Transcripts For CSPAN2 Book Discussion On Stress Test 20140629

Timothy geithner talks begin with the 20072008 financial crisis as president of the Federal Reserve bank of new york and later as president obamas treasury secretary. This is about one hour. I have a Pretty Simple question to start. Why did you write your book . Olga komyagina write the book . I never thought it would. Because i the hard time sitting still and it takes a fair amount of patience to do it. But i wanted to give people a sense of what it was like to every chance to look at these choices we face through our eyes. It has they were pretty bad choices. I think its hard for people to understand why this was necessary, why it was sensible, why suddenly the alternative. Ever thought that was worth a shot. I wanted to give our successors, because we will face a financial crisis in future, and their devastating, i want to give our successors a better framework for making these choices. A better understanding of the mix of things we did, what worked, what didnt work so that when they face this kind of mess in the future they can make better choices and do a better job. Those were my motivations. So your central argument i think is that in the time of financial crisis governments reward the failing institutions and or to say the rest of us from effects of the crisis. You write any severe cases government needs to lean in against the forces of gloom. Borrowing more, expending more, spending more. Even if it looks to reward incompetence. Even if it feels perceptions of an out of control money stealing bailout great big government. Talk about that. Well said, thank you. I like to plagiarize. [laughter] what i cant explain is financial panics are really severe type of panic. They happen very rarely. To protect people from the consequences of the crash, the mass unemployment come you have to do the counterintuitive thing, the opposite of what norman makes sense in response to typical financial crisis. In a typical recession or a typical case of a Financial Institution failing, you should basically let the fire burn, let the losses happen. You can do that with relative confidence that its not going to spread to the responsible and the strong. You can do it with less risk of contagion, and the benefit of acting that way is that you hopefully get incentives better and maybe in the future at the margin you reduced the risk that that behavior that caused the failure is looked at as a tractor. Its a pretty good moral hazard argument. In a panic yet to do the opposite. Because if you let the fire burn too hot, you let the run gain momentum, then it will overwhelm your expenses. It will imperil the week. The strong, not just the week and you risk massive unemployment. If you look at the centuries financial crises, look at the figures of crises before the Great Depression, look at the Great Depression, or look at the last eight emerging market financial crises of the 90s and you can see what happens when governments stand back in the face of those panics, and hope they burn themselves out or some aversion to Political Risk or aversion to look at rewarding our cities. When lit the thing burns its devastating. Its not important that devastating to investors or shareholders of banks or managers of banks. Whats important is its devastating to innocent victims. Again just remember the Great Depression. Of course, we have no memory of that. But unemployment went to 25 . The economy fell by 25 and we had a decade of soup lines around the world. In this crisis, in the fall of 08, the size of the financial shock at the stage in a crisis was five times greater than what happened at the beginning of the Great Depression. So the risks were grave and severe and potentially catastrophic. To protect people from the consequence or to do as much as we could to protect, we had to use overwhelming force to keep the lights on in the Financial System even though it looked deeply unfair, even though it seemed counterintuitive, even though it had more hazard risk and even though a record taking a lot of financial risk, but if we hadnt done that, then we would face uncertainty. Dramatically worse economic outcomes even than the terrible ones we experienced. So thats the basic thesis of the book. And its not an easy thing to make compelling to people i think, except that if you were back what it was like in october of 08 when a bunch of people for the right reasons mostly had let the fire burn too hot, it was devastating. It was just devastating and it was only because we were able because we are the United States, we were able to put overwhelming force behind the system and into the economy that we contained the damage to even the prince of your lovers levels that we face. How do you find that line between when you should let the fire burn and when you need to do the opposite, and how do you expect the market to know what the line is . I think its the best question because the terrible flocfog of diagnosis at the beginning. You cant be sure how vulnerable you are two things. You cant be sure. And in our crisis although it followed a long boom and we are preconditions for pretty severe crisis and they were observable vulnerabilities. This thing basically start in july of 07 and there was a sort of a slow burn for a year. Mostly limited to the periphery of the Financial System, a referee, bear stearns and investment world where the periphery but it was really threatening the core of the Financial System. And the effects of the economy up to that level pretty modest so its hard to judge. In the book i tried to explain the choices. The right response initially these to let the fire burn and let it do what it has to do, which is to consume the week, the weakest institutions. Thats the rational response but youve got to be careful that it doesnt get away from you, doesnt it momentum, that it becomes hard to arrest in the context. But if you step in to quickly and protect every institution, because you are too worried about the panic you make a different kind of error. And error that might raise the risk of financial crisis, bigger crises in the future so its a hard balance to strike. In the United States because we didnt come into this crisis with enough authority, we were late. Had to let the terror shop congress in acting before we had a rod or set of tools to do enough to get our arms around and slow the pace of the run. We would just like to escalate because of that limitation on authority. So a lot of people are mad, and they will still probably be mad after reading your book. I think johnston reported pretty memory. He said this like optical illusion to one person looks at it and you see a pretty girl. Then you flip it and the other person sees ijc is language. Anyway, but do you think you can ever succeed in increasing the perception by a large chunk of the population that this was all wrong and all other . I mean, its clearly understandable anger and rage still because the scars of the crisis, it was just so brutal and were still living with the scars. Unemployment is still alarmingly high. Weve had catastrophic damage to peoples savings and sense of security your we went into the crisis with high rates of poverty, much worse to be. Peoples perception substantially worsened by the crisis. And how can we expect people to understand why it was necessary or just, to protect the institutions that were at the center of the crisis, then turned around and paid themselves pretty generous bonuses for a long time. How can you expect people to understand that . I dont think its understandable. But i can tell you with complete confidence, and again its not a hypothetical or theoretical thing. That the alternative of letting the thing collapse in trying to protect people after that from the damage would have been deeply irresponsible and i think immoral to do because of the cost of damage to peoples livelihood wouldve been much, much worse than we face. Hard to make a compelling because again, this country have not experienced anything like the classic panic since the Great Depression, and really no memory of like a series of Great Depressions we have following the panics of the financial crises of the previous 50 years before the. Hard thing to expect people to understand and i dont think thats achievable. But its still important, not that people will agree but its still important for those of us who were there trying to sort through these bad actions to try to give you a better feel for what we did what we did while we made those choices. Because thats worth doing, even if i think, and i have low expectations for whether you can make it seem acceptable, understandable. So your first by the way, i think jon stewart was more vivid than you said. I dont think this was pretty. I dont think you can look at this and say, oh, it was this cool, elegant thing. It was a messy, horrible, tragic thing. It just would have been dramatically worse if we had done what most people argue we should do. So your first real Public Performance as treasury secretary was in early february 2009. Those were dark days and the country was looking, and he reckons fair to say the speech did not go well. I swayed back and forth. I tried to sound forceful but i sound like someone trying to sound forceful. You said that Larry Summers actually came to office and sit i can tell you what to do that i wouldnt give a speech like this. [laughter] as a light question, when you dont get to go home and curl up in a ball on your bed. Barney frank said that when i appeared in public it was like i was at my bar mitzvah last night under and ran and ran [laughter] i made this decision even in retrospect. To go out and lay out this framework for the next stage of our strategy at a pretty early time we did have all the details yet of how were actually going to do it. Because i thought it was prettyy damaging at the appointed people were filling the vacuum with all sorts of ideas and expectations for what we should do, which we were going to do. And i needed to suck the hope out there about some of the stuff you wanted us to do and i needed to have a device to try to force a little bit of end to the debate were having internally about what to do. Its there and debate things forever because it all sucks. If you just left, if you let people argue about it for ever, you will never decide anything. So i made a choice to go early with the general framework, no details, not enough details, and there a lot of things in the remark that were pretty scary because the stress test the device we used to recapitalize the Banking System was something people never heard of before. Most people are still in without we would have the government come in and go buy some of these banks. A bunch of these bad assets as a way to keep the banks alike. They want us to do, i know this sounds inexplicable, but what people want us to do then even internally, was to do something much more generous to the bank shareholders. I needed to suck the hope out of the air of that. It was a terrible speech and i wasnt great at doing that. That we have a bigger problem, too, which was i made this choice to go early pretty general with a framework with a lot of uncertainty in and that was, made everything a little more scary, even more than it was then. But we did what i said we would do. Everything i said we would do, we did. Not all of it had as much traction or power as we hoped but the overall effect of that strategy was much more effective than even without at the time because the economy when we started with shrinking at an annual rate of about 8 . Releasing three quarters of a million jobs a month and was in sixmonth the economy was growing at 3 . Incredibly rapid turnaround for a world economy, and that was because of the force and the strength of what fiscal stimulus delivered, with the feds policy delivered and the scale of the strategy, the sort of content of the strategy that first laid out in that not wellreceived speech. So lets retrace some of the steps that lead you to that moment. You were a Career Public Service but you are somewhat accidentally developed a specialty in financial crises from mexico to asia, and love this line, former governor of the bank of innocent whenever there was a crisis, tim was there but you didnt cause the crisis. The crisis cost you. [laughter] spent i think he thought i probably cause some of them. He was being gracious. I grew up overseas mostly, and i decided having had that experience living in india and thailand, studying in china, that you get to watch your country from a different Vantage Point and see the enormous effect on the world, mostly for good but not always for kirkuk i decided i want to loose spent part of my life trying to effect those decisions i went to the treasure pretty early in life as a civil servant. 1988, i was 27 i think, 28. And i never thought i would do it for long, but i had this really rewarding extremes of working with people that were really excellent, completely ethical. There was no we had this naive existence were politics rarely got in the way or in a negative way interfered with the choices about policy, and as you said, i had the experience of watching and being part of are helping or observing a bunch of countries deal with pretty devastating financial crisis. Very valuable experience but i had no idea how valuable, because i lived in japan, worked in japan just as there economy was collapsing. Watched how they embraced the strategy of kind of, mostly sideways drift for a long time, didnt do much to clean up the Financial System. And, of course, watched the emerging economies blow themselves up in rapid succession to get tommy ally about how fragile these systems are, how damaging they can be would fall apart the date me a good lesson in the typical mistakes governments make over and over again but it was a great lesson in the importance of force. We fought, debated each of those times all this classic moral hazard debates, it was a good education. So the night before your first bit of work as president of the new Federal Reserve, what happened . Well, i was, they asked me to come to the new york fed in the fall of 2003, and my kids were in school and washington that i wasnt going to move them into squares i went and rented an apartment in new york. My first night in new york i went to buy some stuff for breakfast i bought a sixpack of beer and i was carded. [laughter] that was a somewhat awkward beginning. So lets talk about your time as president of the new config. You talk about your growing fears about some things, about what became known as the shadow Banking System, all the stuff going outside of reagan at Banking System and i to work to clean up the derivatives market. Your critics are not having a. After release of the Federal Reserve transcript from 2008 policy meeting, the wall street journal branded you as one of the losers. In part because you si said in early 2008 in the Financial Markets i think its true that there are some sign of the process of repairs is starting and bear stearns collapsed a few weeks later. To talk about this. Were you really leaning against the winds picked i try to talk openly about the stuff we missed and the stuff we tried, why it failed, why it is so inadequate. I described, i started to a fair job of going through the scum of laying out the things that i described the i thought were reassuring, even going through the crisis and things that were troubling. Lets just do the basic contours of our system at that point to give some feel for what it is like to see a sense. What happened in her system is over the decades that followed the Great Depression is the memories of the panic faded. Our Financial System clearly outgrew the safeguards put in place around banks after the Great Depression. In that case we had a major financial panic. We put in place constraints on banks, deposit insurance, and the fed has a sort of protection come safety net it provided. And overtime we evolved in the United States in that long boom, they call it the quiet period of decades, this set of other institutions that were not constrained in terms of capital leverage, had no access to the basel interest for the safety net of the system and we evolved over time and fannie and freddie, investment banks, some big insurance companies, the whole universe of nonbank Financial Institution. This whole complicated work of essentially banks. More risky than banks because they were not constrained as a leverage and because they had no access to deposit Insurance Protection against runs. And in our system the feds reach was limited to a part of the Banking System, but the Banking System was only about 40 of the Financial System and credit. That of the 60 was much more risky, very vulnerable to runs. And when i got to the new york fed in the fall of 03, i think what worried me most was that big mismatch twin weather was risk, where there were constraints, where there was somebody nominally in charge and the scope of the firefighting authority. Because i knew that when things fell apart, which they might do, people generally say wheres the fed . What are you going to do about it . They come after us for money. We have pretty limited tools at that point. That tells me a lot. I wrote a fair amount about what in the face of that i tried to do, we tried to do to lean against the forces of optimism that were causing this big boom in leverage in this. As i write, those efforts were of course very weak against the force of the boom, inadequate, late, insufficient. Not because there wasnt a lot to worry about, but because we had no direct authority over where most of the risk was but e and even where we had Authority Like over banks, we didnt think about forcing the whole capital against the risk of the Great Depression, because people thought Great Depressions can happen in the United States. They seemed inconceivable. We took those lessons and tried to reshape the rules because of the cost of leverage in the context and those lessons i think informed what are very powerful, promising design reforms that we are not putting in place. But we missed a lot and didnt go enough in advance. So bring us back to the fall of 2008 and tried to explain the sheer amount of fear there was. Theres a great story in the book about a conversation you had with lloyd glenn fine around then. Well, sort of gathering storm or burning fire, getting a lot of momentum and by the fall of 2008 the system really was at the edge of collapse and it was happening around the world and what people call lim and we can come that we can we brought the major institutions together to try to figure out a way to contain the damage and effort to fall by the biggest institutions, at that weekend, ma lynn and Merrill Lynch and aig were all basically had collapsed and if they collapsed the system was going to fail. Although we are able to find a solution to Merrill Lynch and aig with a willing buyer, we had no good option. In the weeks after that when the system was basically breaking down there was a classic run across the system. I got a phone call one morning from this very prominent banker, maybe 630 tonight. I called back what has been said you have to get that youre out of your voice. Dont talk to anybody else in your firm or outside because if they hear you, you know, it will be, it will be terrible. I said, you can replace it will what anger over to view up which cant let people who that way. I explain in the book if you were a weapon, you were scared to death. It was the people who werent scared you had to worry about the most. The people who were scared were more smarter and more competent. Was there anybody who actually wasnt scared . Yet. Remember after lehman that morning after lehman the wall street journal editorial page thought it was terrific. They said thank goodness they didnt step in and find a solution to prevent the default. They thought it was going to be just a virtuous, excellent imposition of pain against, on the deserving. It would have no effect on the rest of us. That was the dominant view of the times. So yeah, there were a lot of people, a lot of people who started going into the washington going into the weekend, washington was caught in the deceiver that were too much risk in going on. Then they get scared to death and they give president bush and hate polls and the authority when it ended in to put out the fire, but the race usually but people still who had no sense for how perilous it was spent you argued there was no desire to enforce moral hazard at work and the decision not to save lehman. It was purely what you could do. Its an important thing, i know seems inexplicable, but in finance its not like nash is a duty. We dont have the president of the United States Standing Authority to but financial fires. We dont do it because of moral hazard concerns but we think you could do that then investors will take much risk. They will do for the expectation that the government will commit to protect them. Our president and even the United States came into this crisis with no authority except to declare a bank holiday or close the equity markets. Not things that would help in a panic. And some the tragic failure in some sense of the country going into many of the founders was that we didnt have the tools to contain the damage early enough. Ultimately, we were able to do it but not until a lot of damage was baked into the outcomes. And the fed also by design very limited tools. I write in a book about how when it went to the new prevent initially in 2003, they should be this book they called the doomsday book. I thought, this will be cool. It was terrifying because it was three inches thick but when you look at it, which i did, carefully, it was a pretty limp, weak set of things because again, by design, people who created a authority for the fed did want the fed to have the ability to step in and preemptively bail out a rescue, and nonbank Financial Institution but even when they gave the fed authority was very limited and we were allowed to take that much risk. The statute says even those Emergency Powers commuting only lend it to president of the nuke fed the beast secured to his or her satisfaction to you have to be able to say where lending not against error, berlin it against something that we might have the capacity of using, deploying to cover our losses. Fairly limited amount of us. No ability to guarantee, no a vote to put capital into. So for that reason, building in case have no good options. I also write how i was confident we had a willing borrower but we have the fed take some of the risk to make that happen. Im very confident we wouldve done that and hank and others wouldve supported the. People wouldve been unhappy with us for an were doing it because again just to go back to the beginning, it seems counterintuitive and paradoxical that was the appropriate and necessary, just look at the damage that happened in the wake of the default. I think its David Axelrod who called relationship with president obama a bromance. [laughter] you did try to talk you out of choosing your for treasury secretary budget independent longestserving member of his economic team. Talk little bit about that relationship. Well, i didnt know him come and we met in i got this call in october before the election, and we talked, and we had a little bit of common background in this as we both lived in Southeast Asia when were kids, when we were younger. Our parents were sort of in the same profession. His mother and my father. But we did know him. He said to me after we talked, come to washington. I said you shouldnt do that. I had a bunch of good reasons for that. I think that helped all of it because he knew that i wasnt eager to come to this and tried to talk him out of it. But then we had spent a lot of time together and we went through a lot of ugly, messy, horrible decisions together. I just had the most amazing admiration for him because hes i think, for me at least, all that you want and much more that you could hope for in a president. He only cared about was try to forget what was the right thing to do, what was going to be the most effective thing in avoiding the most damage and get the economy growing as quickly as possible. He was going to let the shortterm political costs interfere with what was right. He was both very supportive of the path we agreed on, stuck with it, but he also was very hard on this, very hard on me in the sense of subjecting my recommendations to pretty tough in internal debate, deliberati deliberation. But he was never paralyzed by the. He did the right thing which was to make sure that he wasnt he wasnt, you know, whos going to look at all options before he embraced what i laid out. I thought he was just a great decision maker, very brave, very smart, very creative at that moment where it mattered so much. I mean, ill tell you one small story just, the first phone call we had in the transition with the Vice President elect and chief of staff and maybe a couple other people, it was a call to talk about his economic agenda in his first term. And i began and said, well, mr. President elect, you will have to prevent a second Great Depression. Thats what your economic engine is going to be. He snapped at me on the phone and he said, well, i just want you to know thats not enough for me. Im not going to be defined by what i prevented. I admire the fact that he was willing to understand that this economic event was center. Nothing was possible without averting the worst crisis, but he was focused on how he was going to figure out the way to create a governing coalition to make some progress against all the many other challenges we face as a country. I admired that omission and his capacity to look through the immediate imperative and devote the capital he needed to that but still loopy on the. So you have some great mottos seem to be more broadly applicable than in a financial crisis, but mottos for life. Plan b, b. For stuff, and is not just for supper talk look at how these affected you during the debate inside the administration in early 2009 when a number of people were arguing for nationalizing the banks. Used it pretty much alone against that. Well, it wasnt really a debate about whether should nationalize or not. It was possible that if banks were unable to raise enough capital to give themselves the resources to survive Great Depression, they were going to put a lot more capital in and people would call that National Vision but that mightve been unavoidable and desirable in that context, but i think what i learned early in life about how you make decisions in these contexts is you have to surround yourself with people who are not just reasonably smart and ethical and people you can trust with diversity of background and experience, but who have enough capacity for conviction, willing to say what therefore. Are willing to take the risk in saying, how about this . Because mostly what you find in these cases it people want to debate the problem, say its not a problem, hope it will go away, or just describe the challenges, and you can have any effect on the choices you have to make if all you can do is describe your concerns. The concern is important. Its very valuable, but it doesnt get you to a choice. So what i try to do always was just to, you know, have the table, around the table a group of people who are prepared to go relentlessly through all the choice and try to sort through the best and the bad ones and try to figure out which risks with a better risks to take, what the costs of the mistakes would be and could you correct those mistakes because you are going to make mistakes, and help people think through those choices and thats the point i tried to bring to these choices in a crisis. You know, i always try to say no plan is just as good company good short version of trying to convince people that they had to decide what they were for, not just what they were against. What the president did, which is very good, again, trying to let there be enough competition for diagnosis and it is that he could get a better feel for what was the best among those bad choices. I write in the book about how what happened over time as we worked through those choices is that the alternatives, most of them couldnt survive 30 minutes of debate because they were wellintentioned, but they had just bad risk or much too risky relative to the return are we had no authority to do them for the is in the unicorns would exist or Something Like that. But you have to work through those two socks off out of them where there is no hope and expose people to their infirmities. Talk a little bit about the toll this took on your life and on your family. What was it like to have the daily show pay a visit to your house because the daily show. They had a lot of fun with me. [laughter] i think the president said in his morning meetings on the economy, really terrible, and i remember him coming to the oval office one morning and saying, seriously . The second time you on saturday night live. It was not very good. [laughter] but i love my work and a great people around me and very supportive president. And that was not the, you know, it was not so fun for me sometimes but it is very hard on the family. Its like families of people who serve in the military or in the Fire Department or first responders. Its still hard because there is no privacy and they never see. When you around, you are not there. When youre president you are not really present so its not very fun. So there were these misperceptions of you both before you became treasury secretary andrew and the time that you start Rahm Emanuels wife told you that you must be looking forward to returning to your nice career at goldman sachs, and theres a great interview our great anecdotes in the book about your meeting with barbra streisand. So tell us about that and about why you think it is, you say that people never got to know you. Why that is. Well, we were doing stuff that was deeply unpopular. Again, on its face looked like it was designed to reward the arsonists. People wrote about me early on, this perception just became conventional wisdom and hard and very quickly that i spent my life at goldman sachs. I read about this being at a hearing on the hill and this member of the Congressional Oversight Panel said to me, he began a question to me by saying, well, mr. Geithner, of course youre a banker. I said, no, actually im not a banker. Well, youre in banking spent i said, no. I was not in banking. You were in investment banking. I said no, never in investment banking. But that perception or because of that initial description of my past and partly because of what we were doing just hardened, became overwhelmingly accepted wisdom. The way the world works is when those perceptions matter a lot and when those perceptions harden, they are very hard to break. Another policy question, some of the fiercest criticism of you during your tenure and of the book is come about the help that was offered for homeowners. One critic wrote at every turn on housing the evidence points to tim geithner preferring whatever options with the least pressure on banks rather than actually helping ordinary people. I know thats a common perception but it is deeply confused perception and it rests on just a deeply unrealistic since of what our choices were. What our options were. I mean, we had a democratic president at really at the peak of his political power with a democratic majority in both houses. I think some of the best housing talent in the country working for him. Lots of aggressive economist, understanding housing was terrible, and it was getting worse still. And he put enormous pressure on all of us to try to figure out how he could do more to make more likely that people wouldnt lose their homes. Then, but it was a terrible recession. Millions of people lost their jobs, and the scale of those problems, 11 million americans under water, negative equity at the peak was 700 billion. And skip of those challenges were just fast relative to the resources and authority we are. We were unable to relax those constraints and our authority, unable to get more authority from congress, unable to get more resources on the material scale. And we were definitely slower and less creative than i think i would have liked him and i think would ultimately work, using the authority we had. We did ultimately help millions of people stay in homes and refinance come and we did put a floor on house prices and lay the conditions for recovery, but ultimately, ultimately what it took was when people start to get jobs again. That was when you started to see the pain start to ebb a little bit. Thing starting to get better. Once you have an income again you are going to be more likely to be able to stay current on your mortgage. And the scale of that stuff just wasnt large enough. Again it wasnt because we did know it was terrible. It had nothing to do with helping the banks. People, its just upside down. If we have been able to get 700 billion from the congress and use it to the people stay current in the mortgages are reduce their mortgage balance, that would have been terrific for the banks. Tanks would have loved to do. It wouldve taken all bunch of losses off their table. And in some sense with a stress test was designed to do, the stress test, the core of it was to say we are going to say these are the laws you banks would face. Foreclosures, default but this is, if it was a great depressi depression. So the purpose of the stress test was to point out and make it possible for banks to withstand those losses. To illustrate that we would have enough capital to withstand those losses. So the criticism is correct in the sense that they were inadequate, but its deeply confused in terms of what the options were and what our motivations were. It is one thing that confusing a little bit because you do right at the end of the book i wish we expanded our housing programs earlier to relieve more pain for homeowners. I think about is a quite compelling defense of what you did do and why. So is it really true you do things different, but you would do more . Well, lets separate the two things. Try to be very open with his in the book. Within the scope of the authority we had, we did pretty persistent innovations, evolution, expansion of our programs to try to get more traction. Because they were disappointed in the reach. But we didnt do that, we were learning as we were doing it. If we had full knowledge at year one and could of done it all on the, that wouldve been great. Is that possible . Its possible i guess but again we have to be pretty excellent housing people. A lot of knowledge. President putting enormous pressure on us. But anyway thats just one thing. We could get more traction earlier in the authority that wouldve been great. But that a constraint was on, ill just give you an example. Pretty ironic example. When paulson got authority to but fannie and freddie into conservatorship, put capital into them which was necessary to prevent the collapse, congress did not give the secretarytreasurer any power over what they did. Just power to give the money, not power to influence what they did. So ill give an example of what that meant. You guys understand theres a good economic case for principal reduction in financial crises, particularly for people at the risk of losing their homes. So we spent a lot of time looking at the case of risk reduction. We came to the judgment not as early as i think i should have that there was a pretty good case for doing it, having fannie and freddie do it. So we went into this big effort with fannie and freddie to convince them to do a targeted program of principal reduction that wouldve benefited hundreds of thousands of people. We had no authority to force them to do it. We laid out the numbers for them, tried to make the economic case for doing it. They didnt want to do it. So even though they exist because of the money were giving them in capital, that came with no authority. Why . Because Democratic Congress did not want to give a republican President Authority over controlling this thing. So that a constraint on the authority was very consequenti consequential, unable to relax it. So you could say we were unable to relax the constraint. A very different criticism from saying that were left unexploited, unused authority wouldve been hugely powerful in the context. So there are tons of good questions from the audience and some fall into categories. Im going to start with this one. What have you learned about navigating the u. S. Political system during a crisis . Before immediate and decisive action, and the International Political system. I dont think i learned very much about politics. [laughter] i dont understand the i dont really understand that, and its kind of soul crushing experience to go to. Theres just so much hypocrisy and adolescent posturing. Its not very i didnt learn very much about that. In politics, internationally or here in washington, the most important thing you can do is to try to figure out what are the interests and incentives and believes and constraints of the people youre negotiating with. Thats important because unless you have a better feel for those things they are so we can have any chance of moving them or finding where your interest might overlap, might be complementary. So you need to come to these discussions with at least a willingness to try to understand what your opponents or your critics or your counterparts think about the world, even though its a different view. You have to understand because you still to figure out a way to find the capacity for compromise. This country has, over time, demonstrated pretty remarkable pragmatic capacity for compromise. We seem to have lost our way for the moment. We will rediscover it at some point that it does take effort and a bit of appreciation for where you can find some common interest. So please compare the european videos response to the financial crisis. Well, ours was better. [laughter] i mean, they had a harder problem in many ways. The federation of 17 judges, no institutions were common strategy, but like Many Americans felt was ideal in the fall of what, for the first three years of crisis, and some still think it was better for us, for the first three years of the crisis, and this is pretty helpful illustration of a consequence of a different strategy, they decided that they wouldnt, i think put some fuel on the fire. Let the fire burn but they thought the fire was going to be just, put a bunch of deserving, brutal pain on the more profitable investments, banks. They induce a bunch of additional austerity even by countries that have plenty of resources, very strong fiscal position. And those two things cost almost a Great Depression like outcomes in large parts of europe. And they floated over and over again with the risk of a complete collapse. In august of 2012 they decided that was a very good strategy and they reversed course. Basically, rhetorically if not in reality they stack a bunch of money in the window, ecb did, to try to calm the fires of the panic and they bought themselves a much more room now to begin to reform. But there are a Good National expanded and the cost of health and distribute. Its very painful, and its not the austerity the edges was not just the avoidable fiscal austerity they introduced but if you let Financial Markets live with panic like condition for bumpertobumper which they did for three years, its devastating on the capacity of businesses to expand, to borrow, to hire people, retain people. Just devastating. Good national experiment. If people like alternative then you should go live in spain. Question here, do you think fannie and freddie will be reconstructed . And if so, how and when . I have to add on to that a little note, do you think its ironic that some of the institutions that were treated separately, but included in the fannie and freddie and aig. I do think its ironic. Just say no, the context of this stuff, this is a rescue that most people viewed as way too generous to the arsonists and unjust, unfair, and yet the government is being sued for making too much money for the taxpayer on the largest, most riskiest things we did. And i think fannie and freddie will be reformed . Yeah, at some point if you. I think it will take a while because cant really do anything now. This is a complicated thing, a very risky reform process because as you have written about eloquently, but reduced fannie and freddie was this coalition of real estate interest, wellintentioned housing advocates, and banks. Pretty powerful coalition to a little bit of left progress ago all but a market in the coalition. We call it the housing and osha complex and have a pretty strong grip on the political system. And so i always felt, at least when i was there, not good to rush this because if you tried to rush the reform process, i know it doesnt look like we are rushing it, but you try to rush the reform process, it would strengthen end of the coalition and they would try to recreate a set of conditions that were probably not sensible. You know, a badly designed excessively generous subsidy the housing with a bunch of bad incentives for the institutions. So i think its okay if it takes some time. I know the Housing Market has a long way to go to heal. Private capital is probably coming back into that market. The government still this was the only thing in town. Economy is not that strong still. So it will be a gradual process and you want to run and legislative process that maximizes the chance, the reforms, the regime is dramatically better than the one you had before and that might take some time. So this could be a short answer or a long answer. Im going to ask the question on the chance that the answer is a long one. What are your thoughts about the current controversy around highfrequency trading . Well, i think its necessary, undesirable attention to a problem that has no, you know, no obvious easy solution and yet it will take a long time to figure out a better framework but it is worth the eightinch. So i am for the controversy and attention and hopefully it produces some changes that make those markets, you know, have a bit more integrity and a little us risk of catastrophic damage. So in the book you are quite pleased with doddfrank. You think it really did make a difference and go a long way toward making the Financial System safer. But you also write about the very thing in this persons question, and somebody would like you to comment on why the revised rules for the fdic guarantee authority and the limitations on federal authority are problematic. To talk about that in the context of some of things that arent so great about doddfra doddfrank. Well, let me just describe to us important things doddfrank at it. We get put in place a lot of framework for Consumer Protection that much better designed, more powerful, better accountability and will be better not perfect but better at preventing the level of predation, produced of entities that happen. Against the risk of future financial crises we have much better authority to enforce a much more concerted constraint on risktaking, much more broadly. Remember before the crisis in the seven, the ones that existed applied to the 40 of the Financial System. Now they are much more conservative and applied much more broadly. Banks cant to acquisition more than 10 of the Banking System to thats more constricted. We forced big banks do a much more capital than the same amount of risk. This is a systemic surcharge. And theres better bankruptcy like authority to dismember large institutions like lehman and bear stearns, aig. Wwe didnt have independent. Those are all good things. In the deeply populist moment in washington, they took away some of the firefight authority that was so important to protect people from the much worst recession. They took away the fdic guarantee authority and i think less consequentially did a little tightening up for stuff i recommend actually on the. For example, i thought the fed shouldnt be able to do Firm Specific intervention in the future like aig or bear stearns, only generally available stuff. If you want to do Firm Specific things, that should be left to the government. Thats my view. They authority i think is very consequential. Because as one of those effective things that was done to limit the force of the panic in the fall of 08 and its the only way you break panic. One of the only ways you can break panic. What happened was congress, although it wasnt controversial at the time, congress got real caught up in a belief that in finance, the fire stations will cause fires. Not true. It just doesnt happen that way. Or they get caught up in this belief that somehow if you limit tools available to the fire station, you make fires less likely. Thats also not true. So they got caught up in that basically. A limited condition to that authority and what that means is that because politicians are not going to rush to do the right thing in a penny because its deeply unpopular, what he means that congress would be late like it was this time. They will be late when its severe enough. That will be a very costly thing. I think on balance if you look at the reforms, although the are messy and comforted and imperfect, these core reforms around limiting risks are very powerful and they are very well designed, and they will buy us, they have a chance of buying up a long period of relative stability. Not permanent. Theres nothing permanent in this because as people become more confident, eventually risks will migrate around of those constraints and you face the risk beginning of something more severe. But on balance, with limitations the restraint on the fire stations, the reforms i think are really pretty good. Okay, so i think we have time for one last question. And this one is, are you still doing your taxes with turbotax . [laughter] no, i got a good education on the complexity of the tax system. And generally contain for advice. [laughter] well, thank you all very much. [applause] booktv is on facebook. Like us to interact with the booktv guests and viewers. Watch videos and get uptodate information on events. Facebook. Com booktv. You are watching booktv on cspan2. On cspan2. Heres our primetime lineup for tonight. The Roberts Court is quietly rewriting constitutional law in areas such as free speech, privacy, Voting Rights and president ial power