Tim Geithner is wrong about FDR

(Nick Ut/AP)

The leadership delusion is hard to shake.

That's the belief that every unpopular thing you've done was for the best. That you've chosen the hard right over the easy wrong. It's what Paul Volcker actually did when he ignored pleas for lower interest rates from builders who sent him 2x4s they no longer needed because the Fed's tight money policy had crushed their would-be customers.

And it's what former treasury secretary Tim Geithner thinks Franklin Roosevelt failed to do in the months before he first took office in 1933. Here's how Geithner describes it in his new book, "Stress Test":

[Obama] never distanced himself from TARP, rounding up Democratic votes in Congress, passing up the opportunity to run against the Bush bailouts. Franklin Roosevelt had refused to lift a finger to help the outgoing administration relieve the suffering of the Depression, so he could draw a starker contrast with President Hoover after his own inauguration. Senator Obama did not follow this politically shrewd but costly example.

This is bad history. Now, it's true that FDR ignored Hoover's calls for cooperation during the interregnum. But it's not true that FDR did so only out of political expediency. He did so because Hoover's idea of "cooperation" was getting Roosevelt to abandon the New Deal before it began.

As Liaquat Ahamed explains in "Lords of Finance," Hoover asked FDR to issue "a formal statement ... pledging himself to a balanced budget and eschewing inflation or devaluation." In other words, to continue Hoover's failed policies of austerity and tight money in the face of complete economic collapse. Now, this might have actually helped stop some of the bank runs that were going on then, in part, due to fears that FDR would ditch the gold standard. But it would have, at best, helped for a few months at the cost of making recovery impossible for a few years — if not longer. Roosevelt wisely refused.

Geithner is arguing that the Obama administration took the politically difficult road of embracing the Bush-era financial rescue. But he's also using this false narrative about FDR to justify the administration's timidity in that same period. The Obama administration could have demanded that TARP or the stimulus include cramdown, so homeowners would have had the leverage to negotiate down what they owed. They didn't. They could have made sure that the TARP money set aside for housing actually got spent. They didn't. And they could have created an FDR-style Home Owner's Loan Corp. to buy up and restructure troubled mortgages to keep people in their home. They didn't do that either, though as David Dayen points out, hedge funds at least have figured out how to make money doing this.

Now, all of these might have created more short-term losses for the banks — losses that Geithner wasn't willing to risk. But by bailing out the banks and not the people, the administration won the panic and lost the recovery. As Amir Sufi and Atif Mian have shown, still-high household debt is a major reason why the economy hasn't bounced back from the crisis.

Or, as FDR might say, the only thing we have to fear is fear of populism itself.

Update: I did not mean to suggest that Geithner thinks FDR should have continued Hoover's policies of austerity and tight money. And it is true that FDR waited until his inauguration to declare a bank holiday, which was two days after Hoover had asked him to jointly do so.

Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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