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Farewell, Tim Geithner

Lessons learnt

The outgoing treasury secretary sits down with The Economist one last time

Jan 19th 2013 | WASHINGTON, DC |From the print edition 
2013年1月19日 |  华盛顿 |  打印版
Almost free 快自在了。

IF THE Republicans do not raise the ceiling on America’s government debt, Barack Obama said on January 14th, the markets will go “haywire” and the country will plunge back into crisis. Tim Geithner, his treasury secretary, noted on the same day that this could happen in as little as a month from now.


But if all goes according to plan, Mr Geithner will not be around by then; he will have handed the reins to Jack Lew, currently the White House chief of staff. That could be a pity. Thousands of people have studied financial crises, but it would be hard to name anyone who has actually grappled with as many as Mr Geithner (see chart). While working in the 1990s for Robert Rubin and Larry Summers, Bill Clinton’s treasury secretaries, he dealt with currency and banking crises throughout the emerging world. When the global financial crisis erupted in 2007, he was president of the Federal Reserve Bank of New York; this gave him a key role in the Fed’s response, including the bail-outs of Bear Stearns and AIG, an insurance company, and the decision to let Lehman Brothers fail. As Mr Obama’s treasury secretary, he designed and carried out the stress tests and capital injections that stabilised the banking system, as well as multiple mortgage schemes that ultimately did little to curb an avalanche of foreclosures.


Mr Geithner’s life in the trenches has produced its own vocabulary. Serious decisions are “consequential”, good ideas are “cool”, better ideas are “compelling” and the best ideas are at “the optimal frontier”. During a crisis “plan beats no plan”, jury-rigged measures in the face of unavoidable disaster are “foam on the runway”, and bad outcomes are “dark”. Managing public perceptions is called “theatre”. “Fuck” also holds a prominent place in the Geithner lexicon, usually as an adjective, not a verb, as in “I have no fucking idea.”


More seriously, Mr Geithner has also developed rules of engagement for a crisis. The choices that face a policymaker are almost always bad. Don’t intervene, and you risk collapse; intervene, and you reward bad behaviour and outrage the public. “You are going to make mistakes, so you have to force yourself to decide which mistakes are easier to correct,” he told The Economist in a recent interview. “In a crisis, you get to a point where you have to decide that you’re going to risk doing too much, because it’s easier to clean that up.” Success also requires certain character traits: an ability to make decisions quickly in the fog of war without dwelling on what outsiders are going to say. Indeed, Mr Geithner is terrible at the “theatre” of being treasury secretary: he delivers speeches badly, hates lobbying, and has trouble behaving deferentially to Congress.


That alone would make Mr Geithner a polarising figure. But liberal and conservative critics alike consider him excessively generous to big banks at the expense of the public. Evidence gathered by the crisis commission of Congress paints an unflattering picture of the Federal Reserve Bank of New York’s role before the crisis, when Mr Geithner was in charge, in overseeing banks, Citigroup in particular. Critics fault him for not imposing haircuts on AIG’s counterparties (mostly big banks) as part of the insurance company’s bail-out, and for not nationalising or breaking up big banks such as Citi. His actions and the subsequent financial-reform law, they say, enshrine the bad principle that some banks are “too big to fail”. 


Mr Geithner says the banks supervised by the Fed withstood the crisis better than most institutions. The interventions have also been a pretty good deal for the public. The Fed and the Treasury have made a profit on the money committed to the big banks and AIG. Indeed, some AIG shareholders are suing the federal government over the bail-out’s onerous terms. Thanks to the stress tests and recapitalisation Mr Geithner forced on the banks in 2009, they are almost all back in private hands, well capitalised and lending again. The recovery remains sluggish, but compares well with those of other economies.


Mr Geithner readily admits that his interventions have bred moral hazard, but says holding off for that reason worsens a crisis and requires even bigger interventions later. “You will end up having to socialise much more risk and [create] much more future moral hazard,” he says. “You have to design the crisis response to mitigate moral hazard to the extent you can, and then change the rules of the game going forward to undo some of the damage you’ve caused.” Hence the Dodd-Frank banking reforms. The law became maddeningly long and complex in its passage through Congress. But it retains the features Mr Geithner considers crucial. It creates a mechanism for seizing and winding down big failing firms while limiting the government’s discretion to keep them as going concerns. By reinforcing capital and liquidity buffers throughout the financial system, the law allows policymakers to be almost “indifferent about contagion caused by one institution”.


Dodd-Frank guarantees that Mr Geithner has left his mark on America’s financial system. America’s finances are another matter. The budget deficit has exceeded $1 trillion in each year of his tenure. Given the slack that persists in the economy, temporary big deficits are not that troubling. Mr Geithner says it would take spending cuts and tax increases of only about 0.75% of GDP to stabilise the debt relative to GDP over the next decade.


Much more troubling is the lack of a plan to produce that path to stability. The reasons are many: it has not been a priority for Mr Obama, and negotiations with Republicans have foundered on the gaping difference in their respective visions. The result has been a series of deals hammered out at the last minute and, in the summer of 2011, a near-crisis as the government came within days of running out of cash before the debt ceiling was raised.


In 2011, Mr Geithner recalls, he “reminded people over and again, in the case of an existential Europe collapse or of a complete congressional impasse where they had forced us to default, we had no meaningful ability to protect the economy from the consequences. The way the US system is set up, Congress has all the firepower, the executive branch has almost no standing firepower.”


This is not about to change. This year will be dominated by continuous warfare between Mr Obama and Congress. The outcome will depend less on the merits of competing proposals than on who has the advantage in public opinion. If things go wrong, the country could again need a crisis manager. But with luck, Mr Geithner’s skills will not be needed again.


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