Secretary of the Treasury Timothy Geithner deserves some of the blame for the administration’s political problems during its first two years and for the weakness of financial reform. In 2009, Geithner argued against the administration throwing the full weight of the law against those banks and bankers, and related institutions, that had committed fraud. Doing so would have erased or at least countered the impression that the Obama administration was a tool of Wall Street. Geithner also argued for delaying the push for tough financial reform until the financial crisis had passed—the consequences of which are evident now in the financial lobby’s successful attempts to water down and delay implementation of even the weak-kneed Dodd-Frank legislation.
But now I learn, in an excellent profile by Washington Post reporter Zachary Goldfarb, that Geithner is also behind the Obama administration’s unseemly obsession with reducing the debt and deficits—even if that should throw a few people out of work, prolong the Great Recession well into this decade, and pitch American politics to the right. (And, oh yes, increase the deficit and debt itself, because if the U.S. remains in a slump, that will cut into tax revenues and widen the deficit, whatever spending cuts Geithner and the Republicans should recommend.)
According to Goldfarb, Geithner gained the “upper hand” early last year in an administration debate about whether to propose a second stimulus program to Congress. While Lawrence Summers and Christina Romer argued for focusing on bringing down unemployment, Geithner called for focusing on reducing government debt. Of Geithner, Austan Goolsbee, who recently announced he is leaving his post as Chair of the Council of Economic Advisors to return to the University of Chicago Business School, says: “From the earliest moments of the administration and even before, he clearly had a big focus on long-term deficit reduction and making clear, not just to the markets but for the entire economy, that the government is living within its means.”
Of course, Presidents have gotten bad advice from their Treasury Secretaries before. In June 1937, while the United States was still in the midst of the Great Depression, but was enjoying a very modest rebound, Franklin Roosevelt’s Secretary of the Treasury Henry Morgenthau, Jr. recommended that he cut spending. Morgenthau acknowledged that while “the patient might scream a bit when he was taken off narcotics,” the time had come “to strip off the bandages, throw away the crutches,” and let the economy see if “it could stand on its own feet.” Roosevelt followed Morgenthau’s advice, and the economy plunged back into recession, the unemployment rate shot up, and Republicans and conservative Southern Democrats were able to attack the “Roosevelt recession.”
When the stock market tanked in March, 1938, Roosevelt began to have second thoughts. Morgenthau warned him that abandoning the attempt to balance the budget would harm business confidence. But Roosevelt decided not to listen to Morgenthau. He pressed ahead with new relief legislation and, by the next year, the economy was again showing modest signs of growth. Will Obama continue to listen to Geithner? I certainly hope not. I used to blame the administration’s timid and self-defeating fiscal policy on Republican intransigence, but as Goldfarb’s profile shows, Obama and his Treasury Secretary deserve a good part of the blame for what is becoming Obama’s “Great Recession.”
John B. Judis is a senior editor at The New Republic and a visiting scholar at the Carnegie Endowment for International Peace.
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