The Stress Test

by Timothy F Geithner

(Random House, £25)

THIS is a complacent account by the former US secretary to the Treasury of his management of the US financial crisis of 2007 to 2009 when he bailed out the financial system to the tune of $700 billion after the collapse of the Lehman investment bank. 

Critics said it was a policy to rescue the arsonists but he and President Obama saw it as the only way to prevent meltdown. 

The crisis, according to Geithner, is rooted in human psychology. “Every financial crisis is a crisis of confidence,” he declares and that nonsense is belied by his statement that from 2001 to 2007 average mortgage debt per household increased 63 per cent while wages remained flat. Meanwhile credit was used to finance lifestyles that salaries could not support. 

Mortgage companies and banks had lowered their credit guidelines which allowed too many people, thinking they were insured against default, to take out subprime mortgages. That ended when the insurance companies began to run out of cash and banks became afraid to lend to one another lest they received subprime debt as security. 

Alarm bells first rang in 2006 when house prices started to fall and mortgage defaults began to rise. Many analysts, including Geithner in his already exalted position as president of the Federal Reserve Bank of New York, shrugged it off as the cooling-down of an over-heated market. 

In the three worst years of the crisis, nine million people lost their jobs and five million homeowners lost their homes. The economy picked up in subsequent years and much of the lending has been repaid. 

Today, the official unemployment rate is between 6 and 7 per cent but part-time underemployment raises it to over 13 per cent, while the wealthiest 10 per cent possess 80 per cent of all financial assets.

There were no sanctions imposed on the too-big-to-fail banks. The loans to boost their liquidity were unconditional, yet Asian countries in trouble had always been warned to clean up their banks and call a halt to the freedom of powerful people to take the economy to the brink of financial meltdown.

Geithner blames no-one for the crisis. Yet while it was in progress, financiers increased their profits and collected their bonuses and there is no reason to suppose it will not happen again. The US government now demands a 5 per cent ratio of capital to assets, though independent economists say it should be at least 20 per cent. 

Geithner concedes in an offhand manner that “poverty is shockingly high … income growth for most households is still stagnant … inequality is still rising.” Though the latest periodic crisis of capitalism is not over for most people, unfortunately trade union membership remains very low and mass action against oppression is absent.

This books’s author is all right, though. He’s taken a new job in Wall Street as president of a private equity firm.