Stress Test: Reflections on Financial Crises

Geithner was president of the Federal Reserve Bank of New York from 2003 and Treasury Secretary from 2009 to 2013, and this is his account of the crisis and its aftermath from inside the response. It covers his earlier work on the Mexican, Asian and Russian crises at Treasury, which shaped his views on how financial panics end.

His central argument is that a financial panic is a run, that runs end only when the government convinces creditors it will stand behind the system, and that measures which appear morally satisfying, including letting institutions fail and imposing losses on creditors, make panics worse rather than better. He defends the AIG rescue on those grounds and argues that Lehman's failure was not a choice but the absence of a legal authority to prevent it.

The most substantive policy material concerns the 2009 bank stress tests, which he designed against considerable internal opposition. The tests published capital shortfalls under an adverse scenario and required private capital raising, which Geithner argues restored confidence more effectively than nationalisation would have. He addresses the criticism that the response rescued banks while doing too little for homeowners, and his defence, that the mortgage programmes were constrained by legal authority and by operational capacity, is the weakest section of the book.

This is a participant's account with obvious interests. Geithner does not seriously engage with the argument that the response entrenched moral hazard or with the political consequences of rescuing institutions while households were foreclosed on. It is the clearest available statement of the case for the response as executed, and should be read against critics including Barofsky and Stiglitz.