If there had been greater emergency powers, would you have saved Lehman Brothers?
Let’s think of it this way: What’s the ideal? The world’s uncertain. You’re not sure who’s solvent. You certainly don’t want to step in and protect everybody. You have to do triage, trying to separate out who’s fundamentally strong enough to survive and who’s so central to the functioning of the economy that it would be devastating to let them fail. You have to draw a circle, a fire break around them, and make sure you can defend that. But there will be people outside that fire break. And that’s a necessary thing, even a desirable thing, however painful it is to say.
Yet you saved AIG.
We did. In the AIG case, they had a set of businesses around the world that were generating, and were likely to do so for the foreseeable future, quite a lot of income, and we could lend against that legally. Our judgment was, at that time—because the world was so fragile—that where we had the authority to act, we would err on the side of acting. The imperative didn’t change the scope of our authority. We just thought, in that case, that we had the ability to use it and we should.
And you were called as a witness in the case that Hank Greenberg, represented by David Boies, brought regarding the terms of the rescue.
If you’d told me I’d be sitting here six years from the crisis and we’d be getting sued in court in not one but two cases for essentially being too tough on institutions that were at the center of this crisis, I would have found it totally implausible. I mean, really, the idea that we were too hard on them, you know, I find it hard to accept. One great thing about our country is that when governments take actions like this, you can test their merits and legality in court.
Are we more prepared for the next crisis than we were for the last?
We’re better in some ways, but we’re worse in others. We’re better in the sense that the financial system that exists today, after these reforms, after the crisis, is a much more stable system. It’s a much more conservatively run system. We did the most important thing you can: We just forced these institutions to run with less risk. We’re worse off in other ways, though, in that Congress took away some of the emergency authorities that were so important in the crisis in preventing a second Great Depression. In financial crises, the things you have to do to protect people from mass unemployment are deeply unpopular. They look like you’re aiding arsonists. But if you go too far, just like if you were to put fire stations out of existence, you make people more vulnerable.
We don’t hear much about U.S. deficits and debt anymore. Why’s that?
Near-term deficits came down from 10 percent of GDP to about 3 percent in five years. Maybe more important than that, changes to how people use and provide health care are dramatically slowing the growth in costs. But we purchased these improvements in the near-term deficit at the price of pretty damaging cuts in a set of core public investments, which we’re going to have to figure out how to repair.
What concerns you now?
It’s a messy, dark, sad world that we live in. There’s a lot out there that could damage our interests. But the thing that really worries me is the challenges of politics, which are getting in the way of governing. The only threat to us that really matters over time—and that should scare everybody—is the capacity of our political system to find the will to act.
You once told me you wouldn’t be writing a book. What led to Stress Test?
I wanted to give people a chance to sit in our shoes and look at the terrible mess of choices through our eyes. It may not convince them that we were perfect and did everything right. They might choose differently. But they’d have a better basis for how they think about these things.
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