In 2008, 3 Officials Were On The Frontline Of The Financial Crisis
STEVE INSKEEP, HOST:
What can we learn from the 2008 financial crisis that might apply next time? When the global financial system was melting down in 2008, Ben Bernanke was head of the Federal Reserve. Henry Paulson Jr. was Treasury secretary. Tim Geithner was president of the Federal Reserve Bank of New York and later became Treasury secretary as the crisis went on. Now the three men have written a book together about their experiences called, "Firefighting: The Financial Crisis And Its Lessons." They joined us to share those lessons.
You write that many of the things we did appeared to reward the very financial industry that had dragged the world into the crisis in the first place. Chairman Bernanke, why was that?
BEN BERNANKE: Well, it's tough to prevent a financial system from collapsing without indirectly helping some people in the financial system. Our goal, of course, was to try to prevent the financial collapse from having broad, you know, implications for the U.S. economy, which ultimately, of course, it did.
INSKEEP: Secretary Paulson?
HENRY PAULSON: In a system that is as complicated and intertwined as ours, you have to go to the source of the problem if you want to stop the bleeding. That's Wall Street. And it's just essential, you know, for - to continue to create jobs, for people to to get the loans they need to send their kids to college, to buy a car, to buy a home.
INSKEEP: Timothy Geithner, should the administration have been more populist in its approach to this, lashed out at bankers a little more, prosecute people, do anything?
TIMOTHY GEITHNER: Yeah, we didn't - the three of us were not the arbiters of justice on the criminal side. We couldn't be. That wasn't our role. And the scandal was what was legal, not so much what was illegal. And even in the typical financial crisis, you know, the right thing to do is to protect the depositor, let the bank fail. The bankers lose their jobs. The firm doesn't exist to survive to another day. But in the extreme crises, where you're vulnerable to panic, you'll end up with mass unemployment and, you know, a decade of breadlines - soup kitchens across the country.
And that's the dilemma, that what is necessary and essential and just and feels moral in a normal crisis is dangerous and unfair - because to sit back and let the crisis burn and the system collapse will end up causing the most damage in the most unfair way on people completely innocent of most of the mistakes people made that helped cause the crisis.
PAULSON: All the money put into the banks came back, plus almost $50 billion. So the purpose was to avoid a collapse of the financial system. That's why we did it. But the money came back with a profit. And the financial institutions ultimately paid for it. You're never going to get credit for avoiding a collapse precisely because we avoided a collapse of the economy. And people were rightfully unhappy about the huge burden that the crisis placed on Americans, many of whom, you know, were of modest means and less - least able to bear it.
INSKEEP: So trillion-dollar deficits turned out not to be fatal in that situation - in fact, well over a trillion-dollar deficits. Now we're in a situation where the deficit is climbing back up to a trillion dollars in good times. Is it possible that deficits really don't matter at all?
GEITHNER: If left unaddressed, then we're on a dangerous, unsustainable path. It doesn't mean there are things that we could borrow rationally for today that would have very strong powerful economic returns for the country today. But there are limits to how much you can do that. And you can't safely meet all the broad challenges we face as a country by leaving the deficit path on the current, I would say scary, trajectory.
INSKEEP: You say it's scary because - why? - because if there was a recession and the government needed to borrow in order to boost the economy, the government would already be borrowing. There'd be nowhere to go. Is that it?
GEITHNER: In the long run, you'll leave yourselves with much less room to protect people from - in the next crisis or in the next downturn.
INSKEEP: Do you believe the country is ready for the next financial crisis?
BERNANKE: If a crisis does happen, many of the tools that we used - and which other countries have used - will just not be available. So we - we're better in a sense that a crisis might be less likely. But we are concerned - and this is a theme of our book - that if a crisis occurs, we just don't have the powerful tools that would end the crisis quickly and avoid the damage that otherwise might occur.
GEITHNER: I think the central lesson of this crisis is that it's very dangerous to let your system outgrow the protections you need to put in place to limit risk and limit the risk of panics (ph) in the financial system. And that's a forever challenge. It never goes away. You can't sit there inert and let innovation erode those protections. They have to constantly evolve and adapt. And you need to make sure that they're conservative enough that they provide protection when things are really bad.
INSKEEP: Secretary Paulson?
PAULSON: Yes, I agree with that. The other thing that I think is really important to keep in mind is the need for financial literacy. There are many well-educated people that don't really understand finance to the extent they should. Every American has got to be more vigilant and got to ask themselves, if I don't understand all the complicated language on this agreement, if I don't understand what's going on, I better work to understand that and make sure that I don't get myself overextended to the point where I can be seriously hurt by a reversal in markets or a downturn.
INSKEEP: Chairman Bernanke, you get the last word here.
BERNANKE: Financial systems are prone to breakdown - a panic or a run or a crash. You know, you can't leave it without some supervision. And smart supervision at the Federal Reserve and other agencies that oversee the financial system is really important to keep our system stable. And we want to avoid having the kind of events we saw a decade ago that dangered, again, not only the financial system, but the entire economy.
INSKEEP: Ben S. Bernanke, Timothy F. Geithner and Henry M. Paulson Jr. are the authors, co-authors, of "Firefighting." Gentlemen, thank you very much.
BERNANKE: Thank you.
GEITHNER: Thank you.
PAULSON: Thank you. Transcript provided by NPR, Copyright NPR.