Lunch with Geithner

Yesterday we joined former Treasury Secretary Tim Geithner, now president of private equity firm Warburg Pincus, for his first public event in Washington since leaving office.

In response to a question about doing more to help homeowners keep their homes, Geithner said his first obligation, and the "only way to protect people from massive unemployment, is to step in, and try to make sure to prevent the collapse and failure of the financial system... Nothing's possible if you don't do that." He compared the financial crisis to a fire, saying, "paradoxically, in a panic, to rescue people from the risk of massive unemployment, you're going to be doing things that look like you're helping the arsonist. It is just inescapable."

Geithner said the result on housing "was terribly disappointing" because the scale of the problem was massive relative to their tools, authority, and resources. He was interviewed at the Hamilton by Politico chief economic correspondent Ben White and chief White House correspondent Mike Allen. (They mentioned that Geithner spent more time in the West Wing than any other Cabinet Secretary in this administration.) Among the factors that contributed to the crisis, Geithner listed: a "terrible amount of fraud and predation; a systemic failure to extend a basic set of constraints against risk-taking and protections against runs; a Pakistan-like regulatory system with a lot of tribal order but not much power and scope; and a moral hazard in Fannie and Freddie.

You can't necessarily prevent financial crises by having more regulators or central bankers with a perfect view of the future, Geithner said. What causes them is excess confidence produced by long booms. The "only defense against this" is a mix of thicker shock-absorbers against loss, alongside the capacity to put in a lot of money when things fall apart. "One is not enough, you have to do both." We're better positioned today against those risks, said Geithner, but not invulnerable.