What Geithner Is Reading


It’s amazing Tim Geithner has time to read anything at all beyond drafts of his latest plan to save the financial system. But in an interview last week with my colleague Jeff Bartholet and me, the Treasury secretary revealed that he was deep into “Lords of Finance,” Liaquat Ahamed’s brilliant history of the hapless central bankers of the Depression era who “broke the world,” mainly by adhering blindly to the gold standard (read my full report on the interview here). I finished the book myself not too long ago, and it’s a great read. The hero of “Lords of Finance” is John Maynard Keynes, who fought valiantly against the tragically dated conventional economic wisdom of his day. “More than anything, the Great Depression was caused by a failure of intellectual will, a lack of understanding of how the economy operated,” writes Ahamed, an investment manager who has worked both at the World Bank and on Wall Street. Ahamed, of course, draws a parallel to the present crisis (though it has grown considerably worse since the book came out) and concludes chillingly: “In some respects the current crisis is even more virulent than the banking panics of 1931-33. In the 1930s most depositors had to line up physically outside their bank to get their money. Now massive amounts of money are being siphoned off with the click of a mouse. Moreover, the world’s financial system has become both larger compared to GDP and more complex and interconnected. There is much greater leverage, and many more banks rely on short-term wholesale sources of funding that can evaporate overnight. The world’s banks are therefore much more vulnerable than they were then. As a result panic has swept through the system faster and more destructively.”


As he heads off to the G-20 meeting in London this week, maybe the biggest lesson that Geithner should consider is that, according to Ahamed, the global crisis of the Great Depression occurred in large part because of the cascading effect of governments getting things horribly wrong across the globe. It was a “sequence of crises, ricocheting from one side of the Atlantic to the other, each one feeding off the ones before,” he writes. With the G20 talks seemingly headed for some serious disagreement over fixes, let’s hope Geithner brings an armload of copies with him to London.