Stress Test: Reflections on Financial Crises by Timothy F. Geithner Crown, 580 pp., $35.00

1.

Midway through Timothy Geithner’s Stress Test, the former treasury secretary describes a late-2008 conversation with the then president-elect. Obama “wanted to discuss what he should try to accomplish.” Geithner’s reply was that his accomplishment would be “preventing a second Great Depression.” And Obama shot back that he didn’t want to be defined by what he had prevented.

It’s an ironic tale for Geithner to be telling, although it’s not clear whether he himself realizes just how ironic. For Stress Test is meant to be a story of successful policy—but that success is defined not by what happened but by what didn’t. America did indeed manage to avoid a full replay of the Great Depression—an achievement for which Geithner implicitly claims much of the credit, and with some justification. We did not, however, avoid economic disaster. By any plausible accounting, we’ve lost trillions of dollars’ worth of goods and services that we could and should have produced; millions of Americans have lost their jobs, their homes, and their dreams. Call it the Lesser Depression—not as bad as the 1930s, but still a terrible thing. Not to mention the disastrous consequences abroad.

Or to use one of the medical metaphors Geithner likes, we can think of the economy as a patient who was rushed to the emergency room with a life-threatening condition. Thanks to the urgent efforts of the doctors present, the patient’s life was saved. But while the doctors kept him alive, they failed to cure his underlying illness, so he emerged from the procedure partly crippled, and never fully recovered.

How should we think about the economic policy of these past seven or so years? Geithner, while acknowledging the disappointments, would have us view it mainly as a success story, because things could have been much worse. And the middle third of his book, a blow-by-blow account of the acute phase of the financial crisis, carries the implicit and sometimes explicit message that things would indeed have been much worse but for the heroic actions of a handful of high officials, himself included.

But this still leaves open the question of whether things could and should have been considerably better, whether preventing a complete economic meltdown was all that could have been accomplished. Here Geithner implicitly says no—or at least that there was nothing more that he himself could have done.

I’ll return to the questions about Geithner’s role later. First, however, let’s examine the nature of the economic crisis we experienced, and why emergency treatments haven’t produced a full return to health.

2.

Something went very wrong with the US economy in 2008. But what?

Quite early on, two somewhat different stories emerged about the economic crisis. One story, which Geithner clearly preferred, saw it mainly as a financial panic—a supersized version of a classic bank run. And there certainly was a very frightening panic in 2008–2009. But the alternative story,…