Tim Geithner on How to Fight the Next Financial Crisis

Summary

Odd Lots Episode Summary: "Tim Geithner on How to Fight the Next Financial Crisis"

Release Date: April 3, 2025
Podcast: Odd Lots
Hosts: Joe Weisenthal and Tracy Alloway
Guest: Tim Geithner, former U.S. Treasury Secretary, former Head of the New York Fed, Warburg Pincus Partner, and Chair of the Yale Program on Financial Stability

In this insightful episode of Bloomberg's Odd Lots podcast, hosts Joe Weisenthal and Tracy Alloway engage in a profound discussion with Tim Geithner about strategies to preempt and combat future financial crises. The conversation navigates through the erosion of institutional memory since the 2008 financial crisis, the innovative initiatives like Yale's BADGET Project, the delicate balance between bank bailouts and direct consumer support, the evolution of financial regulations post-Dodd-Frank, and the United States' pivotal role in global financial stability.

1. The Fading Memory of the 2008 Financial Crisis

[02:00] Tim Geithner reflects on how the 2008 financial crisis has transitioned from a recent event to "capital H history," akin to monumental historical milestones like the moon landing. This shift signifies a generational disconnect, where newer populations lack firsthand experience and understanding of such profound economic disruptions.

“We’re getting to the point now where the great financial crisis, to a lot of people, is just not something that either feels relevant or anything except out of history books.” – Tim Geithner [02:20]

[03:16] Tracy Alloway emphasizes this generational gap by noting that approximately 20% of Americans were born after 2008, highlighting that a significant portion of the population may not grasp the gravity of financial crises purely from academic or secondhand knowledge.

2. The Importance of Institutional Memory and the BADGET Project

[04:08] Tracy Alloway introduces Tim Geithner and the Yale Program on Financial Stability's new initiative, the BADGET Project, which aims to create an online compendium for designing effective financial crisis interventions.

[05:55] Tim Geithner underscores the critical loss of institutional memory as a key factor exacerbating the impact of financial crises. Without firsthand experience or comprehensive knowledge bases, policymakers may falter when swift and decisive actions are required.

“Memory fades. So I think there’s a hugely compelling case for giving our successors a better body of knowledge about what works and what doesn’t…” – Tim Geithner [06:10]

[07:45] Joe Weisenthal connects the value of pre-developed crisis tools to the swift and effective responses observed during the COVID-19 pandemic, suggesting that institutionalized preparedness can significantly mitigate crisis impacts.

3. Balancing Speed and Credibility in Crisis Response

[08:06] Tracy Alloway poses a crucial question about whether speed or meticulous planning is more vital during a financial crisis.

[08:25] Tim Geithner responds by advocating for rapid action to prevent panics from escalating into catastrophic events. He emphasizes that while having a predefined plan is beneficial, the ability to execute swiftly is paramount.

“There is a huge value to speed when you’re at the edge of panic. It’s like the classic thing. These happen very slowly and then way quickly.” – Tim Geithner [08:27]

He also discusses the limitations of historical precedents, noting that tools like the "Doomsday Book" were inadequate in addressing the unprecedented nature of the 2007-2008 crisis.

4. Bank Bailouts vs. Direct Consumer Support

[16:24] Tracy Alloway introduces the debate on whether emergency funding should prioritize financial institutions or direct consumer assistance during financial turmoil.

[16:24] Tim Geithner argues that these approaches are not mutually exclusive and that effective crisis management requires both. He emphasizes the necessity of safeguarding the financial system while also implementing Keynesian fiscal measures to support households and businesses.

“There is no credible response to a financial crisis that does not come with a huge amount ... where people are not rewarding the arsonist or the imprudent.” – Tim Geithner [16:24]

He asserts that guaranteeing deposits and recapitalizing banks must occur alongside direct support to prevent both the collapse of financial institutions and the deepening of economic recessions.

5. Evaluating Success of Financial Crisis Interventions

[20:34] Tracy Alloway raises the challenge of measuring the success of crisis interventions, given the difficulty in establishing what would have happened in the absence of such measures.

[20:34] Tim Geithner proposes multiple metrics for evaluation, including comparing macroeconomic outcomes to past crises and assessing the resilience and reforms of the financial system post-crisis.

“The quality of the choices we ultimately made were quite good.” – Tim Geithner [20:34]

He highlights that, when compared to other major economies during the 2007-2008 crisis, the U.S. outcomes were significantly better in terms of recession depth, recovery speed, and system resilience.

6. Post-Dodd Frank Financial Regulations and Basel Standards

[25:20] Tim Geithner discusses the ongoing relevance of Basel regulations in maintaining a stable global financial system. He acknowledges the challenges posed by regulatory arbitrage but emphasizes the importance of a unified regulatory framework.

“We have a relatively integrated global financial system. It is very important to have a common floor to govern and regulate the major banks.” – Tim Geithner [25:53]

He advocates for continuous reassessment and enhancement of these regulations to prevent systemic risks emerging from non-bank financial activities.

7. The United States' Global Role in Financial Stability

[35:23] Tracy Alloway inquires about the U.S.'s standing and responsibilities in ensuring global financial stability, especially in light of evolving international dynamics.

[36:02] Tim Geithner articulates that the U.S. has a profound vested interest in maintaining global financial stability due to its substantial share of global GDP and equity markets. He underscores that initiatives like dollar liquidity swap lines are fundamental to both national and international economic health.

“These things are foundational to the system and our predecessors believed it was in the US interests.” – Tim Geithner [36:53]

He explains that such measures are not acts of charity but strategic investments to safeguard U.S. and global economic interests.

8. Modernizing Treasury Systems and Embracing Reforms

[37:53] Tracy Alloway seeks Tim Geithner's perspective on the ongoing modernization efforts within the Treasury, particularly regarding initiatives like the Doge project in the payment system.

[38:32] Tim Geithner emphasizes the importance of continual reform and modernization within government institutions. He advocates for leveraging expertise and maintaining a commitment to staying at the "frontier of knowledge."

“You have to continually bring an objective reform and improvement knowledge.” – Tim Geithner [38:32]

He highlights the need for ethical, smart, and technically adept personnel to drive these reforms effectively.

9. Lessons from the 2008 Financial Crisis

[40:09] Tracy Alloway asks Tim Geithner to share the most creative policy measures implemented during the 2008 crisis.

[40:32] Tim Geithner recounts the innovative approach of recapitalizing the banking system through stress tests, ensuring that banks maintained sufficient capital to weather severe economic downturns. This strategy was coupled with Keynesian fiscal stimulus measures to address remaining economic risks.

“We decided to recapitalize the banking system and what became known as the stress test … That was very helpful in trying to take out the remaining risk that we’d fall off the abyss.” – Tim Geithner [40:32]

He attributes much of the success to collaborative decision-making among a talented group of policymakers who could ideate effectively under pressure.

10. Reflections and Final Thoughts

[42:00] Joe Weisenthal expresses gratitude to Tim Geithner for his deep insights, while both hosts reflect on the importance of preserving institutional memory to effectively manage future financial crises. They commend the BADGET Project as a vital tool for ensuring that critical knowledge is retained and accessible for future policymakers.

“[...] the financial crisis, I spent a lot of time looking back over a bunch of those choices we made, what went into them.” – Tim Geithner [40:32]

The episode culminates with a reaffirmation of the necessity to blend rapid response mechanisms with well-founded, institutional knowledge to safeguard against future economic upheavals.

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This episode of Odd Lots provides a comprehensive exploration of the mechanisms and philosophies underpinning effective financial crisis management. Tim Geithner's reflections offer valuable lessons on the importance of institutional memory, the interplay between regulatory frameworks, and the strategic role of the United States in maintaining global financial stability.

Transcript

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[Bloomberg]

Bloomberg.

[KPMG]

Audio Studios podcasts Radio News.

[Tracy Alloway]

Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

Joe, you know what sucks about getting old?

[Joe Weisenthal]

You know what I twisted? I hurt my neck the other day and I was like, ah. I said, you know, I was washing dishes and I hurt my neck and I said, getting old is such a crime. I hate it. But what were you. Where were you going with that?

[Tracy Alloway]

Well, I was gonna say you start to lose shared experiences with a lot of people. And I realized this whenever I make a Simpsons joke. Oh yeah, there are a lot of people now who do not get that frame of reference. And I was thinking about this in relation to the financial system and specifically in relation to the 2008 financial crisis.

[Joe Weisenthal]

No, I've had this thought in the last year, which is that we' at the point where the 2008 financial crisis is like capital H history, right? It used to feel like when both of us started our careers, that the crisis and the aftermath was current events, including several years in the aftermath. Now it's like when I was a kid and I heard about Woodstock or the moon landing stuff that really was not that long before I was born or whatever, but I had, you know, that like various things when I was a kid could all have been the same year. The moon landing Pearl harbor, et cetera, that was all just like capital H history. And we're getting to the point now where the great financial crisis, to a lot of people is just not something that either feels relevant or anything except out of history books.

[Tracy Alloway]

That's right. And by the way, just to scare you a little bit more, I asked Perplexity, how many Americans were born after 2008? And it said 70 million. So that's roughly 20% of the population.

[Joe Weisenthal]

And if you figure the people who are like under 10 before then means nothing to them either. Anyway.

[Tracy Alloway]

All right, so obviously here at Odd Lots, we take our job, lovers of financial crisis hindsight and I guess, purveyors of financial records, extremely serious. And so we should talk about 2008. We should talk about financial crises. They obviously still exist. We haven't had anything on the scale of Lehman Brothers, but we've certainly had incidents like the collapse of svb. There's also that market sell off in August, which kind of came out of nowhere. A bunch of people talking about the risks of the carry trade, private cred. We have all these big worries stemming from the amount of debt the US has to refinance to really idiosyncratic things like the basis trade in US Treasuries. So we should talk about it.

[Joe Weisenthal]

Let's do it.

[Tracy Alloway]

Okay, so we really do have the perfect guest. We are speaking with Tim Geithner, the former Treasury Secretary, former head of the New York Fed, now at Warburg Pincus, and also chair of the program on financial stability over at Yale, which is why he's here today. The school is launching something called the new BADGET Project, which is an online tool or compendium for designing financial crisis interventions. So, Tim, welcome to the show.

[Bloomberg]

Nice to be with you both.

[Tracy Alloway]

So, first of all, I gotta ask, you know, 200 years ago, Walter Bagehot said that banks should lend freely against good collateral, and then there would be no problems. So, you know, are we done here? 200 years ago, we should have had this figured out.

[Bloomberg]

Yeah, I mean, financial crises have this classic tragic thing. They're crises of beliefs, in a sense, and the crisis of memory. And it's the loss of memory. It's the absence of any personal experience with what happens when things fall apart. It's the loss of memory about how panics start and what it takes to break panics and prevent panics from turning into great depressions, which is really what causes financial. It was Minsky who wrote that stability breeds instability. So you have long periods of expansion, moderation, and Recessions, asset prices going up, which creates the seeds for crisis, causes memories to fade, and allows these beliefs. There's a lot of folk wisdom in these things, beliefs that get in the way of people doing what they have to do in a crisis to prevent it from turning into something catastrophic.

[Joe Weisenthal]

Do you believe that there could be some new academic like, okay, there's this new project. Can we actually escape this trap of forgetting history? Is there any prospect for humanity to avoid the endless cycle of forgetting?

[Bloomberg]

When I went to the New York Fed in 2003, we were in the foothills of that long financial boom. I had spent the previous 18 years or 15 years at the treasury and the IMF watching countries confront a whole range of different financial crises, just not in the United States. There's lots of reasons why, of course, there's lots of parts of policy where the practice of policy, the design of policy, is short of the frontier of knowledge. And closing that gap is a really important thing. If you ask yourself, why is it in the graveyard of mistakes that governments make in financial crisis, why do they make those mistakes? Sometimes it's just because the politics are incompatible with what it takes to break a panic. The basic challenge, which is it looks like what you need to break a panic or make people feel safe to keep their deposits in a bank. Looks like you're aiding the arsonist, looks like you're rewarding the arsonist or the imprudent. So there's a bunch of folk wisdom about that gets in the way of doing the necessary thing quickly enough to make a difference. But a lot of the gap is because people don't know what to do, because, as I said earlier, because memory fades. So I think there's a hugely compelling case for giving our successors a better body of knowledge about what works and what doesn't, so they can act more quickly and be closer to the frontier of good response more quickly. And that's the basic case for what Andrew Mettrick and his colleagues have built at Yale.

[Joe Weisenthal]

You know something, Tracy, one thing, just thinking about this, it occurs to me, 2020, when Covid hit, there were a lot of tools on the shelf developed in 2008, 2009. And it sounds like part of the idea is, let's actually make this a shelf. You know, like, let's actually, like, put that shelf out there. But it does seem like that helped the rapidity of the 2020 response.

[Tracy Alloway]

I was literally about to ask a taking something off the shelf question. Okay, but on this note, how important is speed when you're fighting a financial crisis. Is it more important to have an idea of exactly what you're going to do, or is it more important to, you know, say, good question. Whatever it takes. Allocate.

[Joe Weisenthal]

Fill in the details later.

[Tracy Alloway]

Fill in the details later.

[Bloomberg]

Of course, you have to be able to make the credible commitment that you will backstop the financial system and make it safe to stay and to take risk. Again, you have to be able to make that commitment credible. But it's not enough to state it. People need to see it. And how you design that mix of risk sharing things that go way beyond badget is critical to the efficacy and the credibility of the commitment. So I think you're right, though, to say that if you look back at that early weeks of the pandemic, it was hugely valuable that a bunch of people around the table then were around the table in 07 and 08, and that memory of what might work was still alive. And they could draw from a set of cases, examples, and move more quickly to put them in place. But there is a huge value to speed when you're at the edge of panic. It's like the classic thing. These happen very slowly and then way quickly. And you don't know what the margin is for something that is burning slowly turning into something that's catastrophic. And so you need to be able to move very, very quickly. And again, one of the barriers to moving quickly, there's lots of barriers. One of the barriers to moving quickly is when people are not really sure because they hadn't lived it. There's no people around them in the institution they're coming into who have any knowledge of it. When I went to the New York Fed, I remember initially they had something they called the Doomsday Book. The Doomsday Book was the comprehensive set of precedent of what the New York Fed had done in the decades since the Great Depression.

[Tracy Alloway]

How big is it?

[Bloomberg]

And I was quite eager to see this book. It was a quite fat book. But what was remarkable about the book was in those decades between the Great Depression and 2007, the things the US had to deal with were relatively modest, nothing like the classic systemic financial crisis. And so that body of precedent was of limited value. And you could have people sitting around the table saying, but we should do what Sweden did, or not do what Japan did, or people had all these debates, but if you ask them, what did Sweden actually do? There was no knowledge of that. And you could spend your time calling the person in Sweden who had done that, but that takes some time.

[Joe Weisenthal]

It's so funny because now I have this memory and I totally forgot it. I was a bit Business Insider at the time and people are like, oh, the Swedish model of bailouts. And people were like debating this and I was like, I have no idea what this is. I mean I saw that term, the Swedish model of bailouts dozens or hundreds of times the number of times I actually read something with some substantive. You know, you mentioned that between the Great Depression and the great financial crisis, we didn't really have to deal with too much, but there were a few Continental Illinois in 1984. Could those have gotten really bad and become financial crisis like events had intervention been slower?

[Bloomberg]

I don't think that you had that mix of factors then the type of dry tinder that left you vulnerable to that. Why was that? Part of what makes you vulnerable to a classic panic is when the economy as a whole is so imbalanced, people have borrowed too much relative to income. There's a whole set of expectations that go into leverage and behavior based on a long period of rising house prices or asset prices. And you didn't have this period we the great moderation where people got used to the expectation that recession would be short and shallow and that equity price readjustments you could call them, wouldn't cascade into something dangerous. So you need a long period for the economy to get way out of balance, which was true in 07. It was also true that in the decades after the Great Depression, the financial system outgrew the banking system and outgrew the protections in place around the banking system to prevent excess leverage and runs. And in our system in 07, this is a very important thing to remember is that in our system in 07 you had a banking system which obviously did not have enough capital to withstand a terrible recession. But the more consequential risk for the system was you had a non bank financial system with a set of investment banks and non bank financial institutions like GE Capital and others and a whole bunch of funding vehicles that had classic bank type run risk that were able to run with a huge amount of leverage because people had thought the last decades suggest the future would be benign. And so that mix of factors, a more unbalanced economy with a financial system very vulnerable to runs took a long time to build up. And I don't think we had that mix of factors until 07.

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[Tracy Alloway]

Licensed by NYDFS so one of the big debates when it comes to financial stability is whether emergency funding should be directed at people versus financial institutions. So how do you think about bailing out banks versus maybe bailing out consumers? Helping them to pay their mortgage, helping them to survive through the pandemic? Is that better than underwriting bad assets at a bank or a shadow bank, for instance?

[Bloomberg]

Yeah, excellent question. And they really are not. You can't think of them as choices because there is no credible response to a financial crisis that does not come with a huge amount. What we might call classic Keynesian direct support to households, state and local governments, and to business in some way. And you can figure out your financial system stuff and do that, well, it will not be sufficient because you need to use that massive Keynesian arsenal of force to help take out some of the risk of the acute recession. But it's also true that doing the Keynesian stuff is not sufficient. No economy can survive the collapse of the banking system. And the only way to prevent the collapse of a banking system or a financial system is to guarantee deposits, lend freely against collateral to solvent institutions, and sometimes to recapitalize the banking system. So they are necessary things that go together, and it would be a mistake to try one way out the other. And if you look back, and this is the right way to look back, and part of what Andrew Metric and his team have built at Yale is just to try to do a careful, analytical, dispassionate look back at mistakes and lessons and choices. It is absolutely fair to say that the US as a political system, as a country, did not do enough of the classic Keynesian fiscal response early enough and sustained enough to complement the things we did to prevent the collapse of the financial system.

[Joe Weisenthal]

One of the things that we've sort of realized during the podcast over the years is that even a story like the great financial crisis in 2008, 2009, people are still debating it, People are still debating why and what actually was the cause. And you still get people who say things like, you know, actually, subprime really wasn't that big. And that actually was not as crazy as it sounded when it was asserted at the time. And it's like, actually, you know, the issue was like, it was all those like, yield hungry German land banks and stuff like that. I'm curious, just for you, like, you know, 17 years later or whatever, are there things that you've changed or not in like, necessarily the response, but when you think back at causes that you see in a different light today than you did at the time.

[Bloomberg]

No, I mean, you should never say no. Obviously, you should look fresh at these things all the time.

[Joe Weisenthal]

Or is there any conventional wisdom from the time that you don't think has stood up as well as maybe.

[Bloomberg]

I think the enduring debate everyone still has is a good debate to have, which is a version of your question, Tracy, which is that. But couldn't we have done more for the individual and shouldn't we have done more for the individual? And wouldn't it have been more effective and less damaging? Absolutely, that's the right question. And the fiscal response of the Us in the pandemic is just a good counterexample. There's a good set of arguments that we overdid it in the pandemic, but the speed and the mix and the overall force and the composition of the fiscal policy measures put in place, there are a good counter example, and I think that is a very good lesson. Of course, you don't want to be like. You don't want to overlearn your lessons of these things. I think the other big lesson, of course, and we've talked about this, is just again, that we were as a country, we were late to escalate on the purely financial dimensions of the crisis. And part of that was because as we talked before, people had no memory of what it takes. And people could debate whether we're going to have a crisis for a long period of time. And that got the way of speed, but partly because in our system, a lot of the very powerful things run through the Congress and that it takes some time. And normally in our system, and uniquely our system, in some ways, because of the checks and balances, things have to feel terrible before you can shake the Congress into action.

[Tracy Alloway]

Things have to feel like issues that people will actually vote on. Okay, so how do you actually judge the success of a financial crisis intervention? Because this seems to me to be the real difficulty here. So you're trying to prove that the counterfactual would have been worse.

[Bloomberg]

Exactly.

[Tracy Alloway]

And that's probably impossible. So how do you go about thinking, oh, this was good, this was successful versus we should have done this, this was a total failure, et cetera.

[Bloomberg]

Yeah, there's a bunch of different measures you can use, and of course, none of them are perfect. One is you could look at the quality of the macroeconomic outcomes relative to past crises, and it's not a great comparison. Seems like a low bar. But the classic comparison is to say what was the depth of the recession, its duration, and what was the path of growth in the US in this experience relative to two things, two comparators. One is the Great Depression, where unemployment peaked at 25% and you had a decade of negative, if not terrible, growth outcomes. And the other comparison is to look at the other major economies that went through this crisis and what were those outcomes in terms of basic thing, depth of recession, speed of recovery, rise in unemployment, loss of income, loss of wealth. Those are not perfect comparisons because everything is different. But I think they're pretty good comparisons. And I think that there's a bunch of arguments that, and Ben Bernanke knows written about this, that the size of the shock that Precipitated the crisis of 0708 was larger than at the beginnings of the Great Depression. And I think by that measure U.S. outcomes were dramatically better. Our outcomes were also significantly better than those of any other major economy went through the crisis. And I said, we made a bunch of mistakes. We were short of the frontier of what was possible, we were late to escalate, didn't do enough fiscal. So I think we should look at those things with open eyes. But on those two measures, I think that the quality of the choices we ultimately made were quite good. There's one other thing you can look at which is what is the health of the system that emerges from the ashes of the crisis? What's the quality of the reforms that are put in place? I think if you look at, again, these are imperfect things, no perfect comparisons, but our system emerged with much more capital than the peers of the major US institutions. Therefore, we had a much more resilient system and I think a system able to help finance a more rapid recovery that was from many other countries. And I think we were able to still preserve a system which is still, I think, best in the world at channeling capital to people who have had a good idea. And the wave of innovation, massive innovation we've seen in the US economy in the decades since and its relative concentration in the United States is partly a function of the fact that we were able to repair the damage done to this system relatively quickly and put in place a set of institutions and ways to fund good ideas that still remains the envy of the world.

[Joe Weisenthal]

It's interesting, Tracy and I have done tons of episodes on how the financial system has changed post Dodd Frank, and we've talked a lot about multi strategy, hedge funds and private credit, et cetera. And we can all come up in our minds with scenarios where all that good's bad because. Right. It's easy to come up with. But a lot of times I walk away from those conversations, it's like, oh, seems like a lot of risk taking activity has in fact moved away from deposit taking institutions, but the deposit taking institutions still have function. I mean, like, you know, I don't want to jinx it, but it does seem like the financial system that exists today to some extent is the financial system that was conceived of with Dodd Frank.

[Bloomberg]

Yeah, of course, as you said, you want to always be careful because you won't know until you have the more exacting test of resilience and the more exacting test of resilience. Is a severe recession that starts outside the system, not within the financial system. And we haven't really had that test yet. And the pandemic was not a perfect test of that system. So we won't really know. But I think you're right to say that the system as it looks today has a banking system which has more capital, better set of protections around it and the non bank system has more stable foundations. It's a system where the credit that comes outside the banking system is in relatively stronger hands, less leverage, less run risk. Now of course there will be some sadness and there will be some pain and people will lose some money and there will be some failure in even modest shocks in this system. But that's the way the system should work. The test of a system is, I think Larry Summers said, it should be safe for failure. And you want to build a system that is not prevents failure where failure is inconceivable, but where it's safe for failure. And that meaning you can allow a fair amount of failure to happen without needing to do the massive escalation that we had to do in that crisis.

[Tracy Alloway]

So speaking of banking reform and Dodd Frank and capital, I wanted to ask you about Basel because in the aftermath of the financial crisis, Basel was this huge, huge conversation. And if you wanted to do something or change something, you had to get all these different countries to come in and agree on that specific thing, all these different policymakers. Fast forward to today. I'm going to try to put this diplomatically, but it seems like the US is kind of going its own way in many respects. Does Basel matter anymore?

[Bloomberg]

We have a relatively integrated global financial system. So it is very important there to be a sort of common floor to govern and regulate at least what the major banks do that operate across the system. That's a hugely valuable thing. And one of the great things that was done in the early 90s was that initial wave of setting of norms and standards. Very valuable. Of course you want that floor to be set at a reasonably conservative level, not easily eroded over time. But countries should be free to go beyond that. And you might look at that as we all did in the mid 2000s afterwards and say that floor was set too low and you want to raise the floor. And you don't need to let the requirements of consensus or the long arp of global negotiations get in the way of countries deciding if they want to be more conservative. And we were more conservative in some ways. But anyway, I think it's a valuable framework and we should want to protect and preserve it. But always look at it fresh and careful and understand that the fundamental challenge in design of these safeguards is that you're going to create incentives for arbitrage. And you're going to create, if you make the banking system safe, you're going to make it more economic for a whole bunch of risk to move outside the banking system. And you might leave yourself with a system where the banks look less likely to fail, but the system is more unstable. And that's just the thing you want to avoid. So you want to constantly be looking at that balance between how to make sure that the core of the system that is the oxygen lifeblood of any economy, is stable. But that's a necessary but not sufficient test. You want to make sure that the rest of the system, because of the incentive you're creating for arbitrage and migration, did not leave you with an overall less stable system. And you should look at the fresh at that challenge all the time.

[Joe Weisenthal]

You talked about this before. When you think about past crises, either in the United States or internationally, and there are various. The bookshelf again of the various tools. But then there's also the political reality. And even in the US TARP failed the first time, famously, it barely passed the second time. And of course TARP itself wasn't enough because then of course, the Fed had to engage in a number of different programs. And then there was the Obama stimulus on top of that afterwards, which was post tarp. I'm curious, when you look back through history and the new Baget project and stuff like that, how much is it when you think about system design? This is a good way to bail out a bank, whatever it is. This is a good way to backstop deposits. This is a good way for the Fed to find a price for buying private bonds, whatever it is, versus understanding the political reality of the country that had the successful bailout or the successful intervention, I should say at the time, because it really does seem to me that that's huge in a parliamentary system. There's no division of government between the legislator and the head of state. And if they have the majority, they could probably pass it and you move fast, et cetera. It seems like a huge deal in the United States that we don't have that sort of same unilateral fiscal capacity often.

[Bloomberg]

Yeah, exactly. I mean, we have a system where the anchor of the global financial system has a central bank with much less authority than most major central banks in terms of what they can do, what assets they can buy in a crisis, and has a political system, as you said, unlike a dominant parliamentary model where there's a set of checks and balances with a lot of rationale foundational justice to them that is designed to make it hard for the executive branch to do a bunch of things that you have to do quickly in a crisis that creates a huge vulnerability to the US but also to the world. And I think it is something where there is a very good case to try to make sure you have some delegated emergency authority at the level of the central bank and the treasury with some constraints on discretion and good framework for disclosure and protections so that you are not putting the country in the position or the global financial system in the position where we are Tooling.

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[Tracy Alloway]

Licensed by NYDFS so Joe mentioned earlier that it's pretty easy to come up with potential risks to worry about. Right? There's like a long list of things at any one time right now. People talk a lot about the indebtedness of the U.S. u.S. Treasury is obviously a bedrock of global finance. People talk about things like the basis trade, private credit, all that stuff. Where do you see risks right now?

[Bloomberg]

I think it's good for people to understand that these things that are foundational to how well economies do across time and how fair outcomes are and the incentives for innovation and investment. A lot of these things rest on what are intangible. Some people say magical things like the treasury is the risk free asset that people feel comfortable they can come take exposure to Treasuries and to the dollar when they're worried about the world. Those things are hugely valuable. People tend to think of these things as partly around what's the dollar's role as reserve currency. But there's some foundational benefits and they're about a type of trust, you could say about a confidence and stability in rule of law, in property rights and predictability. Independence of the Fed is one piece of that. And I think it's important for people to not take for granted the durability of those things because many of them are not fully anchored in law. Part of them are a set of norms and customs.

[Tracy Alloway]

Norms.

[Bloomberg]

Yeah. And there's the kind of things that you don't, you don't know you have them until you risk losing them. It's important to recognize and it goes to what you've all been talking about. These are things that are about trust and credibility. And whether the world believes that the US can hold things together and defend them and protect them is again, it's partly a measure of how fiscally responsible we are. It's partly a measure of do people trust? The Fed can operate independent of politics, but it's also a function of whether people believe that those foundations of relative stability and expectations in rule of law and property rights and things like that are still durable protected assets of the country.

[Tracy Alloway]

So speaking of trust and people believing in the US you were very involved in the FX, the currency swap lines around the 2008 financial cris into 2009. And I saw a report over the weekend saying that European central banks are, you know, policymakers are questioning whether they can still rely on the US to actually provide that dollar liquidity in an emergency. Again, things are changing when it comes to the US's relationship with the rest of the world. So how do you think about that and the importance of, I guess the US's global role when it comes to financial stability?

[Bloomberg]

I think Americans and the world understands that the role we have, and it's built up over time, it existed before World War II, but its foundations were laid in the wake of the Second World War. That that system where the US was central and dominant and still is dominant today, is a system that's hugely beneficial to the United States. It's not designed as an act of charity to the world. It's something that our predecessors believe was deeply fundamentally in the US interests. So these things you talked about, like the swap lines or the willingness to give access to dollar liquidity to foreign central banks in a crisis, these things are foundational to the system. And they're foundational. We made them at foundations because we thought they were fundamental to US interests.

[Joe Weisenthal]

Can you explain that for how. Because I do think some of the big questions are people look at the United States relationship with world and they sort of ask like, oh, what are we getting out of this? So how would you articulate the US's role and what we get out of it?

[Bloomberg]

It's a hard thing to explain and defend. It's one of those things that until you lose it, it's hard for people to appreciate it. One way of thinking about it is, I don't know, we're single digit percent of the world's population. We're 25% of the world's GDP. That would make you think that we have a big stake in the basic quality of economic outcomes outside the United States just by that basic ratio. But we're 75% of the of equity markets globally. So we have a huge fundamental economic interest that comes from what happens outside the frontiers of our borders and a lot of benefits to us and trying to make sure we protect and sustain that can't be indifferent to the fates of other nations.

[Tracy Alloway]

So you're a former civil servant, even before you were U.S. treasury Secretary, you were a civil servant way back in the day. And obviously government bureaucracy is a big story right now. And we've done a couple episodes on Doge and what they're doing specifically at US treasury in the payment system. There's a lot of back and forth about exactly what the goal is, how much coding power the team actually has. But what's your impression of what's going on here and how much modernization, I guess, based on your experience at treasury is actually needed in that system?

[Bloomberg]

As you said, I grew up in the treasury, in some sense I got to work with a hugely talented group of people, ethical people, very smart people, wonderful, amazing experience for me. And of course, anybody who's been in government has lived with a whole bunch of things, obviously technology, but not just technology, a bunch of things where of course, if you took a fresh look at it, you'd say, gee, we could make that better. And I think a huge amount of credibility and trust in government requires people in those roles trying to continually bring an objective reform and improvement knowledge. I mean, one of the things that I first met Larry Summers when he first came to run the international part of the treasury when I was a civil servant. And one of the things that I admired about him most, I still admire him the most, is that he came in and he had this deep conviction that anything we were doing, any type of policy, any type of practice, was short of the frontier of knowledge. And that our basic idea job was to get it closer to the frontier. And I think it's very important for people who come into these jobs, whether you're a civil servant, whether you're coming in fresh political thing, to bring that basic, have that sense of obligation and a possibility. So of course there's huge frontiers where if you bring an effort to improve and reform, and it's not just the tech stack of the IRS or the treasury or the Fed, vast opportunities there.

[Tracy Alloway]

So Joe and I, we love historical anecdotes, we love stories. Our listeners do too. What was the most creative thing that you did as a policymaker back in 2008 in the financial crisis? The thing that you don't have to necessarily be the most proud of it, but the thing that was the most, I guess, out there, creative solution.

[Bloomberg]

This is not going to be as interesting as your question. When I left my old job and I was writing about the financial crisis and I started to teach with Andrew Metric at Yale, the financial crisis, I spent a lot of time looking back over a bunch of those choices we made, what went into them. And I remember having the experience over and over again, which I love, which is I'd convene this team of people that are working on some aspect of the crisis and I'd ask them, and where did that idea come from? Whose idea was that? And I love the fact that people would say over and over again, I can't really remember. I remember sort of the meeting venture ideas. It was. Anyways, it was a great group of people. I think that the most valuable, in some ways the most innovative thing we did was how we decided to recapitalize the banking system and what became known as the stress test as a way to. What we basically said is we want to make sure the banking system has enough capital to survive a Great Depression like outcome. And we're going to give people a chance to go raise that capital and if they can't raise it, we're going to give them the capital. And that alongside all the things that had been done in the fall of 08, alongside the Keynesian stimulus, the first initial stimulus and what the Fed was doing, that was very, very, very helpful in trying to take out the remaining risk that we'd fall off the abyss. And that was something that countries hadn't done quite that way before.

[Tracy Alloway]

Do you remember how you came up with that idea?

[Bloomberg]

A lot of awesome people sitting around a table together.

[Joe Weisenthal]

Tim Geithner, thank you so much for coming on. Oddlaus.

[Bloomberg]

Yeah, nice to see you guys.

[Joe Weisenthal]

Really appreciate it.

[Bloomberg]

I'm a big fan of what you guys do. I love the, you know, the long deep exploration.

[Joe Weisenthal]

Love to hear it.

[Bloomberg]

Of the highly technical but consequential chapters of financial history producers.

[Tracy Alloway]

Keep that in.

[Joe Weisenthal]

Yeah, keep that in. All right, take care, Tim.

[Tracy Alloway]

Joe, obviously that was a fascinating conversation. Again, we have a bias towards talking about this stuff because we live through it. But I did think that Tim's point about institutional memory is really important and it is true, you know, 2008 is fading into the background capital H history, as you mentioned, which means if something happens, then potentially people aren't going to have that sort of instinctual, knee jerk knowledge of what they need to do. And so from that perspective, I find this new Bagehot program very interesting.

[Joe Weisenthal]

Yeah, I do too. You know, the other thing that I think is interesting is like, okay, so you have to go a certain amount of time for people to forget and for people to just sort of not remember what the playbook looks like, et cetera. But also he said, and I thought it was really interesting, is you also need time for some sort of balance sheet dislocation or lopsidedness to emerge or the dry tinder that can explode. And so why didn't we have a crisis in 1984 with continental Illinois? Well, maybe at that time there just wasn't some derangement of the financial system that. That had the ability to set off. And so I don't know. Obviously, like Covid was this very bizarre shock where the economy was sort of shut down, and then there was a financial crisis for about five minutes. But you do wonder whether these sort of, like, imbalances have built up in some extreme way that we haven't seen is, like, a really interesting question.

[Tracy Alloway]

Right. And just since you brought up the pandemic, this was the other thing that struck me. So there is that argument that in 2008, the US should have done more on the fiscal side, so, you know, help people pay their mortgages.

[Joe Weisenthal]

Pay their mortgages? Yeah.

[Tracy Alloway]

Write some checks, helicopter money and all of that. And then in the pandemic, we actually did that. We handed out some money for both people and businesses. And then we had inflation. And so I guess, like the needle kind, it feels like we're swinging from, like, on a pendulum. Right. Like, it's either too little fiscal or too much. And we've never gotten it exactly right.

[Joe Weisenthal]

And we'll never get it exactly right. But two things, like, in April 2020, I still think a lot of people would be pretty happy with the economic outcome that we had two or three years later. But also, more deeply, we did a bunch of stuff in the 2000s that I've said many times on the podcast we probably should have done in the 2010s. Not just on the pure helicopter money, fiscal stimulus, but a lot of the things on industrial policy, energy, et cetera, when there was widely available labor, when there was widely available raw materials, because so much of the economy, global economy, was slack or in a state of slack. A little bit of a missed opportunity there.

[Tracy Alloway]

Yeah. Like, you know, building highways to Tim.

[Joe Weisenthal]

We need to bring Tim back in here. I need to make this one last point to him.

[Tracy Alloway]

Yeah.

[Joe Weisenthal]

I just need to tell you, I think you're missing. No, I'm just kidding.

[Tracy Alloway]

But on that note, I mean, Tim was bringing up the Great Depression as the sort of baseline for judging the success of interventions, which, again, probably a low bar, but we did some stuff during the Great Depression, like, we built things, and that provided jobs to a lot of people during a very bad time. So shall we leave it there one.

[Joe Weisenthal]

Day we'll get one, right? Let's leave it there.

[Tracy Alloway]

That's right. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at traceyallaway.

[Joe Weisenthal]

And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at carmenarmon, Dashiell Bennett at dashbot and kalebrooksailbrooks, and check out the new BADGET project at the Yale Program on Financial Stability. Really fascinating stuff. Really interesting research. I'm sure even if you're not a central banker in a crisis, you'll learn something from reading through it. For more Odd Lots content, go to bloomberg.com oddlots where we have all of our episodes in a daily newsletter and you can chat about all of these topics 24. 7 in our Discord, Discord, GG, Oddlauds.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we look back on financial crisis history, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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[Bloomberg]

Every time I hear about my dad is, oh, he's a killer. He's just straight evil.

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[Bloomberg]

At the end of the day, I'm literally a son of a killer.

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[Bloomberg]

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