Tim Geithner on How to Fight the Next Financial Crisis

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:23)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, you know what sucks about getting old?

Joe Weisenthal (0:28)

You know what? I twisted my, I hurt my neck the other day, and I was like, I said, you know, I was washing dishes and I hurt my neck. And I said, getting old is such a crime. I hate it. But what were you getting? Where were you going with it?

Tracy Alloway (0:39)

Well, I was gonna say, you start to lose shared experiences with a lot of people. And I realized this whenever I make a Simpsons joke, there are a lot of people now who do not get that frame of reference. And I was thinking about this in relation to the financial system and specifically in relation to the 2008 financial crisis.

Joe Weisenthal (0:59)

No, I've had this thought in the last year, which is that we're at the point where the 2008 financial crisis is like capital H history, right? It used to feel like when both of us started our careers, that the crisis in the aftermath was current events, including several years in the aftermath. Now, it's like when I was a kid and I like heard about Woodstock or the moon landing, stuff that really was not that long before I was born or whatever. But I, you know, that like various things when I was a kid could all have been the same year, the moon landing, Pearl Harbor, etc. That was all just like capital H history. And we're getting to the point now where the great financial crisis to a lot of people is just not something that either feels relevant or anything except out of history books.

Tracy Alloway (1:43)

That's right. And by the way, just to scare you a little bit more, I asked perplexity how many Americans were born after 2008 and it said 70 millions. That's roughly 20 percent of the population.

Joe Weisenthal (1:55)

And if you figure the people who are like under 10 Yeah, before then means nothing to them either. Anyway.

Tracy Alloway (1:59)

All right. So obviously here at Odd Lots, we take our jobs as lovers of financial crisis hindsight and I guess purveyors of financial records extremely serious. And so we should talk about 2008 We should talk about financial crises. They obviously still exist. We haven't had anything on the scale of Lehman Brothers. But we've certainly had incidents like the collapse of SVB. There's also that market sell off in August, which kind of came out of nowhere.

Joe Weisenthal (2:30)

Yeah.

Tracy Alloway (2:30)

Bunch of people talking about the risks of the carry trade.

Joe Weisenthal (2:33)

The end carry trade.

Tracy Alloway (2:34)

Private credit. We have all these big worries stemming from the amount of debt that the US has to refinance to really idiosyncratic things like the basis trade in US Treasury. So we should talk about it.

Joe Weisenthal (2:46)

Let's do it.

Tracy Alloway (2:47)

Okay. So we really do have the perfect guest. We are speaking with Tim Geithner, the former Treasury Secretary, former head of the New York Fed, now at Warburg Pincus, and also chair of the program on financial stability over at Yale, which is why he's here today. The school is launching something called the New Badget Project, which is an online tool or compendium for designing financial crisis interventions. So Tim, welcome to the show.

Timothy Geithner (3:14)

Nice to be with you both.

Tracy Alloway (3:16)

So first of all, I got to ask, 200 years ago, Walter Badgett said that banks should lend freely against good collateral, and then there would be no problems. So are we done here? 200 years ago, we should have had this figured out.

Timothy Geithner (3:31)

Yeah, I mean, financial crises have this classic tragic thing. There are crises of beliefs in a sense, and a crisis of memory, and it's the loss of memory. It's the absence of any personal experience with what happens when things fall apart. It's the loss of memory about how panic start and what it takes to break panics and prevent panics from turning into Great Depressions, which is really what causes financial. It was Minsky wrote that stability breeds instability.

You have long periods of expansion, moderation, and recessions, as prices going up, which creates the seeds for crisis, causes memories to fade, and allows these beliefs. There's a lot of folk wisdom in these things. Beliefs that get in the way of people doing what they have to do in a crisis to prevent it from turning into something catastrophic.