On two occasions in the space of months I interviewed Treasury secretary Geithner about the government’s response to “too big to fail.” He told me that they had been working hard to find the right way to stop a crisis before it spread. “The key point is, that if big banks ever manage themselves to the edge that they cannot survive without government assistance,” he said, “the government should have the ability to come in and dismember them and unwind them and sell them off in pieces without putting the taxpayers at risk. We don’t want the taxpayers to be at exposure of nearing the costs of the large financial crisis.
“One way to think about it is to use the firefighting metaphor,” he added. “You want to draw a fire break around the fire, and make sure that the fire can’t jump from the failing firm and threaten the rest of the financial system.” It seemed self-evident to me—so obvious, in fact, that I marveled that such a plan had not been in place at the time of the financial collapse around Lehman. Geithner agreed. “A tragic failure of the country,” he said, nodding vigorously. “We had it in place for small banks, but we didn’t have it in place for large, complex institutions that dominated the world—for Fannie and Freddie, and AIG, and Lehman, and Bear Stearns, and even the major banks in the country. The only authority the president had was to come in and shut down the markets and declare a bank holiday.”
Geithner and I discussed the matter at some length. I didn’t question his sincerity, or even his incredibly bright mind, which was on full display when he relaxed and opened up one-on-one. At the time of our last interview, in the early spring of 2010, I noted that he looked older and more burdened than he had in September 2008—and no wonder.
“We are not going back to the system the way it was,” he said firmly, but the new direction was less clear. He spoke of fundamental change, but he couldn’t explain exactly what that would mean.
NINE
A Greek Tragedy
“Our debt is $13 trillion. To give you an idea of what a trillion is, if the day that Jesus Christ was born somebody put a million dollars into a bank account and then added another million dollars every single day for the next two thousand and ten years, you still wouldn’t have a trillion.”
—DAVID RUBENSTEIN, COFOUNDER AND MANAGING DIRECTOR OF THE CARLYLE GROUP, DISCUSSING THE ENORMITY OF OUR DEBT IN MY PANEL DISCUSSION AT THE ASPEN IDEAS FESTIVAL, JULY 9, 2010
SPRING 2010
In a classic Greek tragedy, the protagonist suffers a fall as a result of a fatal flaw. By 2010 this had become an apt metaphor for the sinking fortunes of Greece, which threatened the European Union and the stability of the euro itself. Greece had long been a profligate spender, continuing to pay the bill for an excessive national standard of living, even as it was going broke. Those who might have asked why we should care about what happened to this tiny country across the ocean could find an answer in the dangerous debt load that was building here at home.
Greece mattered because it was emblematic of what sovereign debt (that is, government-owned debt) could do, and as such was a cautionary tale for the bailout-strapped United States. If debt brought about the crisis on Wall Street in 2008, the transformation of private debt to government debt was in many ways the story of the post–September 2008 economy.
By the time 2010 came around, there was a sense that the panic was dying down, and we were headed toward daylight, even if we were not there yet. But stability seemed to be coming up against some difficult economic and political realities. The crisis on Wall Street in 2008 and the enormous capital spent on bailouts empowered a new administration to push for more stringent financial regulations. No one knew for sure how strict the regulatory environment would become, but many critics felt that the administration should be more focused on the growing debt. A year and a half after the financial crisis, our debt was more than $14 trillion, larger than the U.S. economy, and it was expected to rise to $16.9 trillion by 2015.
According to the Council on Foreign Relations, foreign ownership of U.S. debt has increased dramatically over the last decade. Foreigners now hold 57 percent of U.S. Treasuries, while foreign holdings of U.S. government agency and government-sponsored-entity debt have increased from 6 to 16 percent. Virtually the entire increase in both has been accounted for by foreign governments, as opposed to private investors. And one government dominates: China. According to the Wall Street Journal, China has accumulated an astounding $850 billion in Treasuries and $430 billion in agency debt over the last decade—almost half the total foreign government accumulation.
Former Treasury secretary Hank Paulson revealed in his book, On the Brink, that in August 2008 he learned that “Russian officials had [earlier] made a top-level approach to the Chinese suggesting that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” referring to the debt issued by Fannie Mae and Freddie Mac. Paulson said that the Chinese declined to cooperate but noted that the report was “deeply troubling,” as “heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets.” With the United States needing to sell another $1.3 trillion in debt this year, should be we worried about these concerns and should the structure of the GSEs be changed?
Ben Bernanke tried to calm such fears back in 2006.
