In the history of product launches, the rollout of the Obama Administration’s plan to stabilize the financial system was in the category of “Ishtar,” smokeless cigarettes, and New Coke. On February 10th of last year, the newly appointed Treasury Secretary, Timothy F. Geithner, appeared in the Treasury’s Cash Room to outline proposals that would relieve banks of toxic assets, force them to undergo stress tests, and provide relief for struggling homeowners. Immediately after Geithner’s speech, the Dow fell sharply, and it closed the day down 382 points. Critics from all quarters dismissed Geithner’s plan as vague and inadequate. “Has Barack Obama’s presidency already failed?” Martin Wolf, the Financial Times’ influential economics commentator, wrote. “In normal times, this would be a ludicrous question. But these are not normal times.”

“We saved the economy, but we kind of lost the public,” Geithner said. Illustration by Barry Blitt

In the ensuing weeks, the Dow dropped below 6,500, and other indicators of financial stress, such as the interest rate that banks charge one another, rose, pointing to continued skepticism about Geithner’s plan. Commentators from Paul Krugman and Joseph Stiglitz on the left to Alan Greenspan and Lindsey Graham on the right called on the authorities to seize control and restructure the most troubled banks, which were widely believed to be insolvent. “I understand that once in a hundred years this is what you do,” Greenspan told an interviewer. Adam S. Posen, a senior fellow at the Peterson Institute for International Economics, said to the Times, “Putting it off only brings more troubles and higher costs in the long run.” At a lengthy White House meeting last March, Lawrence Summers, the head of the National Economic Council, pressed Geithner and his aides on whether nationalization was now the least bad option. Geithner held his ground, arguing that rushing to take over salvageable financial institutions would be irresponsible and economically damaging. In the end, Summers and the President agreed with him. But his stilted public performances, together with his reluctance to take a populist line on other issues, such as Wall Street bonuses, led to demands for his resignation—calls that have continued into his second year in office. From across the political spectrum, critics have accused him of kowtowing to Wall Street and failing to hold to account those responsible for the financial crisis.

On the anniversary of Geithner’s disastrous speech, the Treasury issued a two-page briefing paper hailing the achievements of the stabilization plan, which much of the media ignored. “A year later, there’s still a lot to criticize,” David Wessel, the economics editor of the Wall Street Journal, wrote, noting that the unemployment rate remains close to ten per cent and that banks are paying generous bonuses to their staff but remain reluctant to lend to small businesses.

And yet—whisper it softly—there is good news about the financial system and the roundly loathed bank bailout, the seven-hundred-billion-dollar relief package that Congress approved in October, 2008. During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses. While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers. Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars—and much of that related to propping up General Motors and Chrysler. Barring something unexpected, the bailout will end up costing taxpayers less than the savings-and-loan implosion of the early nineteen-nineties. The government could conceivably end up making money.

Wessel is right, of course, that the unemployment rate remains stubbornly high—the rise in long-term joblessness is particularly worrying—but other economic trends are pointing up. Although some businesses are struggling to get bank financing, municipalities, car buyers, and students again have access to credit. Consumption and exports are rising. Corporations are once more spending money on software and machinery. Meanwhile, it looks as though the Senate may be finally preparing to vote on an overhaul of financial regulation.

Economists are still debating what it was that ended the financial crisis and turned the economy around. It is inarguable, though, that Geithner’s stabilization plan has proved more effective than many observers expected, this one included. “The policy worked,” Brad Hintz, a top-rated financial analyst at the research firm Sanford C. Bernstein, said. “Now, did it raise the mob to come after the bankers and politicians and try and drag them off to the guillotine? Certainly it did. That’s part of the political price that is being paid for the policy having worked.”

A few weeks ago, during a blizzard that deposited several feet of snow on Washington, I met Geithner in his office. Dressed casually in bluejeans and snow boots, he seemed to have largely given up hope of convincing the public that the financial-rescue plan was well calibrated, but he insisted that it had been necessary. “My basic view is that we did a pretty successful job of putting out a severe financial crisis and avoiding a Great Depression or Great Deflation type of thing,” he said. “We saved the economy, but we kind of lost the public doing it.”

When President Obama came to office, the Bush Administration had already committed two hundred and thirty billion dollars of taxpayers’ money to big banks—a policy that Geithner, as president of the New York Federal Reserve Bank, helped to enact. During the transition, he warned the incoming President that more “repugnant” actions would be necessary to shore up the financial system and restore economic growth. (In the first three months of 2009, G.D.P. declined at an annual rate of 6.4 per cent.) “We knew it would be politically costly, but not nearly as costly as if we hadn’t got it right,” Geithner said to me of the financial stabilization plan. “And we didn’t think we had other options available that were credible.”

The new Administration offered a threefold policy response. Through the American Recovery and Reinvestment Act of 2009, which President Obama signed into law on February 17th, Congress approved a $787-billion stimulus program, consisting of roughly equal amounts of tax cuts, new spending projects, and increased financial aid to states and individuals affected by the recession. A month later, the Federal Reserve, which had already introduced a series of emergency lending programs for distressed financial institutions and reduced the short-term interest rate to near zero, announced that it would purchase up to a trillion dollars’ worth of Treasury bonds and mortgage securities—a move designed to bring down long-term interest rates, particularly for mortgages.

Geithner’s Financial Stability Plan was the third piece of this policy triad, and it consisted of several elements. Initially, the most widely discussed was the establishment of two public-private investment funds that would buy toxic assets and troubled loans from banks. The Treasury Department and private investors would provide equal amounts of capital for these funds, and other arms of the government would furnish them with hefty loans to scale up their purchases to as much as a trillion dollars. This Public-Private Investment Program—which echoed an earlier idea from Henry Paulson, Geithner’s predecessor as Treasury Secretary—set off a heated debate, with many commentators describing it as a giveaway to Wall Street. If the new funds did well, the private investors would share equally in the gains; if the funds fared badly, the government would assume most of the losses.

In the end, banks were reluctant to sell their assets to the government for prices that would have forced them to recognize losses, and the public-private funds invested less than thirty billion dollars. (Geithner still insists that the idea was a good one.) As things turned out, the far more significant part of Geithner’s plan was the bank stress tests, which the Treasury and the Fed carried out in March and April of last year. The stated aim of these tests was to figure out whether individual banks were strong enough to survive a severe recession. Government officials simulated a number of economic scenarios, involving successively higher rates of loan defaults, to see if the banks had enough capital to withstand losses. Undercapitalized banks would have to issue more stock to investors, or, if they couldn’t manage that, accept more government funding and more government control.

At first, some people on Wall Street feared that the Obama Administration was simply seeking a pretext for taking over embattled firms like Citigroup and Bank of America, as liberal Democrats had urged. But Geithner was resolutely opposed to such an option, at least at that stage. He and Ben Bernanke, the Fed chairman, intended to use the stress tests to bolster banks’ finances rather than nationalizing them. “That would have been a deeply transforming policy mistake,” he said to me. “The country would have suffered for decades. We’d have spent hundreds of billions of dollars more that we didn’t need to spend, and would have been stuck in those institutions for years.”

Other critics dismissed the tests as a sham, arguing that the economic assumptions underpinning them were too benign. As the tests unfolded, however, it became evident that the government’s loss projections were quite high, and that many banks would be forced to raise considerable sums of money—in some cases, more than ten billion dollars. “When people did the math, they said, ‘This is for real,’ ” Mark Zandi, the chief economist and co-founder of Moody’s Analytics, recalled. “That went for the banks, too. They complained that they didn’t need to raise all of this capital.”

In fact, some commentators agreed that the Treasury and the Fed were being too tough on banks. (Stock issues dilute existing stockholders and reduce earnings per share.) One of these skeptics was Richard Bove, an analyst at Rochdale Securities, who has been following the financial industry since 1965. He has since changed his mind. “Geithner recognized that the system needed overkill on security and soundness to rebuild the confidence that was lacking,” he said. According to Bove’s calculations, U.S. banks now have more capital as a percentage of assets than in any year since 1935. “He built in that safety and soundness throughout the industry. As time goes on, I’m getting more and more respect for him.”

Between March 9th and May 7th, when the results of the stress tests were announced, the Dow rose by almost two thousand points, and the spread between AAA and BAA bonds—a reliable indicator of financial distress—fell sharply. Other factors contributed to this revival: the decline in house prices slowed; the Fed began buying mortgage bonds; Congress started to disburse funds from the stimulus program; and the U.S. accounting authorities granted banks more leeway in writing down their assets. From abroad, the Group of Twenty nations agreed on a range of policies to fight the global slump. But the stress tests surely played an important role in reassuring investors that the banking system wasn’t about to collapse.

During our conversation, Geithner compared the effect of the tests to the banking holiday that F.D.R. introduced in March, 1933, to stem a financial panic. In January and February last year, Geithner recalled, there was an undifferentiated “run” by bank creditors. Nobody, not even the banks, knew which firms might be saddled with heavy losses, and there was a general reluctance to extend money to financial institutions. The stress tests “allowed people to differentiate,” Geithner said. “They could decide who deserved capital and who didn’t.”

Once the banking panic had ended, the economy, like a patient recovering from a coronary arrest, began to take some hesitant steps forward. Between July and September of 2009, G.D.P. grew at an annual rate of 2.2 per cent, and in the fourth quarter of the year the pace of expansion accelerated to 5.9 per cent. Despite a recovery in demand for their products, many firms chose to increase output by working their existing employees harder; some continued to cut payroll, and until this winter the unemployment rate rose steadily. But a “jobless recovery” is nonetheless a recovery of sorts. At this time last year, most economists saw the economy contracting throughout 2009.

Without a successful stabilization of the banking system, even a modest recovery would have been inconceivable. Still, some economists insist that nationalization would have produced an even better outcome. “While the Obama Administration had avoided the conservatorship route, what it did was far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses,” Joseph Stiglitz, a Columbia economist who served in the Clinton Administration, writes in his new book, “Freefall: America, Free Markets, and the Sinking of the World Economy.” Stiglitz goes on, “The government response has set the economy on a path to recovery that will be slower and more difficult than need be.”

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Stiglitz could be right—since history happens only once, there is no way to know for sure. But his argument raises several issues. Contrary to widespread belief, the Obama Administration never ruled out nationalization; it simply made it a policy of last resort. Last April, at an off-the-record dinner at the Brookings Institution, Larry Summers was confronted by a number of economists who believed that the financial crisis would not end unless the government took over stricken banks. Summers told the critics that if they were proved right in the following months the Administration would move toward nationalization, and the wait would exact some cost to the economy. But if they were wrong and the Administration moved now it would be like amputating limbs that might instead be saved with strong medicine. “Today, with all of the major financial institutions having a market capitalization of more than a hundred billion dollars and the economy growing again, the judgment not to nationalize but to put an enormous emphasis on raising private capital looks to have been effective,” Summers told me a couple of weeks ago. “I think the critics were wrong, and that Tim’s leadership helped us avoid a lot of things that could have been very damaging.”

The experience of other countries that have taken over banks, such as Sweden, Norway, and the United Kingdom, shows that it can be done quite effectively. Northern Rock, which the British government nationalized in February, 2008, is operating fairly well. Conceivably, the U.S. government could have seized control of some big banks, forced them to boost lending more rapidly, and, eventually, split them into pieces and sold them off, thus alleviating the too-big-to-fail problem. “It would have been temporary ownership and genuine restructuring,” Robert Kuttner, the author of the forthcoming book “A Presidency in Peril,” said. “You would have had more money going out to the rest of the economy sooner, and you would have had an honest accounting for losses. The problem with doing what we did, kicking the can down the road, is that you have these wounded institutions that are very parsimonious with credit, and, even today, nobody knows what their real state is.”