In addition to the issues where one hopes that Geithner is being less than honest, there are several important parts of the book where we know that he is not being honest. The one I'll note first is Geithner's boasts about the size of the stimulus. Geithner writes that President Obama's stimulus request of $800 billion over two years "was considered extraordinarily aggressive, twice as much as a group of 387 mostly left-leaning economists had just recommended in a public letter, more than the entire New Deal in inflation-adjusted dollars."
I happen to be familiar with that letter signed by 387 mostly left-leaning economists since I helped to draft it. The letter actually called for a stimulus of 2-3 percent of GDP, which would have implied a stimulus of $600-$800 billion over the years 2009-2010.
Furthermore, this letter was released in November of 2008. It had been drafted in the early days immediately after the Lehman collapse; before we had data showing that the economy was losing 700,000 jobs a month. I and many of the other signers had substantially revised upward my assessment of the need for stimulus based on this new information. By the time the President released his stimulus package in January, I was arguing that a stimulus package of more than twice this size would be needed. Others, like Paul Krugman, were very visibly arguing the same position.
Geithner can argue that we did not need a bigger stimulus or that it would not have been possible to get a bigger stimulus through Congress, but it is just dishonest to imply that Obama was out on a limb with a stimulus package way larger than anyone thought reasonable. In the context of the times it was a very modest (and inadequate) proposal.
If anyone doubted that Geithner's point is to create a false impression rather than convey information the comparison to the New Deal seals the case. In inflation-adjusted dollars the economy was 15 times larger in 2009 than it had been in 1933. A comparison in inflation-adjusted dollars (rather than one based on the size of the economy) is the sort of thing that may sell on the David Gregory Sunday morning talk show circuit, but it is an insult to the intelligence of serious readers.
2) TARP and the Fed Commercial Paper Lending Facility
The next excursion in deception is the discussion of the debate over the passage of the TARP in the weeks following the collapse of Lehman. Geithner chronicles the political debate against the backdrop of what was happening in financial markets and the Fed's actions. In the case of the latter, Geithner notes that Federal Reserve Board Chair Ben Bernanke announced the creation of the Commercial Paper Funding Facility in October and that it began operations by the end of the month (page 229). The key fact that Geithner leaves out of the discussion is that Bernanke's announcement took place the weekend after the House approved the TARP on a very close vote, after previously rejecting it.
This is important because the most compelling argument that there was an urgency to pass the TARP was the claim the commercial paper market was shutting down. Major companies like Boeing and Verizon rely on borrowing in the commercial paper market to finance their ongoing operations. If these companies could not get the funding needed to meet their payrolls and pay their suppliers we would literally be looking at a complete economic collapse.
If Congress recognized that the Fed actually had the power to support the commercial paper market without the TARP then it might have felt less urgency to rush to approve the bill. This would have allowed room for more debate and perhaps more conditions -- like a requirement that TARP beneficiaries write-down principle on underwater mortgages. But the threats from the Paulson, Bernanke, Geithner team that the alternative to TARP was the end of the world prevented a more levelheaded discussion.
3) The First-Time Homebuyers Tax Credit
This brings up another major lapse in Geithner's account. The first-time homebuyers' tax credit, one of the all-time greats in hare-brained policy proposals, conveniently disappears from history. This also is a case of deliberate deception. The book features a chart showing how house prices stopped falling in early 2009 and began rising into 2010 (page 304). The captions claims the chart shows the effect of supporting Fannie Mae and Freddie Mac, lower mortgage rates and efforts to prevent foreclosures.
Whatever impact these measures may have had they were swamped by the impact of the first-time homebuyers' credit which provided up to $8,000 to people who had not owned a home in the prior three years. (I confess to being a beneficiary of this awful policy.) The credit was inserted into the stimulus package by a House Republican, who was a former realtor, but it enjoyed broad bi-partisan support and the administration never publicly indicated any opposition.
House prices stopped their steep fall and began rising almost immediately upon the credit taking effect. However the problem was that the bubble had far from fully deflated at that point. This meant that the credit encouraged millions of people to buy into a bubble-inflated market. If Stress Test had been written by a more honest person the chart would not have ended in 2010, but would have instead shown the subsequent decline in house prices that began in the second half of that year, after the end of the credit.
The index in the chart would have showed a 6.5 percent drop in prices over the next year and a half, but the most affected markets saw much sharper drop-offs. For example, the prices of homes in the bottom third of the Las Vegas market fell by 18.2 percent after the temporary lift from homebuyers tax credit. The price of houses in cheapest third of the Minneapolis fell by 28.6 percent and in Atlanta the drop was 51.9 percent. In these and other markets house prices did begin to rebound in 2012, but people who were forced to sell in the interim would have incurred huge losses and many people who bought during this period are undoubtedly still underwater.
The first-time buyers credit effectively allowed many homeowners who would have been underwater otherwise to transfer homes their homes to new buyers. These people would then be faced with the further drop in house prices. And, in the process many mortgages held by banks and private issue mortgage backed securities would be transferred to Fannie Mae, Freddie Mac and the Federal Housing Authority. That may not be good housing policy, but it is good policy if the point is to help the banks.