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Book Review

Geithner provides view from centre of the storm

THIS WEEK, Thais will be reminded of the baht devaluation 17 years ago. The so-called Tom Yam Kung crisis haunted many in the country and sent shock waves to other emerging markets.

Yet to Timothy Geithner, former US treasury secretary, it was just one of a number of dreadful memories.

In his book "Stress Test: Reflections of Financial Crises", Geithner details a long list of crises he was involved with, from the Mexican crisis to the latest one exploding in his homeland.

The first part of the 580-page book is about his family and his educational background. Frequent relocations to many parts of the world, including Zimbabwe and Thailand, were part of the family's routine, as his father worked for the US Agency for International Development (USAID) and then Ford Motor Foundation.

His childhood showed him the big gaps between the privileges of children in the US and those in developing countries. He observed what was going on in the world, and the experience influenced his decisions as well as the US government's measures to deal with the 2008 financial crisis.

Working in Japan when its economy was heading towards the "lost decade", Geithner became an official at the US Treasury just in time to observe the Mexican peso crisis in 1995 and his government's decision to assist the neighbouring country.

A couple of years after that, Thailand suffered the Tom Yam Kung crisis, and many other emerging economies felt the contagious effect.

In his memoir, Geithner details why the US refrained from offering direct assistance to the countries and why the International Monetary Fund was encouraged to play the leading role. He admits that the US$17-billion bailout package to Thailand "didn't look as generous as Mexico's, and the Thais felt betrayed that none of it came directly from us. Other Asian nations were offended too … I warned Bob [Robert Rubin, then treasury secretary) and Larry [Summers, his deputy] that we were suffering huge damage to our credibility in Asia. Even with one hundred thousand troops stationed on the continent, our influence was waning."

The heart of the book lies with the Federal Reserve Bank of New York's policies to deal with distressed US banks. Geithner was the New York Fed governor in 2007, when some bad signs - fuelled by the past housing boom - emerged. The Fed engineered the takeover of Bear Stearns, the first of the top five investment banks to fall. That marked the first Federal Reserve System handout to weak banks.

Against other fears of moral hazard, he felt the need to prevent a systemic crash that would paralyse the finances of the United States and the rest of the world. He is adamant that the action was not to support "too big to fail" banks.

A lot of the book in the following pages deals with negotiations. These only heightened when he was sworn in as treasury secretary under President Barack Obama in 2009. As the financial crisis gained speed, the Treasury Department and the US Federal Reserve worked against the clock looking for new options as politicians were unable to strike an agreement.

"The financial crisis was also a stress test of the American political system, an extreme real-time challenge of a democracy's ability to lead the world when the world needed creative, decisive, politically unpalatable action," Geithner writes.

Needless to say, those actions sent shock waves to the global financial system, and the US economy has not yet fully recovered. Yet Geithner firmly believes that he did the right thing, given the circumstances.

"I'm proud of most of the decisions we made to try to save the economy. And I'm under no illusions that better marketing or better speechmaking could have made those decisions popular. That said, I never found an effective way to explain to the public what we are doing and why. We did save the economy, but we lost the country doing it."

He acknowledges that the US response to the global financial crisis is still wrapped in myth and haze and misperception. And he hopes that this book, detailing the process and what was in his head at the time, will clear that up.

Indeed, no policymakers or regulators in Thailand at the time have been this straightforward, though the crisis here was as long as 17 years ago.


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