Tim Geithner on How to Fight the Next Financial Crisis

The 2008 financial crisis is fading into history, but the risks of something big happening again remain. In this episode, we speak with Tim Geithner, the former US Treasury secretary and head of the New York Fed during the tumultuous collapse of Lehman Brothers. The conversation coincides with the launch of Yale's New Bagehot Project, which is aimed at guiding the next generation of financial crisis-fighters (Geithner is Chair of the program on financial stability at the Yale University School of Management). We talk about what's most important when it comes to putting out financial fires, and what could have been done differently during 2008. And of course, we also talk current risks in the financial system. Read more:US Debt Load Tops Fed’s Survey of Financial Stability RisksFiscal Debt Binge Is World’s Biggest Stability Threat, BIS SaysSubprime Collapse to Global Financial Meltdown: Timeline Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 0:59Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:39Speaker 02

  The world of business is constantly evolving and Comcast business keeps you totally in step with secure AI-backed networking in more than 100 countries. They're powering over 90% of the Fortune 500 and millions of small businesses. That's a lot of muscle. And behind it all, thousands of experts answering your call at 2:00 a.m. like it's 2:00 p.m. One partner powering how business gets done for companies around the globe. When you add it all up, no one does business like Comcast business.

• 2:27Tracy Alloway?

  Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alockway.

• 2:31Joe Weisenthal?

  And I'm Joe Weisenthal.

• 2:33Tracy Alloway?

  Joe, you know what sucks about getting old?

• 2:37Joe 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 getting? Where were you going with that?

• 2:48Tracy Alloway?

  Well, I was gonna say, you start to lose shared experiences with a lot of people. And I realize this, whenever I make a Simpsons joke, 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.

• 3:08Joe Weisenthal?

  No, I've had this thought in the last year, which is that we're 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 in the aftermath was current events, including several years in the aftermath. Now, it's like when I was a kid and I like 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, etc. 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.

• 3:52Tracy 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 millions. That's roughly 20% of the population.

• 4:04Joe Weisenthal?

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

• 4:08Tracy Alloway?

  All right. So obviously here at All Thoughts, we take our jobs as 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.

• 4:42Joe Weisenthal?

  Yeah, carry trade.

• 4:43Tracy Alloway?

  Private credit. 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 Treasury. So we should talk about it.

• 4:55Joe Weisenthal?

  Let's do it.

• 4:56Tracy 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 Badgett Project, which is an online tool or compendium for designing financial crisis interventions. So, Tim, welcome to the show.

• 5:23Speaker 05

  Nice to be with you both.

• 5:25Tracy Alloway?

  So, first of all, I got to ask, you know, 200 years ago, Walter Badgett 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.

• 5:40Speaker 05

  Yeah, I mean, financial crises have this classic tragic thing. They're crises of beliefs, in a sense, and the crises 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 crises. It was Minsky wrote that, you know, stability breeds instability. So you have long periods of expansion, moderation, and recessions, asset prices going up,

• 6:23Speaker 05

  which creates the seeds for crisis, causes memories to fade, and allows these beliefs, there's a lot of folk wisdom in these things.

• 6:33Joe Weisenthal?

  Right.

• 6:33Speaker 05

  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.

• 6:43Joe 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?

• 6:58Speaker 05

  You know, when I went to the New York Fed in 2003, we were sort of in the foothills of that long financial boom. I'd 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. And 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 crises? Why do they make those mistakes?

• 7:42Speaker 05

  Sometimes it's just because the politics are incompatible with what it takes to break a panic. You know, 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

• 8:26Speaker 05

  to the frontier of good response more quickly. And that's the basic case for what Andrew Metruch and his colleagues have built at Yale.

• 8:33Joe Weisenthal?

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

• 8:50Tracy Alloway?

  That's so funny.

• 8:51Joe Weisenthal?

  But it does seem like that helped the rapidity of the 2020 response.

• 8:53Tracy 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, whatever it takes, allocate?

• 9:13Joe Weisenthal?

  Fill in the details later.

• 9:14Tracy Alloway?

  Yeah, fill in the details later.

• 9:15Speaker 05

  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 Badgett, 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 like, what might work was still

• 9:55Speaker 05

  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. You know, 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 like 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, 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 not, no people around them in the institution or they're coming into who have any knowledge of it.

• 10:40Speaker 05

  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.

• 10:52Tracy Alloway?

  How big is it?

• 10:53Speaker 05

  And it was, and I was quite eager to see this book, and 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 we had all these debates. But if you ask them, what did Sweden actually do? There was no knowledge of that. And you know, you could, you could spend your time calling the person in Sweden who had done that, but that takes some time.

• 11:35Joe Weisenthal?

  It's so funny, because now I have this memory, and I totally forgot it. I was a Business Insider at the time, and people were like, oh, the Swedish model of bailout. 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.

• 12:01Speaker 05

  There were some.

• 12:02Joe Weisenthal?

  Continental Illinois in 1984. Could those have gotten really bad and become financial crisis-like events had intervention been slower?

• 12:10Speaker 05

  I don't think that you had that mix of factors then, that the type of dry tinder that left you vulnerable to that. Why was that? You know, part of what makes you vulnerable to a classic panic is when the economy as a whole is so unbalanced. People have borrowed too much relative to income. There's a whole set of expectations that go into leverage and behavior, you know, based on a long period of rising house prices or asset prices. And you didn't have this period, we called the Great Moderation, where people got used to the expectation that recessions 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 those days.

• 12:53Speaker 05

  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 you 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 a whole bunch of funding vehicles that had classic bank-type run risk that were able to run with a huge match of leverage because people had thought the last decades suggest the future would be benign.

• 13:38Speaker 05

  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.

• 14:05Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 14:21Speaker 06

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high-frequency traders and that sort of thing, and folks who service institutional clients.

• 14:29Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reese Merrick of Ripple says.

• 14:37Speaker 07

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 14:57Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 15:07Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 15:49Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 16:30Tracy Alloway?

  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?

• 16:56Speaker 05

  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 a 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

• 17:41Speaker 05

  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 or the other. And if you look back, and this is the right way to look back, and you know, part of what Andrew Metrung and his team had built at Yale is just to try to do a careful analytical dispassionate look back at mistakes and lessons and choices. And 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.

• 18:25Joe Weisenthal?

  One of the things that we've sort of realized during the podcast over the years is that even like a story like the great financial crisis in 2008, 2009, people are still debating it. You know, 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, not in like necessarily the response, but when you think back at like causes that like you see in a different light today than you did at the time?

• 19:07Speaker 05

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

• 19:13Joe Weisenthal?

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

• 19:19Speaker 05

  I think the enduring, the enduring debate everyone has, still has, is, 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? And absolutely, that's, that's the right question. And the fiscal response of the US and the pandemic is just a good counter example. 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 measure put in place there are a good counter example. And I think that is a very good lesson.

• 20:01Speaker 05

  Of course, you don't want to be like, you know, you don't want to overlearn your lessons of these things. I think the other big lesson, of course, is, and we've talked about this, is just again that, you know, 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 would debate whether we're going to have a crisis for a long period of time. And that got the way of of speed. But partly because in our system, a lot of the very powerful things runs 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.

• 20:40Tracy 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.

• 20:56Speaker 05

  Exactly.

• 20:56Tracy Alloway?

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

• 21:07Speaker 05

  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, it 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 to 25%. And you had like a decade of negative, if not, you know, 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.

• 21:50Speaker 05

  Rise in unemployment, loss of income, loss of wealth. And 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 have written about this, that the size of the shock that precipitated the crisis of 07, 08 was larger than at the beginnings of the Great Depression. And I think by that measure, US outcomes were dramatically better. Our outcomes were also significantly better than those of any other major economy that went through the crisis. And I said, you know, 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.

• 22:32Speaker 05

  So I think we should look at those things with 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? And I think if you look at, again, these are imperfect things, you can't, you know, more comparisons, but you know, 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 at more rapid recovery, it was from many other countries.

• 23:17Speaker 05

  And I think we were able to still preserve a system which is still, I think, best in the world at channeling capital of people who have a good idea. And the wave of innovation, massive innovation we've seen in the US economy in a decade 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 the 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.

• 23:49Joe Weisenthal?

  It's interesting. Tracy and I have done like tons of episodes on like 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.

• 24:31Speaker 05

  Yeah, of course, as you said, you want to always be careful.

• 24:34Joe Weisenthal?

  Right.

• 24:34Speaker 05

  And 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.

• 24:44Joe Weisenthal?

  Right.

• 24:45Speaker 05

  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. You know, 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

• 25:29Speaker 05

  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.

• 25:52Tracy 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?

• 26:25Speaker 05

  You know, we have a relatively integrated global financial system.

• 26:30Speaker 05

  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 and 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 our global negotiations get in the way of countries deciding they want to be more conservative. And we did,

• 27:15Speaker 05

  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, you know, 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, you know,

• 27:58Speaker 05

  it's 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, do not leave you with a, with an overall less stable system. And you should, you should look at the fresh, fresh at that challenge all the time.

• 28:17Joe Weisenthal?

  You talked about this before. When you, 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. You know, I'm curious, like, when you look back through history and the new Badgett project and stuff like that, how much is it when you think about like, system design, this is a good way to bail out a bank, whatever it is, this is a good way to backstop deposits,

• 29:01Joe Weisenthal?

  this is a good way for the Fed to like, 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, that like, in a parliamentary system, you just, there's no division of government between the legislator and the, you know, head of state, and if they have the majority, they can probably pass it and you move fast, etc. It seems like a huge deal in the United States that we don't have that sort of same unilateral fiscal capacity often.

• 29:36Speaker 05

  Yeah, exactly. I mean, we have a system which, 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. And 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 trying to make sure you have some

• 30:18Speaker 05

  delegated emergency authority at the level of the central bank and the treasury with some constraints, some 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 too late.

• 30:54Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 31:35Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 32:16Tracy Alloway?

  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 US. US 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?

• 32:41Speaker 05

  You know, 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 sort of magical things, like the Treasury is the risk-free asset.

• 33:06Speaker 05

  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 a reserve currency and but there's some foundational benefits and they're about a type of trust, you could say, about a confidence and stability and 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. Their part of them are a set of norms and customs.

• 33:49Tracy Alloway?

  Norms, yeah.

• 33:50Speaker 05

  And you know, there's the kind of things that you know, you don't, you don't know you have them until you risk losing them. It's important to recognize that 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, you know, 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, in property rights, and those things like

• 34:35Speaker 05

  that are still durable, protected assets of the country.

• 34:39Tracy 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 crisis 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?

• 35:18Speaker 05

  I think Americans and the world understands that the role we have, and it's built up over time, you know, it existed before.

• 35:28Speaker 05

  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 believed was deeply fundamentally in the US interests. So these things you talked about, like the swap lines.

• 35:55Joe Weisenthal?

  Yeah.

• 35:56Speaker 05

  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.

• 36:09Joe 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 the 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?

• 36:21Speaker 05

  You know, 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 to think about it is, you know, we're, I don't know, we're a 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 market cap of equity markets globally. So we have a huge fundamental economic interest that comes from what happens outside our, the frontiers of our, of our borders. And a lot of benefits to us in trying to make sure we protect and sustain that.

• 37:06Speaker 05

  Can't be indifferent to the fates of other nations.

• 37:08Tracy Alloway?

  So you're a former civil servant. Even before you were US 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 of 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?

• 37:47Speaker 05

  I, you know, as you said, I grew up in the Treasury in some sense. You know, 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

• 38:27Speaker 05

  a objective reform and improvement and knowledge. I mean, one of the things that I first met Larry Summers when he first came to run the International Department of 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 politically, to bring that basic, to have that sense of obligation and a possibility.

• 39:09Speaker 05

  So of course, there's huge frontiers where you can, 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.

• 39:25Tracy 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 know, you don't have to necessarily be the most proud of it, but the thing that was like the most, I guess, out there creative solution?

• 39:48Speaker 05

  This is not going to be as interesting to you as your question. When I left my old job and I was writing about the financial crisis and I started to teach with Andrew Metrigan at Yale, the financial crisis, I spent a lot of time looking back over a bunch of those choices we made while I 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 were working on some aspect of the crisis and I'd ask them, and who, where did that idea come from? Whose idea was that? And I love the fact that people would say over and over again, you know, I can't really remember. I remember it's sort of the meeting, not sure ideas it was. Anyways, it was a great group of people. I think that the most

• 40:27Speaker 05

  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 is a way to, you know, 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. 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 a weight, 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.

• 41:10Tracy Alloway?

  Do you remember how you came up with that idea?

• 41:12Speaker 05

  A lot of awesome people sitting around a table together.

• 41:16Joe Weisenthal?

  Tim Geithner, thank you so much for coming on Odd Lots.

• 41:18Speaker 05

  Yeah, nice to see you guys.

• 41:19Joe Weisenthal?

  Really appreciate it.

• 41:20Speaker 05

  I'm not a big fan of what you guys do. I love the, you know, the long, deep exploration.

• 41:25Joe Weisenthal?

  Love to hear it.

• 41:26Speaker 05

  Of the highly technical but consequential chapters of financial history.

• 41:30Tracy Alloway?

  Producers, keep that in.

• 41:31Joe Weisenthal?

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

• 41:46Tracy Alloway?

  Joe, obviously, that was a fascinating conversation. Again, we have a bias towards talking about this stuff because we lived 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 Badger program very interesting.

• 42:21Joe 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.

• 42:46Tracy Alloway?

  Yeah.

• 42:46Joe Weisenthal?

  Or the dry tinder that can explode. And so why, you know, 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, you 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 the sort of like imbalances have built up in some extreme way that we haven't seen is like a really interesting question.

• 43:21Tracy 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.

• 43:34Joe Weisenthal?

  Pay their mortgages, yeah.

• 43:34Tracy 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, 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.

• 43:58Joe 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, you know, two or three years later. But also, more deeply, we did a bunch of stuff in the 2020s 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 like, you know, industrial policy, energy, et cetera, when there was.

• 44:29Joe Weisenthal?

  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.

• 44:39Tracy Alloway?

  Yeah, like, you know, building highways.

• 44:41Joe Weisenthal?

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

• 44:44Tracy Alloway?

  Yeah.

• 44:45Joe Weisenthal?

  I just need to tell you, I think you missed it. No, I'm just kidding.

• 44:48Tracy 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?

• 45:09Joe Weisenthal?

  One day we'll get one right.

• 45:10Tracy Alloway?

  That's right. Okay. This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 45:17Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at theStalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashell Bennett at Dashbot, and Kale Brooks at Kale Brooks. And check out the new Badgett 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/oddlots.

• 45:52Tracy 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.

• 46:45Speaker 05

  If you're a business owner, you need a card that can keep up. With the Delta SkyMiles Reserve Business American Express Card, everyday purchases transform into miles you can use towards future travel. So business as usual can lead to a well-deserved getaway. And for a limited time, card members can earn 200,000 bonus miles, the highest miles offered this year. Whether you're traveling for business or planning your next adventure, now's a great time to make every purchase go further. Apply today at www.deltacom/podcast. Offer ends November 4th. Minimum spending requirements and terms apply. Quick question for you. How much of your day is spent typing? Email, Slack, notes, prompts to ChatGPT? Whisperflow is a voice-to-text app.

• 47:29Speaker 05

  Instead of typing, you talk and it types for you in any app on your Mac, Windows, iPhone, or Android. It takes out the ums, fixes the typos, and the result sounds like you wrote it. Four times faster than typing. So the email that used to take two minutes now takes 30 seconds. Whisperflow is free. Download it at whisperflow.ai. That's W-I-S-P-R-flow.ai.

• 47:51Speaker 06

  This message comes from Edward Jones, where they believe rich is about more than saving and investing. It's also taking care of what gives your life meaning. That's why your dedicated financial advisor meets you where you are with personalized financial strategies that help protect what matters so you can preserve your progress while creating a path forward. The key to being rich is knowing what counts. Edward Jones. Member SIPC.