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Book Review

An insider’s reflections on fighting financial crises

Stress Test: Reflections on Financial Crises
Stress Test: Reflections on Financial Crises by Timothy Geithner May 8, 2019. PHOTO | DIANA NGILA | NMG 

Timothy Geithner’s book draws its title from the fact that the architects of the Obama administration’s response to the 2008/09 Great Recession placed at the core of the crisis response tool kit an in-depth analysis of the state of financial health of major firms.

This was with a view to determine how much capital boost they would need to weather a deep economic downturn.

For moral hazard crusaders, the book will not be an easy read, especially in Chapter Four as Geithner refers to Walter Bagehot’s 1873 publication titled Lombard Street — A Description of the Money Market, a book I deem to be one of genuine distinction, citing lending freely and boldly as the way to arrest a run on lending institutions.

I find his argument that in the face of crisis “the more risk the government could commit to take the less risk it will ultimately have to take” bound to be as compelling as it is controversial.

To bring this closer home, in the wake of the run that besieged Chase Bank in April 2016, the Central Bank established a liquidity support framework targeting commercial banks and microfinance institutions that faced vulnerability to panic-driven shocks.

Domino effect

Coming against the backdrop of wide circulation of panic-fanning messages on a potential domino effect across the banking system, it did a lot to quell jangled nerves. Geithner aptly observes that “financial systems are, after all, built on belief…Confidence is a fragile thing. When it evaporates, it usually does so quickly and it is hard to get back once it is lost.”

There is a general consensus that the collapse of Lehman Brothers on September 15, 2008, was the canary in the coalmine for the Great Recession.

What is scarcely known, and revealed by Geithner’s book, is that the Treasury Department’s findings revealed that the bank’s internal stress tests “had not been stressful enough”.

“Stress Test” is an excellent and illuminating read for people across a wide spectrum—from students of economics and finance to those simply pricked by curiosity around the 2008/09 global financial crisis and the Obama administration’s response.

This notwithstanding, the book left me with the feeling that for a person with Geithner’s wealth of experience in crisis fire-fighting and at a time when economic orthodoxy seems to be turning on its head, he would have done a lot better by sharing thoughts on what he deems to be the future trajectory of global economic policy. But maybe that is the subject of another book in the pipeline.

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