we come up with this insurance policy. And yeah, we're happy they paid back the money. But how was there not more remorse and accountability? And we should have had tougher conditions to get the money, like ended up happening with the auto companies or others.
And we will live to see whether we learn the lesson of Paul Volcker that no matter who, no matter what industry it is, you can't just trust people to police themselves. We've got to establish rules of the road. We've got to enforce those rules of the road, and that's good for business. That's not just good regulation; that's good for the market itself. It deeply undermines public trust in our financial markets if people can't trust the balance sheet or they don't know what is going on.
And at the peak of the crisis, the highest interest rates were the banks lending to each other. No bank would lend to the other bank because they said, "Well, they probably look about like us, and we're doing everything we can not to show what our problems are." We will see whether we learn that lesson. If we don't, then 10, 15 years from now, we will again be subject to similar kinds of speculative bubbles, excess credit and potential crises. And let us hope that we have learned some important lessons of both how to prevent it and how do you stop it when that occurs.
The president is out there now campaigning, and he's a got big problem to some extent because of course the economy and the handling of the crisis is what everybody is focused on. There's a lot of anger, and there's a lot of frustration out there. Part of the anger and part of the frustration is this feeling that the banks got taken care of, but Main Street did not, that individuals did not get a plan that is designed to help them. Why are we at that point, and how difficult does it make the president's role in the re-election?
So I think the first thing -- and I'm sure the president will tell voters this time and again -- everything he did was about the average person; it's not about the banks. Even when we were doing things for the banks, it was about the collateral damage, all of the people that would be hurt if the banks went down.
And if you think about the things that he's done, from the Recovery Act to the various extensions of unemployment insurance and the extensions of the payroll tax cut to health care reform to financial regulatory reform, all of those things are designed to help this economy be stronger, more stable, and to create jobs.
So I think the thing that people can rightly say is, "I wish you'd done even more." But [if they] say that what you did was not aimed at job creation and aimed at dealing with the fundamental problem, I think that's deeply wrong. That was always the focus. That was always the thing that he cared most about.
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.
... Overall, how do you rate the decisions by the administration, by Geithner's Treasury Department and Bernanke's Fed?
If you judge the bailout by the fact that the banking system has survived, most of it, and that it's back paying bonuses, then you'd say it was a success.
If you judge the bailout on the criteria of has the banking system returned to lending, has the American economy been returned to health, has the problem of "too big to fail" banks been resolved, has the problem of non-transparency been resolved, you have to say we failed.
If you ask the question is the problem of moral hazard worse, you have to say we failed even more. Has the problem of the undermining of our democratic processes [been rescued]? You have to say we failed. ...
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