Book Review: Stress Test by Timothy F. Geithner
Introduction of “Stress Test: Reflections on Financial Crises,” by Timothy F. Geithner
As president of the Federal Reserve Bank of New York and then as President Barack Obama's secretary of the Treasury, Timothy F. Geithner helped the United States navigate the worst financial crisis since the Great Depression, from boom to bust to rescue to recovery.
In a candid, riveting, and historically illuminating memoir, he takes readers behind the scenes of the crisis, explaining the hard choices and politically unpalatable decisions he made to repair a broken financial system and prevent the collapse of the Main Street economy.
This is the inside story of how a small group of policymakers—in a thick fog of uncertainty, with unimaginably high stakes—helped avoid a second depression but lost the American people doing it. The stress test is also a valuable guide to how governments can better manage financial crises because this one won't be the last.
Stress Test reveals a side of Secretary Geithner the public has never seen, starting with his childhood as an American abroad. He recounts his early days as a young Treasury official helping to fight the international financial crises of the 1990s, then describes what he saw, what he did, and what he missed at the New York Fed before the Wall Street boom went bust.
He takes readers inside the room as the crisis began, intensified, and burned out of control, discussing the most controversial episodes of his tenures at the New York Fed and the Treasury, including the rescue of Bear Stearns; the harrowing weekend when Lehman Brothers failed; the searing crucible of the AIG rescue as well as the furor over the firm's lavish bonuses; the battles inside the Obama administration over his widely criticized but ultimately successful plan to end the crisis; and the bracing fight for the most sweeping financial reforms in more than seventy years.
Secretary Geithner also describes the aftershocks of the crisis, including the administration's efforts to address high unemployment, a series of brutal political battles over deficits and debt, and the drama over Europe's repeated flirtations with the economic abyss.
Secretary Geithner is not a politician, but he has things to say about politics—the silliness, the nastiness, the toll it took on his family. But in the end, the Stress Test is a hopeful story about public service. In this revealing memoir, Tim Geithner explains how America withstood the ultimate stress test of its political and financial systems.
Table of Contents
Stress Test: Reflections on Financial Crises
About the author - Timothy F. Geithner
Timothy F. Geithner is an American economist, the 75th Secretary of the U.S. Treasury Department, and the youngest Treasury secretary in U.S. history. He served as a research assistant to the former U.S. Secretary of State Kissinger.
He joined the U.S. Department of International Affairs in 1988. In the next 10 years, he served successively as Deputy Assistant Minister for International Monetary and Financial Policy, Assistant Minister for International Affairs, and Deputy Minister for International Affairs.
In 2002, he joined the American Institute of Foreign Affairs and became a senior researcher in the Department of International Economics. At the same time, he also serves as the head of the policy development and review department of the International Monetary Fund.
In October 2003, he was appointed Governor of the Federal Reserve Bank of New York. Before joining the New York Fed in 2003, Geithner served in the Treasury Department for three administrations and five Treasury secretaries. He was also employed by the former Secretary of State Kissinger’s private company "Kissinger Associates".
Geithner is an expert in dealing with financial crises. He has previously studied the Asian financial crisis and participated in the formulation of financial rescue plans in Mexico, Indonesia, South Korea, Brazil, and Thailand. He is incredibly sensitive to problems, and he can often quickly find the key points of the problem intuitively and overcome crises.
As Chairman of the Federal Reserve Bank of New York and Secretary of the Treasury of US President Barack Obama, Timothy F. Geithner helped the United States survive the worst financial crisis since the Great Depression.
Excerpt from a book: "Stress Test"
Most of the principles of an effective response to crises are counterintuitive. The more you promise to do, the less you have to do. If you take a great risk to exit the market, you will take a smaller risk of a huge loss, and you will attract more private funds to consolidate stability instead of requiring government funds. You should make more mistakes instead of less. You will make mistakes anyway, but you should try to make mistakes that can be corrected at a lower price. It is easier to curb economic panic than to deal with the aftermath of an economic disaster.—— Quoted from page 394
The latter part is too long-winded. The first part explains to readers from the perspective of the government why the government has made the decision not to save the Lehman brother. How to decide who to save or not to save? How much funding do I need to allocate? What are the consequences? The 2008 financial crisis was caused by the excessive borrowing of real estate.
The current economic boom has relaxed the policy, demand exceeds supply, debt is higher than assets, and the financial industry binds the chain. Every company should have enough cash reserve to buffer the storm that may occur in the worst period. Bank lending should do enough background credit investigations.
The public should make sure that the risks are bearable (sufficient income to invest). Pay monthly interest), take responsibility for your own words, and don’t publish information that can be devastating without investigating and thinking. Investment projects must do a good job of risk management, must ensure a stable cash flow and cash volume, and speak with data, the book is a good book!
Stress Test Book Summary
If anyone in the world has the most say in the financial crisis, then Geithner is probably counted besides Bernanke. As a professional civil servant, few people have such a rich experience in dealing with crises--from working in the Ministry of Finance to handling international economic affairs and personally participating in the Mexican tequila crisis and the Asian financial crisis; to the New York Federal Reserve Board and witnessing the crisis.
The emergence collapsed, and the Minister of Finance was under the spotlight to design unprecedented relief measures. This book is a review, explanation, and reflection on his 25 years of experience after he stepped down as the Minister of Finance.
I read this book with gusto in 2 weeks. Although this book is not a novel at all, it has a novel appeal. I was taken into it to think: in the face of a crisis if it were me, what would I think and how would I do.
In the first half, Geithner described the situation in the U.S. market before the crisis and how the seeds of the crisis were planted. I have to say that I think the market at that time has an unusual similarity to the current one: low volatility, Complacency (Greenspan put ), chasing the yield
Stability can produce excessive confidence, which produces the seeds for future instability
In the second half of the book, Geithner mainly elaborated on his thinking model for formulating crisis response policies, and why some policies seem to be bail out the arsonist. Geithner believes that in the critical moment of crisis response, the moral hazard and the dogma of punishing sinners are Should be put aside, the first measure is to save the lack of confidence.
Every financial crisis is a crisis of confidence. Or apply the St Augustine Prayer he keeps quoting: Grant me chastity and continence, but not yet. Not yet. The most prosperous time of the crisis. We do need to control the deficit, but not when the current economy needs stimulus most.
I very much agree with Geithner’s response to the crisis. Although I was like many angry youths in 2008-2009, I thought why the U.S. government should save the culprits of those crises; and in 2011, I also believed that, like many Germans, Greece should get out of the eurozone.
But as I matured, I realized that those idealistic dogmas often came at a higher price. Those actions that are dressed in the cloak of justice, even if their purpose is completely just, but may not bring the justest result.
Finally, I want to talk about Geithner's criticism of politics. Throughout the book, Geithner has shown his aversion to Washington politics. In the last section of the book, he even said
"(The crisis) demanded the kind of response that democratic governments aren't built for-swift, consistent, coordinated action that prioritizes the desperate needs of the nation over the immediate demands of the public"
So in fact, Geithner is an elitist from the bottom of his heart. I actually agree with elitism, because the governance of the country and the economy is a difficult subject, and many of them are not easily understood by non-professionals, so trusting the nation to the trustworthy hands must be trusted.
But this does not mean that the democratic system is not important, because the democratic system just ensures that the trustworthy hands model can be elected. What we have to do is to design this system more efficiently.
In short, I strongly recommend this book. The book is full of subtle words and profound wisdom, and it is worth thinking about.
Stress Test Book Review
This book is very rich and detailed. It uses the personal experience and thoughts of the young US Treasury Secretary to fully describe the picture of the US financial crisis-roughly like the financial market.
In the eyes of ordinary people, the U.S. government is undoubtedly very powerful, but when faced with a financial crisis, it is obviously so weak, weak, internally, and externally difficult-this is far more than just government departments and international capital giants who have more power. A powerful problem, but because the two sides have a decisive difference in their own basic characteristics in the competition.
In the past, the understanding of the Great Recession was mostly derived from grassroots works, but I am afraid there is no such thing as Geithner in this world and so cool that it can be straightforward from beginning to live. There is nothing left to say. More than five hundred pages of narrative, heavy content, great harvest.
I will write down a deep impression, the main points are as follows.
1. Any financial crisis is a crisis of confidence. The core paradox of any financial crisis is as follows: The current justice and fair decision-making often give people the opposite feeling. The financial policy was affected by political correctness, which is why the Great Depression and the European financial crisis were not properly resolved. To solve the financial crisis, we must solve the problem of confidence. To solve the problem of confidence, the government must intervene in the market, inject capital, relieve companies on the verge of bankruptcy, and increase fiscal expenditures. The elites will think that this kind of relief is a drop in the bucket, and the grassroots will think that the government and Wall Street are at the same time. Therefore, any solution to the financial crisis is bound to offend the entire political spectrum.
2. However, government fiscal expenditures, capital injections, and even emergency rescues for companies are all necessary actions to prevent the collapse of confidence and the drying up of liquidity. Waiting and watching for a collapsed crisis will only allow the situation to spread. When the situation becomes more serious, a stronger government will be required to intervene. This is precisely against the original intention of minimizing the government. Naturally, the government should not eagerly intervene every time it encounters a small-scale regional crisis, because doing so will encourage moral hazard and excessive risk appetite. However, how to define when should be rescued is not easy! Geithner has given his own prescriptions for the prevention and governance of financial risks, which are worthy of careful study and study by each country.
3. The most important prevention against the financial crisis is to urge private companies to install "shock absorbers", such as increasing core capital requirements, restricting corporate liquidity sources (reducing perishable short-term financing), insuring deposits, and requiring initial deposits for derivatives, Higher mortgage loan down payment, etc., the main purpose is to reduce leverage, increase own capital, and protect enterprises to hold sufficient liquidity during the economic down cycle. Risks need to be systematically controlled. For example, before the crisis, the Federal Reserve was only managing commercial banks, then the risks would migrate to non-Fed-managed trusts, shadow banks such as investment banks and hedge funds (short-term loans and long-term loans), or other countries to pursue higher returns. In the end, a large number of OTS-regulated trusts closed down, and the remaining two investment banks changed their identities to become commercial banks to facilitate the Fed’s help. Basel III is designed to address global systemic risks.
4. When a crisis occurs, the two magic weapons that policymakers have are fiscal stimulus and monetary stimulus. The prerequisite for effective fiscal stimulus is that government debt cannot be too high. The relatively low government debt allows it to borrow cheap funds, and it also convinces the market that it has the ability to bear the burden of being the borrower of last resort during the crisis. Conversely, the high level of government debt during a stable period will inevitably limit its ability to act during a crisis. As far as fiscal policy is concerned, on the one hand, it is to reduce taxes and on the other, it is to increase government expenditures. Tax cuts take effect quickly but the effect is small, infrastructure investment is slow but effective, and direct subsidies to low-income families take effect quickly and are strong, but they involve social equity issues.
5. As far as the Federal Reserve and monetary policy are concerned, simply lowering the overnight lending rate cannot escape the liquidity trap. Market confidence is the key. The other most important tools are: the credit of the ultimate lender (the ability to stand up to provide liquidity when the market is in urgent need of liquidity), the right to orderly liquidate insolvent companies, and deposit protection to avoid runs. For example, in this crisis, the Federal Reserve took action to alleviate the scarcity of liquidity in the tripartite repo market and commercial bonds, and the FDIC guaranteed the security of new bank loans (encouraging more lending activities to boost liquidity). Capital injections by companies that are solvency but require liquidity (such as the dilution of Citi's equity) have also blocked the flood of confidence. The ultimate goal is to turn individual rational and collective irrational runs into individual senseless/irrational behavior, and the liquidity crisis will naturally subside.
6. Geithner and Greenspan have different views on the crisis. Geithner believes that the response to the crisis is counter-intuitive. The more you promise to do, the less you actually need to do, because confidence returns and liquidity returns, and the market quickly returns to normal operations. Greenspan believes that it is easier to clean up the bubble after it bursts, but for a systemic crisis involving the entire macroeconomic body, it is far easier to catch financial panic quickly than to boost the economy after the Great Depression. The ECB initially did not do this due to the influence of the German and French central banks and politicians, but it said that it wanted Greece to default on its debts, causing panic to spread, and the capital that broke out of Greece also spread to other countries with weaker fiscal positions such as Ireland, Portugal, and Italy. The shortcomings of Europe’s lack of a unified fiscal policy and financial power are obvious until the ECB promises to protect Greek creditors who feel guaranteed.
7. The Dodd-Frank Act gave the Fed the ability to liquidate companies that were unable to debt in an orderly manner during the crisis and established a consumer protection department to protect consumers from predatory loans, but at the same time abolished the FDIC's extensive guarantee deposits for political reasons. The ability to be safe, and the ability to refuse the Fed's single intervention in the enterprise (such as Bear Stearns, AIG, etc.), has laid a hidden danger for the rescue of future crises.
8. Although capital injection has been criticized by nationalized banks during the crisis, it is much more effective than buying potentially risky assets. This is because banks have high leverage. The resolution of non-performing assets that can be achieved by each unit of capital injection is based on leverage. The rate increases. The main function of the FDIC guarantee is to protect liquidity, while the main purpose of the capital injection is to avoid insolvency. Housing security projects that did not perform well in rescuing the crisis are also very limited in themselves, especially when compared to projects that generate jobs and guarantee income. The realization of the latter can help the former, but not vice versa. The root cause of the ongoing economic crisis is not the inability to repay mortgage loans, but the weak economy itself (high unemployment and declining real income).
9. Why government intervention in a crisis is important (203): When you can credibly commit to protecting people from a catastrophic outcome, they don't have to act in anticipation of it. When you eliminate the incentive to run, you don't have to finance a run.
10. The relatively slow recovery after the crisis is certainly related to the premature tightening of the fiscal policy due to the compromise with the Republican Party (although the real GDP growth rate is only 2.4%, the real growth after removing the tightening government spending Actually 3.5%), but what is more important is the painful deleveraging process after the financial crisis. The excessive expansion of credit before the crisis caused the post-crisis American people to shrink and diet, pay off debts and remove real estate inventories. Banks have reduced borrowing due to stricter supervision (interestingly, the overall ROE of the bank has been reduced from 22% to 22%. The current 11%, which means that the profitability of banks has weakened a lot due to stricter supervision).
11. Tell three interesting things. The first is that David Tepper made a fortune in 2009. At that time, the Ministry of Finance approved (the so-called Geithner bearish) that it would buy securities of financial companies at a certain price. The market still plummeted due to panic, and there was almost no media report. At this time, David bought heavily because he believed that the Ministry of Finance had enough funds to fulfill his promise. Secondly, if the Ministry of Finance breached the contract, he could sue him for infringement of the securities law. . At that time, the government's TARP project invested 426.4 billion US dollars in purchasing bank assets, and six years later, they reaped 441.7 billion US dollars. In fact, the taxpayers who scolded their mothers at that time not only did not pay for the large and failing financial institutions but also made money during the financial crisis. Money. This is the true portrayal of others' panic and my greed!
12. Second, when negative news floods the market, almost any positive news will cause the stock price to start to rise (March 2009), which is similar to the sudden surge in the stock market after World War II. The catalyst this time comes from Buffett’s PPIP idea. The Fed does not have the ability and time to accurately value bank assets and dare not promise TARP funds. Buffett recommends introducing asset management companies in the private market to jointly invest funds. In this way, the Fed will not overbid taxpayers because of ignorance. The entry of money and private companies also prevents banks from selling assets at cheap prices. This design makes fair transactions possible (although due to the crisis, the limited participation of private assets will inevitably lead to the fact that the capital investment in the project cannot be very large).
13. Third, in order to boost the securitization market (such as auto bonds, credit cards, and consumer credit), the Federal Reserve designed TALF. The Treasury Department allocated 20 billion funds in TARP, and the Federal Reserve cooperated with increasing leverage by ten times and injected it into the securitization market. middle. This move raised the almost shrinking ABS market's monthly activity to 13 billion U.S. dollars (18 billion U.S. dollars before the crisis) within six months of the collapse of Lehman. This very successful move is little known. The least promising companies at the time may be the fastest growing in the recovery (as of August 2017, in the previous five years, Citigroup annualized 19.1%, JPM 20.5%, Bank of America 26.4%, Morgan Stanley 26.9%! However, there are only 9.3% of the prudent rich countries and Goldman Sachs’s 17.4%.
14. Finally, let’s talk about the stress test. The purpose of the stress test is to increase the transparency of the banking system and reduce the market’s panic and speculation about uncertainty. After the test results come out, The banks with the largest capital gaps also receive more capital injections (the shareholders suffer more from dilution, which is a punishment for banks' excessive greedy risk, for example, Citigroup 1 yuan is diluted to 16 points). There is a stress test for this. The result may be bad, but Geithner’s intuition is that the capital gap will not be very large. Even if it is large, he can’t always cover-up, up but always show up to meet people. The tradition of stress testing has continued to this day. Fortunately, testing. As a result, because it was similar to the Bridgewater Fund, which had the most authoritative private-sector data at the time, and the results showed that the total capital gap in the banking industry was relatively small, the problem of insufficient market confidence was fundamentally eliminated, and the market gradually began to recover.