LA: Your predecessor Hank Paulson in his book describes how at the height of the crisis he would have sleepless nights, worrying that a giant financial collapse was going to occur on his watch and that he would go down in history as the Herbert Hoover of the current era. Your colleagues all say you are remarkably calm, even in the middle of a crisis.
TG: Well I was very worried throughout that period of time. Starting in August of ’07 I had moments of deep, serious concern about the future. The hardest part for me was that period between when we knew we faced an existential threat of collapse but before we figured out what we were going to be able to do. Before we figured out the contours of our plan.
LA: Was that from Lehman onwards?
TG: I would say from the end of December of ’07, there was a great sense of foreboding, gathering storm, forces beyond our control. Even as early as back in August of ’07. But it dramatically worsened in the fall of ’08, of course.
LA: When you took office in January, we had had TARP, we had had all of those guarantees in place, and yet they still didn’t seem to be working. There was still a run on Citi, still a run on Bank of America.
TG: When I first met the President in October of ’08, when he was then a senator, a candidate running, I remember saying to him that the steps that Hank Paulson, Bernanke and I and others took earlier in the fall had broken the financial panic. But at that stage the economy was still eroding at an accelerating pace and the financial system was still completely frozen. So yes, it was getting worse. When the President took office, when I came in in January, at that point we were still at the edge of the abyss. And we now know in retrospect that the economy was shrinking at an annual rate of 9 percent and the global economy was in a state of near freefall too. It felt pretty bad.
LA: The way you dealt with the financial crisis will go down as your signature achievement. It turned out to be remarkably successful economically. But you yourself have said that while you saved the economy, you lost the public. Was there any way of making politics of this work?
TG: I think that’s a great question. I think it’s hard for any of us to know. My own view was that it was going to be very hard, if not impossible to design a financial rescue that was going to be effective in protecting all the innocent victims hit by the crisis and still satisfy the completely understandable public desire for justice and accountability. Those things were in direct and tragic tension, never resolvable at that time. I always felt that the only preoccupation for people in policy at the time should be to fix the problem as quickly as we could, as effectively as we could, and only after that would other things be possible, including how to figure out not just how to clean up the mess, but reform the financial system.
LA: One of the ways that people have figured out in the past to reconcile the politics was to go populist. That was what Roosevelt did. You, on the other hand, had been resolutely against that. You refer to it as Old Testament justice, implying that while it may be emotionally satisfying, it doesn’t serve any purpose.
TG: I never used that phrase as a pejorative description. I just used it as a simple shorthand to refer to the understandable need people had for justice. But the President didn’t ask me to come do this to be the architect of a political strategy. I never felt that was my thing. I had some views on the issue, but I didn’t give them much weight. I thought my job was to figure out the financial parts.
LA: Was the talk about “fat cat bankers” counterproductive?
TG: I’m biased but I felt that in the basic strategy that the President embraced and that we put into effect, we did something that was incredibly effective for the broad interest of the economy and the financial system. I feel the President’s rhetoric over that period of time was very moderate relative to the populist rage sweeping across the country. And I never quite understood why the financial community took such offense at what was such moderate rhetoric relative to what we have seen in other periods in history.
LA: Let me ask you about the way you work with the President. Presidents vary in their degree of engagement on economic policy; some get very involved, others essentially leave it to their economics team. Where does President Obama fit on that spectrum?
TG: He’s the first president I’ve worked with closely, so I don’t really have a comparison. I know what people have said about other presidents. To me, the most important thing, and the most impressive thing, about him was that he absolutely wanted to know all the alternatives. He wanted to know the merits of the alternative choices. He wanted there to be active debate and to be exposed to all the dissent. That was hugely important to me.
I always had the sense that he was going to put policy ahead of politics. And he always made it clear to people working for him that our job was to inform him of what the relative merits were of the policy choices, not to try to do the politics for him, or to limit our prescriptions by what was politically expedient. I think the country was very lucky because as you know, there have been lots of other examples in other countries, and certainly in our history, where the leaders of the country were much more reluctant to put politics aside and take the sting of a more decisive resolution. I’ve talked about this before, but I think that what really distinguishes countries in crisis are those that are lucky enough to have political leaders who are willing to take the brutal political cost of doing what’s necessary and those countries that waited and let the populist fires burn, or decided they were going to try to teach people a lesson and put populism ahead of other things. Those countries had far worse experiences in crisis than we had.
LA: Is the President interested in economics?
TG: To govern this country, at this time, you have to be interested in economics, because it’s so essential to so many of the challenges that we face. So many of the constraints that we face going forward are going to be affected by the choices we make in economic policy.
LA: Now you’ve had a pretty full four years as Treasury Secretary. What’s been the hardest and most frustrating part of the job?
TG: I think absolutely the hardest thing was trying to design a response to the crisis that would be effective, that would work over time. That was the most important thing, because nothing was possible without that. I knew with a fair degree of confidence by the summer of ’09 that the cumulative actions we took, on top of what Paulson and Bernanke did, was going to work. I was very confident about that by that time. Even though we still had a long, rough road ahead of us.
The most frustrating part of this work, but in some ways it’s the most consequential, is how effective you can be in relaxing the political constraints that exist on policy. You can see that most compellingly now in the fiscal debate. Paulson before us and the President were very successful during the crisis in getting a very substantial amount of essential authority essential to resolving the crisis. But it has been very hard since then to get out of the American political system more room for maneuver both on near-term support for the economy, as well as reforms that would lock in a sustainable fiscal path. That is the most frustrating thing, to get the political system to embrace better policies for the country.
LA: Do you have any big regrets about either things you did, or things you didn’t do?
TG: I think about that a lot. Of course, I have regrets that it was not possible to do more. But I also feel really comfortable with the big choices that we made. I really believe that given the choices we had at the time, with the authority we had and the options available to us, that we did a very effective job. And by “we,” I mean in many ways this was a bipartisan response across two administrations that will look good against the comparison of what we know about other crises of this magnitude.
LA: If there’s a dark cloud over the economic record it’s that unemployment still remains obstinately high. Are you bothered by that?
TG: The reason why financial crises are so devastating is because of the extent of the damage that they do to the innocent. High unemployment is just one measure of that. That’s the unavoidable, terrible, tragic legacy of a financial crisis this bad. Europe and other things that happened globally have definitely slowed the recovery. But mostly it’s a legacy of the crisis.
LA: Have we run out of bullets in dealing with high unemployment? Specifically, was it the politics of the budget, and in particular, Republican opposition to a fiscal stimulus that prevented us from doing more? Or were there economic limits?
TG: I think there’s very, very substantial room to do more on fiscal policy that would be good for nurturing long-term growth. That capacity would be greater if it was accompanied by some credible long-term plan to bring down future deficits. But generally the world views the American political system as still better positioned to deal with our challenges than any other major economy, and that’s one reason why we can borrow at very low rates. I think that the best economic strategy for the country would be to combine a set of very powerful near-term investments in infrastructure and elsewhere that would help support demand with long-term fiscal reforms that would restore sustainability. I think the limits we face right now are only political, not economic, not fiscal.
LA: I’m interested in this because you’re identified as the person on the economics team who pushed earliest for a pivot to a focus on the debt situation. Is that perception wrong?
TG: It was definitely my view, and it still is, that our ability to get more growth-promoting policies out of the Congress is contingent on our ability to put in place long-term fiscal reforms that restore sustainability. That’s true for lots of different reasons. It’s true not just because, without action, the natural dynamics of demography and healthcare costs would crowd out a whole range of investments over time. But it’s also true the average person, facing deficits this large, is just uneasy supporting substantial additional growth-relevant fiscal policy without that framework. So that’s the main reason why I was a supporter of trying to make a more credible commitment to some gradually phased-in, sensibly designed restraints over time. I think without that, there was no way we were going to be able to make the case for a big long-term infrastructure program.
LA: Over the last couple of years we’ve had pitched battles over the budget between the administration and the Republicans in Congress. There are really two interpretations of what’s driving the Republicans. One is, there is indeed in this county a fundamental philosophical divide about the role of government and that what we’re seeing is this divide being played out in the political arena. The other is that the Republicans have been willing to do almost anything to hand this President a defeat. Do you have a view?
TG: There’s something strange about the debate today. The magnitude of additional deficit reduction – revenue increases or spending cuts – that you need to lock in in order to achieve fiscal sustainability is pretty modest. By most accounting, because of what we’ve already done on the spending side and tax side, we have to find another ¾ of 1 percent of GDP of policy measures. And if we did that, that would achieve the economist test of sustainability, meaning it would get the deficit down to a modest primary surplus so the debt would start falling as a share of GDP.
LA: Provided we went back to full employment.
TG: Yes, but that’s even with pretty modest assumptions about the pace of growth. Now, that doesn’t give you a lot of room for error if there’s a recession or something like that. But a very modest amount of additional adjustment is required to achieve a pretty meaningful level of sustainability. The reason I say this is because the political divisions you read about in the country, about the nature of the safety net and the role of the government in the economy are way, way exaggerated. To say it differently, you can achieve that additional margin with pretty modest changes. You don’t need to dismantle or roll back the basic safety net for seniors and healthcare to achieve sustainability. And you don’t need to contemplate what people would view as growth-killing revenue increases to do it.
In some ways, that’s what’s so frustrating about the current context, because it should be relatively easy to reach an agreement.
LA: So if you said that to Paul Ryan, would he agree with you?
TG: I think he would. We’ve had the chance to talk about this in public and in private. I think what he would say is that you also have to worry about the 50-year problem, not just the 10-year problem. And it is true that because of the demographics of the nation, and because people use healthcare very intensively in this country, if you look out 20 years, 30 years, 40 years, we’re still going to have to do some other things to change how people use healthcare in this country. We all agree with that. However I think that our view would be that you don’t want the absence of agreement on the 50-year problem to get in the way of what would be a very good set of reforms for the country for the next 10 years.
LA: Both attempts at a so-called grand bargain have failed, even though you say that the bargain actually need not be that grand. But if even that’s not reachable, how do you envisage the budget getting sorted out? Will it be done incrementally by a series of mini deals?
TG: It is easier to do it together. Some people have said from the beginning, “It’s easier to do hard things if everybody is doing hard things together.” How are you going to legislate reforms to Medicare unless there is some move towards greater progressivity in the tax system? Or, from a Republican perspective, why would they agree to raise revenues on the American if they think that’s going to finance unsustainable levels of spending that we can’t afford? That’s the case for doing it all together. But if that’s not possible, then the country will have to do it in stages. And maybe that’s easy for people to absorb. The good thing about the United States today is that we have a very resilient economy. We are a strong enough country that we can withstand, not indefinitely, not forever, but we can withstand a sustained period while the American political system figures out how to bridge these differences.
LA: So you spent thirty years working on economic statecraft both internationally and domestically. You’ve been involved in just about every major financial crisis of this era, starting with Japan, the Asian crisis, Mexico, 2008, now the euro crisis. Each one seems to be worse than the other. What lessons have you learned from dealing with all these crises? You alluded earlier to the idea of taking political costs upfront. Can you amplify on that?
TG: Well, they’re all different in their contours and causes. But they usually have this common feature, which is a huge increase in leverage in the financial system. When the shock hits or the tide turns, as people bring their borrowings down, it puts enormous pressure on the economy as a whole. These things tend to reinforce each other, amplify each other. The financial deleveraging feeds on the economic weakness, the economic weakness forces more financial deleveraging, and you have this vicious spiral.
And I think what we have all learned from history, mostly from mistakes that we and others have made is that confronted with that, you need to apply a lot of force, with a lot of speed across the full spectrum of the policy tools we have. Which means monetary policy has to be very aggressive. You need to make sure that fiscal policies are very supportive of growth so you’re compensating for the huge collapse in private sector demand. And you need to be incredibly aggressive in making sure that you recapitalize the financial system. If you do those things incrementally, where you do one but not all three, then you’ll be left with much more damage. You have to do all of them. None of them is effective individually.
LA: That’s essentially how to deal with each crisis in isolation. The problem is each crisis has been worse than the last. Is there something fundamentally flawed in the way we’ve been trying to deal with them? Can we not find some durable remedy?
TG: Are you asking if we are in this trap where the things you have to do to solve the last crisis make the next crisis more likely?
TG: I’m not an adherent to that basic view. I respect it and I understand it. But I think there’s something about human beings, and something about financial systems, where people tend to give less weight to the risk of an extreme event. So after a long period of relative stability, like we had in the U.S. and the world economy in the decade before this, that leads people to take on more risk than they should, borrow more than they should, and that’s what creates the vulnerability to crisis.
The things we did in this crisis, and certainly the things we did in financial reform, will significantly reduce the probability and the intensity of crises for a long period of time. Because there’s much more capital in the financial system. We did a pretty brutal restructuring of our financial system as a part of the crisis response. I know that markets over time will find their way around those things, and memories will fade. But if we’re lucky that will take a long time.
LA: Based on what you saw while getting financial reform through, do bankers have too much political muscle in this country?
TG: Not anymore. There’s always some risk of regulatory capture in the Congress or of regulators that would undermine reform. But I don’t think that’s our biggest challenge. It is true that there is an ongoing political effort to legislate a weakening Dodd-Frank or block appointees. But that effort does not have much political force now. I think our country is strong enough to withstand that. These are really complicated things to do. I think the harder challenge is to be able to attract talented people to come into government do these things and let them operate independent of political forces.
LA: Your famous saying is, “a plan beats no plan.”
TG: It’s not a great phrase. Really what you want to say is a good plan beats a bad plan.
LA: Ok, so what is your plan for yourself?
TG: I really don’t have a plan. I’ve been doing this for a long time, I’m going to take a long time to think about what I do next. As I should.
LA: Thank you very much.