Stress Test by former US Treasury secretary Tim Geithner; Debt-to-GDP ratio: a key indicator of financial health of countries

Last updated on August 10th 2014

A few days ago I finished reading Stress Test, http://www.amazon.com/Stress-Test-Reflections-Financial-Crises/dp/0804121184, by Timothy Geithner, former US Treasury Secretary, http://en.wikipedia.org/wiki/Timothy_Geithner. It is a very detailed book and as there are many reviews of it, including one from a Nobel Prize winning economist, I will not spend time on writing a (casual book reader) review of it. Instead I will just say that it comes across as a seemingly very honest book about his views and role, as well as that of some other key players, in combating the 2007-08 financial crisis, http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308, and putting in measures aimed at preventing/controlling some of the problems of that financial crisis from recurring.

I found it to be a very educative book on the global financial crisis and how the topmost guys in the US financial and government world battled to control it. A few days ago the Portugese government bailed out its biggest bank, http://www.cnbc.com/id/101891921#. My understanding of this matter is much better than it would have been if I had not read Geithner's book. So I certainly would recommend this book to those who want to get the treasury dept. of US government view of the global financial crisis of 07-08 and its aftermath.

This graph, https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTk8wNnQ2Magdp08eblpmrX2NpKrzz7rz_oF70LAEZTE3hZr_OR_jqf2MqmwoHtfqstQLOpcPtJtbh0H8i6nEKejmlbxiEjf1rbaG5fI2LDOP2WUC5uEBDcu6ec4i-hmH8Iej9xTyjHq8/s1600/GDP+2.png, validates a similar graph in the book showing that US GDP growth which was negative for some quarters between 2008 and 2010, turned positive after 2010. In other words, Geithner and others handling the financial crisis, were successful in preventing the Great Recession from becoming a Great Depression.

I do not know enough about the financial crisis to know how accurate Geithner's account and analysis are (the book seems to be a very honest account but I am not in a position to judge its honesty). However, the book makes a pretty strong case for the US govt's success in tackling the biggest (and very, very scary) US and global financial crisis in living memory. Geithner also acknowledges that there still are many more challenges in the broader US and global economy to be overcome before things can be said to be fine.

BTW here is, what seems to be, a very thorough and not-so-positive review, dated July 2014, of Geithner's book by Economics Nobel prize winner and New York Times columnist, Paul Krugman, http://www.nybooks.com/articles/archives/2014/jul/10/geithner-does-he-pass-test. Besides a review it is a brilliant short tutorial on the financial crisis as well. Krugman is truly an awesome communicator in writing, having the gift of grasping and telling, in simple terms, the essentials of high finance stuff which is usually (and perhaps deliberately) wrapped in complex sounding jargon.

I think I can pitch in with my view that I tend to agree with Krugman on, "Whatever Geithner may say, it’s clear that a lot more could also have been done to reduce the burden of mortgage debt". The book has US president Obama telling Geithner about letters he gets from families who are getting devastated with their mortgage payments and asks Geithner why can't we do more to help such people. The book mentions the HAMP intiative, http://en.wikipedia.org/wiki/Home_Affordable_Modification_Program, but acknowledges that it did not do a great job. The wiki page includes scathing criticism of HAMP: "HAMP has proven a colossal failure that has done more to harm than help debt-laden homeowners. Having only achieved slightly more than 500,000 permanent modifications, 40% of which the Treasury expects to default, HAMP has fallen dramatically short of its goal of helping 3 to 4 million homeowners avoid foreclosure."

Given the fact that loan waivers for farmers in India are quite a common affair, when the US President was so keen on bailing out debt-laden homeowners, I think the US treasury department under Geithner should have figured out a way to provide significant debt-relief to them. I mean they could have introduced a new act and few elected politicians would have dared to oppose it as many of their own constituents would have benefited. I am quite sure that the judiciary too would have backed any act/law helping out the devastated debt-laden homeowners. The world was watching the incredible and shocking sight of these debt-laden homeowners of the USA suffer (with some even becoming homeless and living in a car or in a desolate park/street, while many houses were empty) while AIG executives earned million dollar bonuses after the company received huge tax payer money bailout! From http://en.wikipedia.org/wiki/AIG_bonus_payments_controversy:

President Barack Obama said, "[I]t’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" and "In the last six months, AIG has received substantial sums from the U.S. Treasury. I’ve asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."

...

AIG has defended the bonuses by citing contractual obligations.[citation needed] AIG also claims that only their executives can unwind their complex derivative deals. Rick Newman of US News & World Report argues that this is tantamount to extortion.[46] MSNBC host David Shuster said "The argument that these were so-called retention bonuses is undermined by the fact that 52 of the people who received them have already left the company."[10]

--- end wiki extract ---

That Geithner and the US treasury department couldn't deliver on bailing out debt-laden homeowners and were powerless in preventing the tax-payer bailed out AIG bonuses, must be viewed as a glaring and deeply distressing failure of the US government, and of democracy as a whole.

Having said the above, I have to say that I can't really comment on the remaining part of the last words of Krugman's review (that the US failed the Stress Test) - I just don't know enough about the topic.

However, one important thing I have picked up from recent readings on this topic is that a key indicator of financial health of a country is the debt-to-GDP ratio. I do not recall much coverage of this ratio in Geithner's book. Maybe he avoided it as it does not look so great during his term as treasury secretary.

The wiki page, http://en.wikipedia.org/wiki/List_of_countries_by_public_debt, has two graphs at the beginning of the page itself showing public debt as a percent of GDP of various countries of the world with easy-to-grasp colour shading/coding of countries based on the range they fall in. One of the graphs uses CIA data and the other uses IMF data. In the IMF chart, Western countries (USA, Western Europe) and Japan are in the high ranges (80 to 100+%). India is somewhat lower (66%). [USA is 106%].

The increase in USA debt-to-GDP ratio since the financial crisis can be seen here: http://useconomy.about.com/od/usdebtanddeficit/a/National-Debt-by-Year.htm. In 2007 it was 62 % but in 2013 it had shot up to 99 %. This wiki page, http://en.wikipedia.org/wiki/National_debt_of_the_United_States, has an interesting graph of "U.S. federal debt held by the public as a percentage of GDP, from 1940 to 2012".

Here's a BBC News article dated Oct. 2013, http://www.bbc.com/news/business-24541140, covering debt of 12 major economies of the world including USA, some West European countries, China and India. It states US debt as almost $17 trillion and Japan's debt as $11.5 trillion. But in debt as percentage of GDP, Japan and Italy have a higher percentage than USA. France, Canada, UK and Germany are not too far behind the USA figures. Brazil and India come next (below Germany).