3 Insights From The Best-Ever Interview With Tim Geithner
This time it's with Liaqat Ahamed at TNR. Ahamed is the perfect interviewer, given his expertise in The Great Depression, and understanding the grave policy blunders that worsened that crisis.
Ahamed's book Lords of Finance: The Bankers Who Broke the World is a must-read today.
In the interview, Geithner pretty much nails everything.
Here are three big lessons.
How To Address Financial Crises
And I think what we have all learned from history, mostly from mistakes that we and others have made is that confronted with that, you need to apply a lot of force, with a lot of speed across the full spectrum of the policy tools we have. Which means monetary policy has to be very aggressive. You need to make sure that fiscal policies are very supportive of growth so you’re compensating for the huge collapse in private sector demand. And you need to be incredibly aggressive in making sure that you recapitalize the financial system. If you do those things incrementally, where you do one but not all three, then you’ll be left with much more damage. You have to do all of them. None of them is effective individually.
What's Holding Back The Economy
I think there’s very, very substantial room to do more on fiscal policy that would be good for nurturing long-term growth. That capacity would be greater if it was accompanied by some credible long-term plan to bring down future deficits. But generally the world views the American political system as still better positioned to deal with our challenges than any other major economy, and that’s one reason why we can borrow at very low rates. I think that the best economic strategy for the country would be to combine a set of very powerful near-term investments in infrastructure and elsewhere that would help support demand with long-term fiscal reforms that would restore sustainability. I think the limits we face right now are only political, not economic, not fiscal.
The Fundamental Reason Financial Crises Happen
...I think there’s something about human beings, and something about financial systems, where people tend to give less weight to the risk of an extreme event. So after a long period of relative stability, like we had in the U.S. and the world economy in the decade before this, that leads people to take on more risk than they should, borrow more than they should, and that’s what creates the vulnerability to crisis.