Maybe some good came out of the financial crisis of 2008 — that is, lessons about how to handle another crisis. Congress and the U.S. Treasury have responded to the economic trouble that has followed the nation’s response to COVID-19 in an unprecedented and impressive way. As of this writing, Congress and the President passed a law allocating $2.2 trillion in crisis relief and the Federal Reserve is prepared to backstop as much as $2.3 trillion in debt. This is a massive response, exceeding anything this country has ever seen, save our response to the second world war.
“In an emergency, you need to lean against the forces of panic, to restore confidence, to reduce uncertainty… . There will be intense pressure to let major firms fail, avoid moral hazard, minimize government intervention. But that’s a formula for a larger crisis that will ultimately require greater government intervention.” That’s Tim Geithner, the Treasury Secretary who dealt with the last crisis, writing in “Stress Test,” his memoir. “The more the government commits to do up front, the less it will end up doing. The more risk taxpayers take up front, the less they end up paying.”
The theory is that if you show up with a fire hose to put out a campfire, people will feel confident lighting birthday candles. If the government shows it is ready to handle any financial crisis, the markets and consumers will feel confident moving forward with their normal levels of activity despite repercussions from a very serious health crisis.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, articulated this message on “60 Minutes” on March 22. Kashkari, who was Assistant Treasury Secretary in 2008, said the government was too timid 12 years ago. “We didn’t want to overreact … and the right answer should have been overreacting to try to avoid the devastating recession that ended up happening,” Kashkari said.
Of course, there are all kinds of caveats this time around — the sudden loss of employment for 22 million people, businesses forced to close by government decree, rules preventing people from leaving their homes, not to mention the race to find a vaccine for an as yet incurable disease. Geithner’s book is worth reading, especially his chapter called “Reflections on Financial Crisis.” There he states: “Our crisis, after all, was largely a failure of imagination.” I think we can all imagine a better, post-pandemic future. Let’s keep encouraging our leaders to take the steps necessary to assure that future.