How Tim Geithner Won a War on Financial Terror — and Lost the Peace

A financial first responder.

When the housing bubble burst, and the bull market went down in flames, the U.S. government launched a global war on financial terror.

Or so the economic historian Adam Tooze suggests in Crashed: How a Decade of Financial Crises Changed The World. Tooze’s new history of the 2008 crisis and its aftermath offers no shortage of penetrating insights into the calamitous epoch we’ve been living through. But one of its most memorable observations concerns the use (and abuse) of national-security metaphors.

As Tooze documents, in the days after Lehman Brothers’s collapse, Treasury secretary Hank Paulson implored his staff to prevent an “economic 9/11.” Paulson’s successor, Tim Geithner, elevated this analogy, calling on Congress to “give the president and the financial first responders the powers necessary to protect the country.” Later, Geithner would liken his experience managing the crisis at the New York Fed to that of a bomb-disposal unit dismantling unexploded IEDs in Iraq — and his theory of financial crisis management to Colin Powell’s military doctrine. In conversations with Europe’s technocrats, Geithner warned that “it is more dangerous to escalate gradually and incrementally than with massive preemptive force.”

That American officials would view the financial crisis through the lens of post-9/11 national-security policy is not surprising. In the fall of 2008, a national emergency with global consequences — that was centered in Manhattan, and appeared to undermine core aspects of the United States’ conception of itself — was sure to bring 9/11 to the front of many American minds. And Geithner, Paulson, and Ben Bernanke had an incentive to keep it there: Stabilizing the financial system after Lehman’s collapse required the Federal Reserve and Treasury Department to claim extraordinary powers — and Bush-era national-security policy offered a paradigm for legitimizing such exceptional exercises of executive authority.

Tooze suggests that this paradigm had a beneficent aspect, as it gave America’s neoliberal technocrats permission to mount a more muscular response to the crisis than their European peers. In drawing on the precedent of a post-9/11 “state of exception,” Geithner & Co. could more comfortably condone the massive state intervention necessary for recapitalizing the nation’s banks.

But U.S. policy-makers’ habitual appeal to national-security analogies also had the insidious effect of obscuring the political and distributive implications of their response to the crisis. As Tooze writes:

[The metaphors] position the crisis-fighting team as first responders facing a compelling emergency. And they place us, their audience, by their side. Who would not root for … Geithner’s heroic bomb disposal team? Politics is set aside as we anxiously watch our heroes struggle to rescue us from disaster. There is no time to ask why this is happening. We are ‘all in this together.’ But it is precisely with that assertion that a political economy of the crisis begins. Which system was it that needed to be saved in the autumn of 2008? Who was being hurt? Who was included in the circle of those who needed to be protected? And who was not?

The (ostensible) ideal of national-security policy is to secure the country without changing it; to keep Americans safe from novel threats, while infringing on their liberties and traditional way of life as little as possible.

This same logic guided America’s response to the financial crisis. In early 2009 — as executives at bailed-out banks collected billions in bonuses — there was broad, bipartisan support for a radical reformation of the American financial system. In those months, no less a “free-market” champion than Alan Greenspan endorsed temporarily nationalizing America’s major banks, as Sweden had done following its own banking crisis in the 1990s. Republican senator Lindsey Graham seconded that idea. But Geithner vetoed the proposal, warning that nationalization would be a “deeply transforming policy mistake” (a phrase that posits the concept of radical change as undesirable, by definition). In public remarks, Barack Obama rejected nationalization on similar grounds. The United States had “different traditions” than Sweden, the president argued, and a “different set of cultures in terms of how the government relates to markets.”

For these reasons, “we want to retain a strong sense that private capital [is] fulfilling the core — core investment needs of the country,” Obama explained, at one of his presidency’s first press conferences. (Change, you couldn’t believe in; private capital, you could.)

Through “massive preemptive force,” Geithner’s mission was accomplished. A great depression was averted, and the global financial system was restored, with its traditional way of life, largely intact. The “too big to fail” conundrum was resolved — not by making Wall Street’s titans smaller, but rather, by further insulating them from the threat of failure. Quantitative easing and near-zero interest rates got major banks and the ultra-wealthy back in the black in short order. Eventually, ordinary Americans saw a return to economic normalcy, complete with a rising stock market, (slow but steady) growth, and full employment — along with stagnant wages, rising health-care costs, mounting household debts, booming tax havens, and accelerating inequalities in wealth, income, and life expectancy.

Of course, the return of those latter “normalities” testifies to the fundamental inadequacy of Geithner’s approach. “Financial first responders” might have been up to the task of restoring the security of the global banking system. But only “deeply transforming” changes to our nation’s political economy could have restored the financial security of the American working class (let alone, that of underwater homeowners).

It’s reasonable to suspect that the Obama administration’s failure to implement such reforms was one thing that a significant number of 2016 voters — and nonvoters — could never forget.

Geithner Won a War on Financial Terror — and Lost the Peace