Inside problem
Joshua Green‘s recent profile of Timothy Geithner in The Atlantic‘s April issue is well-written and fascinating. It provides rare insights into the upbringing and career of Geithner and how the financial crises (Japan, Mexico, Asia) he encountered during his career shaped his thinking. He is truly an intellectually awe-inspiring man. But one thing really stuck with me: How rare it is that we get a good glimpse of the background of events.
You could have been reading dozens of books and articles about the recent financial crisis and the U.S. government’s response to it and still be inclined to believe moral hazard and ‘bail-outs’ as a preferred mode of response to crises were something unheard of. Which just goes to show how ignorant one can be.
Joshua Green’s profile really helped me put events into perspective. Geithner learned first-hand about the dangers of taking a gradualist approach to a banking crisis as an assistant Treasury attaché in the U.S. embassy in Tokyo. He was part of the crucial team that helped Mexico sustain its troubles. And by the end of the Clinton era, a basic method of responding to financial crisis had emerged: quickly flood the market with money to restore confidence.
There is a lot more in that article to make you think, but that point really made me flinch. If you’re convinced that this exact response mechanism creates more problems than it solves, like I do, although you can just as well see things differently, then you have a much larger and much more established problem at hand than you previously thought.
This profile also reveals how much of our prevailing thinking about the origins of crises and whom to blame etc is shaped by story-telling that bears little to no resemblance to actual reality. As Nassim Taleb’ said, “the narrative fallacy [...] is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths.”
