Book Review & Summary: 'Stress Test' by Timothy F. Geithner
From the former Treasury Secretary, the definitive account of the unprecedented effort to save the U.S. economy from collapse in the wake of the worst global financial crisis since the Great DepressionOn ... Google BooksOriginally published: May 12, 2014Author: Timothy Geithner
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| Stress Test by Timothy F. Geithner |
About the Author - Timothy F. Geithner
Excerpt from a Book
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
Short Comment
"This is the central paradox of financial crises: What feels just and fair is often the opposite of what's required for a just and fair outcome. It's why policymakers generally tend to make crises worse, and why the politics of crisis management are always untenable."
Bill Gates said that after reading this book, at least people know what efforts managers made during financial crises.
It is a very realistic review and reflection in an environment full of pig-like teammates and pig-like illusions.
Book Summary
a good book, so I'll share it in the form of a book Summary to share with like-minded people.
Timothy F. Geithner described this book best with the word: Sensational! In the past, most people's understanding of the Great Recession came from grassroots works, but there is probably no one in the world who is as immersive as Geithner from beginning to end and so cool that he can speak frankly and say anything.
MorIt's more than 500 pages of narrative, heavy content, and great gains. I will write down the most impressive points, 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 one 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 can 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 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, 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 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.
