Tim Geithner: Baptism of fire
From The Economist print edition
America’s treasury secretary is torn between politics and policy
ASKED after giving a speech on April 22nd whether he regretted taking his new job, Tim Geithner, Barack Obama’s treasury secretary, paused for what seemed an eternity. “I…uh…feel deeply privileged,” he replied. His audience erupted in laughter.
Mr Geithner’s first three months have been a baptism of fire. The markets soared last autumn (see chart) when the New York Fed chief’s name surfaced for the job. But within weeks of taking office in January, personal tax problems, a poorly received plan for fixing the financial system and a backlash against his bail-out of AIG, a big insurer, had some in Washington, DC, counting the months to his resignation.
Talk of resignation has died down as markets have recovered amid renewed hope about the economy. The outrage over AIG burned itself out. And Mr Geithner has scored some successes: he has proposed new federal powers to take over failing financial institutions and he led the way for the G20 to boost the International Monetary Fund’s credit by $500 billion to support cash-starved countries.
Even so, Mr Geithner has not yet silenced the sceptics. In a town full of people steeped in politics but short on substance, Mr Geithner is the opposite. Few question his policymaking qualifications. As an aide to previous treasury secretaries, then as president of the Federal Reserve Bank of New York, he earned a reputation for rapid analysis and decisive responses.
However, he did that job mostly behind closed doors and, thanks to the Fed’s independence, with few political constraints. Being treasury secretary requires some rather different skills. These include showing empathy with working people, patiently nursing deals through Congress, and beating back competing and usually strident interests. Mr Geithner speaks quickly, peppering his speeches with jargon that resonates more with economists than with congressmen. On several occasions Mr Obama has been able to explain Treasury plans better than Mr Geithner. “Barack Obama for treasury secretary,” one blogger, Felix Salmon, quipped.
Still, resolving the current crisis would test even the most battle-hardened politician’s skills. That is largely because fixing the financial system means putting public money into the same banks and other financial institutions that the public blames for causing the crisis. The cost is obvious, while the main benefit—avoiding a catastrophic downward cycle of contracting credit and recession—is, mercifully, hypothetical, no matter how plausible. If the bail-outs work, it will be hard to prove conclusively that they were needed.
This means that Mr Geithner has had to come up with solutions that may sacrifice economic effect for political legitimacy. To relieve the banking system of dud loans, Mr Geithner considered, then rejected, a government-run “bad bank”, as Sweden and South Korea had previously used, because it was vulnerable to accusations of overpaying for assets. His solution, a “public-private investment programme”, or PPIP, relies on investors to negotiate a price with banks, although they will be subsidised by government-backed loans.
A bad bank might also have required money that Congress at present is not inclined to grant. Mr Obama’s proposed budget does in fact pencil in $750 billion more in bail-out money. But Mr Geithner will not ask for it until he is sure he needs it. He has argued that the PPIP is superior to a bad bank, but the weight of expert opinion, as he surely knows, disagrees.
Mr Geithner sought early on to hold banks accountable for the bail-out money. But, fearful of driving banks and investors away and so neutering the effort, he and Larry Summers, Mr Obama’s White House economic adviser, have consistently resisted imposing conditions as strict as some in Congress would like.
For the same reason, they have resisted calls simply to nationalise the banks. Mr Geithner and Mr Summers want to preserve the banking system largely as it is, in private hands: advocates of nationalisation simply do not appreciate the long-run damage it would do to the efficient functioning of the economy. This is a valid point, but it has exposed them to accusations of identifying too closely with bankers. At a meeting with a congressionally picked panel charged with overseeing the $700 billion Troubled Asset Relief Programme (TARP) on April 21st, Mr Geithner had to correct a questioner who thought he had once been an investment banker.
Mr Geithner presented a comprehensive explanation of the causes of the crisis, his response, the state of the economy and regulatory reform. But impatient panellists wanted to focus on whether banks were getting too sweet a deal. “How does protecting Citi’s common shareholders at the expense of taxpayers benefit our economy?” one demanded.
The TARP is being overseen by no fewer than three separate bodies, and at times it seems they have more employees than the Treasury Department has administering TARP (Mr Geithner still remains the Treasury’s only Senate-confirmed official). This week Neil Barofsky, the New York lawyer who was appointed as the programme’s inspector-general last year, has recommended that any firm participating in PPIP should have to disclose the names of its beneficial owners—such as hedge-fund partners. He has also suggested such firms might be subject to the same executive-pay restrictions as banks that have been bailed out now are. Such conditions could well drive investors away.
The markets are another tough constituency for the treasury secretary. They have priced many banks as insolvent. By contrast, Mr Geithner and Ben Bernanke, the Fed chairman, think that most American banks are well-capitalised and able to lend. Stress-test results due early next month will identify the few that need more capital. But markets, like voters, don’t have to be right to affect the outcome of Mr Geithner’s policies. If their stocks fall, it will make it harder for banks to raise new capital and for the economy to revive.
On the other hand, if the programmes work and today’s green shoots become a full recovery, Mr Geithner will get a lot of the credit. That does not mean his life will get easier: once the crisis is over, he will have to tame the national debt and overhaul America’s antiquated financial regulations. Mr Geithner claims to relish the challenge. “You have to be here at this moment, doing this,” he said in his answer to whether he regretted taking the job. “There is no plausible alternative.”