Two books published this month offer radically disparate interpretations of the Great Recession and its aftermath. They each tell a very different story about the housing bubble, the 2008 financial crisis and the weak recovery that has followed. In one version, the bailout of the Wall Street banks is the hero, keeping the Great Recession from becoming a replay of the Great Depression. In the other, the bailout is a sideshow, even a distraction, to the real story about our economy. The interpretation that gains traction will determine how the recession is understood, what went right and wrong, and who is ultimately to praise and blame.
The first book is “Stress Test,” former Treasury Secretary Timothy Geithner’s memoir. Although he discusses his education, world travels as a young person and experiences in the Clinton administration, the bulk of the narrative is a first-person account of the financial crisis and subsequent bailouts. Unlike other books about the bailouts, such as “Too Big to Fail” by Andrew Ross Sorkin and “On the Brink” by Geithner predecessor Hank Paulson, “Stress Test” provides a point of view from within the first term of the Obama administration.
The second is “House of Debt,” by Atif Mian and Amir Sufi, economists at Princeton and the University of Chicago, respectively. In it they describe the large amount of empirical research carried out since 2008 to try and understand what went wrong in the financial markets and in the economy as a whole. Much of this work was either generated by the two authors or in response to them, and their command of these debates and the underlying data is impressive.
The books offer very different reading experiences. “Stress Test” is massive, at over 500 pages; “House of Debt” is barely 200. “Stress Test” is filled with clever humor and day-to-day observations during the economic crash. “House of Debt” reads as an excellent summary presentation of the recession to date, with each page packed with data. As opposed to many economists who try to force their pet theory onto the recession, Mian and Sufi let the research speak for itself.
The central story of “Stress Test” is the 2008 financial crisis. The plot: How can it be stopped? After the Sept. 15 failure of Lehman Brothers, which precipitated a financial panic, Geithner argues, any step that could undermine confidence in financial markets wasn’t worth the risk. Efforts to try and nationalize the banks, force creditors to take losses or place requirements on Wall Street bailout funds are dismissed.
“House of Debt,” by contrast, portrays the financial crisis as a minor plot twist in the main narrative of the Great Recession — the collapse of the housing bubble, which left homeowners so underwater and so saddled with debt that they stopped spending money in an attempt to save. This lack of spending is so severe that the Federal Reserve, the first line of defense in maintaining full employment, loses its ability to keep the economy on a steady path with its normal methods. As a result, we have a major period of unemployment. In Mian and Sufi’s account, the financial crisis is merely a symptom of this recessionary deleveraging, not its cause. In fact, the recession started nine months before Lehman Brothers collapsed. “House of Debt” also demonstrates that high levels of private debt are generally associated with deep economic recessions and financial panics, as in the Great Recession and Great Depression.
“Stress Test” thrills its readers with the story about how a government-in-transition found itself in the middle of a market panic. And Geithner’s dark humor and sarcasm make this story of an unfolding financial market panic an enjoyable read. You can follow him debating, planning, scheming and otherwise going to the limits to try and backstop the financial markets in the name of confidence. Housing, however, is an afterthought to the narrative. Where Geithner describes how he dreamed up using every resource available, including raiding the Federal Deposit Insurance Corporation and using the Troubled Asset Relief Program (TARP) — the funds assigned by Congress to bail out the financial sector — to create a “Public-Private Investment Program” to buy bad loans, for instance, his narrative and its underlying passion come alive.
On the other hand, Geithner’s narrative goes largely passive when discussing housing policy. There’s no grand attempt or drama in the text for preventing the wave of foreclosures or restructuring bank household debts, certainly not compared with the bailouts. At one point Geithner is told that one of the central things President Barack Obama ran on and used to secure the bailouts — allowing the reworking of foreclosures under bankruptcy — doesn’t have enough votes in Congress to pass. With a shrug he says he didn’t think it was “a particularly wise or effective strategy, anyway.” There’s no race to repurpose TARP funds to help homeowners using any number of plausible plans. It stands out against the way he goes after opposition to the stuff he really wants to do in the bailouts.
Housing, however, is the central focus of “House of Debt.” The authors’ groundbreaking work on the relationship among indebtedness, falling consumption and high unemployment puts the real economy, families and a collapsed housing market, rather than the financial sector, at the center of the story. They make a convincing case that restructuring housing debt is as important as fiscal and monetary policy for economic recovery from severe recession.
“The financial crisis left tragic pain and suffering in its wake,” Geithner tellingly says. “Financial crises always do.” Why would that be? Because of the “healing process” of deleveraging. For “House of Debt,” on the other hand, financial crises leave pain because they are associated with high debt levels, and with political efforts by creditors to make sure those debts are never reduced or eliminated. Deleveraging is driven in large part by foreclosures, a process that tends to cause even more damage. Besides harming communities, foreclosures also drive down housing prices, which in turn leads to a vicious cycle of even more people underwater, wallowing in debt and unwilling to spend money, which leads to unemployment, which leads to further foreclosures. There’s nothing “healing” about this process.
The two books even differ in their accounts of what happened before the crisis. In “Stress Test” the housing bubble is everyone’s fault, which in turn means it’s nobody’s fault. But in “House of Debt” there’s a clear set of culprits. As a result of the IMF’s austerity policies in the late 1990s, countries in Southeast Asia began to hoard safe assets, which Wall Street was more than happy to provide. However, serious conflicts of interest in Wall Street had it selling risky investments in real estate loans and pretending they were, in fact, safe.
In a further interesting and telling difference, even their historical analogies conflict with each other. Geithner praises Alexander Hamiliton, the country’s first treasury secretary, for being “America’s original Mr. Bailout,” and attacks President Franklin Delano Roosevelt for risking financial panic by not working with his predecessor, President Herbert Hoover. Mian and Sufi draw on a different history. They applaud 19th century changes in the bankruptcy code to help fix economic chaos by reducing burdens on debtors. Roosevelt is a hero for using his break with Hoover’s presidency to refinance home loans, go off the gold standard and abrogate gold clauses in debt contracts. These stories of the appropriate role of the state — as working in the interests of either creditors or debtors — are in the background of all the subsequent narratives.
“House of Debt” is a remarkable work, presenting solid evidence of how we’ve gotten into this deep, ongoing recession. However, the authors, at times, don’t situate debt restructuring as part of a balanced portfolio of solutions as well as they could. It’s understandable, given how everyone already debates fiscal policy and the Federal Reserve, while housing has been left to the side. But, as Roosevelt understood when he ran a deficit, abandoned the gold standard and reworked mortgages, you pull on all three levers as best you can to get to full employment. It’s a lesson this administration, with its pivot to reducing long-term deficits, its early avoidance of filling Federal Reserve vacancies and its failed housing policies, did not get.
Although Geithner’s “Stress Test” is an entertaining story, the result of reading it alongside “House of Debt” is damning. The worst thing about taking in the two books together isn’t that bailouts are tragic, necessary even when they feel unjust. Nor is it that nobody appreciates the good that was accomplished. Rather, it’s that the bailouts — Geithner’s magnum opus —were ultimately less important than the serious work of trying to deleverage household balance sheets, fix the housing crisis and focus on full employment.
History will show that the stress faced by households, not finance, was what really mattered, and here the Obama administration and Geithner failed their stress tests.