THE STASH NOVEMBER 24, 2009
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So far the members of Congress who think the Treasury Secretary should go don't quite constitute a full-blown caucus, much less anything resembling a majority. But they're expressing their opinions with increasing passion. Early this month Democratic Senator Maria Cantwell confessed that she was "not sure" why Geithner still had his job given his too-soft treatment of Wall Street. (A spokesperson later walked back the implication of that statement.) Then, last week, Geithner took some lumps from both Democrats and Republicans in the House. Oregon liberal Pete DeFazio proclaimed that Geithner should resign over his refusal to answer questions about the AIG bailout. At a hearing of the Joint Economic Committee the following day, Texas GOPer Kevin Brady told Geithner that "[T]he public has lost all confidence in your ability to do the job" and pleaded, "For the sake of our jobs, will you step down from your post?"
And the risks for Geithner only appear to be growing on Capitol Hill. Someone who recently attended a large gathering of House Democrats told me last week that "there were moments when it turned into a pep rally against Geithner and the Obama economic team."
The criticism of Geithner is threefold: First is the continued taint of AIG, whose bailout he orchestrated as president of the New York Fed. The recent report by Neil Barofsky, the special inspector general for the bank bailout (aka TARP), has reignited suspicions that Geithner and the Fed pumped taxpayer money into the cratering insurance company in order to funnel billions of dollars to its major counterparties--banks like Goldman and Merrill Lynch. The second criticism is related to the first--that Geithner is too close to Wall Street generally. This comes partly from his role in the bailouts of Citigroup and Bank of America, partly from his decision to help investors buy the banks' toxic assets rather than nationalize them, and partly from revelations about conversations he had with the CEOs of Goldman and Citi at the height of the crisis. Third, both of these problems have been magnified by the rising unemployment rate and the perception that Geithner is more concerned with the deficit than with job growth.
On the merits, I think these criticisms are all slightly off the mark.
Certainly it would have been nice to strike a better deal with AIG's counterparties. But, as I've explained before, that needed to be done back in mid-September of 2008, before the government bailed out the company, not in November, when the issue was finally broached. Before the bailout, the government had real leverage over AIG's counterparties, since they would have suffered big losses had AIG gone into bankruptcy (i.e., absent a bailout). The government lost that leverage after the bailout.
Problem is, no one was thinking about bargaining with counterparties last September.* The main order of business back then was to prevent the whole financial system from melting down. According to the reconstruction of events in James Stewart's epic New Yorker piece, Friday September 12 was pretty much the first time Geithner had heard of the problems at AIG. Over that weekend, he had to figure out how to deal with Lehman Brothers' imminent collapse. By the following Tuesday, he and Fed Chairman Ben Bernanke had loaned AIG $85 billion. They had to make this decision so quickly they didn't even have a chance to figure out whether the company had sufficient collateral. (In Stewart's account, they basically made an educated guess.)
So while it would have been nice to renegotiate with AIG's counterparties when the government had leverage, the reality is that this was at best a second- or third-order issue at the time, and the Fed was barely able to deal with the first-order issue of averting disaster. (In the same way, it would have been nice to renegotiate the bonuses AIG owed some of its top executives, since they would later blow up into an international scandal. But, again, Geithner and Bernanke had other things on their mind.)
Likewise, Geithner's decision not to nationalize some subset of banks looks like the right move in retrospect. Citigroup and BofA are still struggling, of course, and it's hard to know when they'll recover (though much of that seems tied to the unemployment rate). But the rest of the country's biggest banks are chugging along reasonably well. The stress tests restored confidence and allowed them to raise capital privately rather than rely on the government. If anything, it's the successful response to the bank crisis that's made Geithner a target--the profits seem too big too soon. That's offensive and cries out for serious reforms, only some of which Geithner supports. But it's hard to argue that we'd be better served had Geithner botched the financial-crisis response.
Finally, on the deficit and unemployment, it's true that Geithner has been outspoken about reining in the deficit. It's also true that dwelling on the deficit can seem beside the point or worse with unemployment stuck in double digits. But it's worth considering the role of a Treasury secretary here. As one Treasury official told me a couple months ago, almost every Treasury secretary embraces somewhat more fiscally conservative views than he actually holds,** because one of the Treasury secretary's jobs is to reassure our creditors we'll pay them back. Were Geithner to suddenly argue that the deficit isn't a big deal--even though there's a strong economic case that we should ignore it for the next year or two and focus on stimulus--the bond markets would probably go nuts. By reassuring the bond markets, Geithner buys the administration a little cover.
Having said that, it would be crazy for the administration to start cutting domestic spending while the economy is still fragile. But I'd be surprised if that's where we end up. The administration economic team is aware of the dangers of withdrawing stimulus too soon, and they know it's the long-term rather than the short-term deficit that really matters. The only question is how much additional stimulus they're willing to go along with over the next several months. If they turn out to be overly stingy, then some criticism is certainly warranted. But that's a separate question from whether the Treasury secretary should worry about the deficit. He clearly should.
So the good news for Geithner is that he's mostly facing a perception problem. The bad news is that it's a pretty damn stubborn one. How can he fix it? I don't have a ton of answers, but a good place to start would be an idea now percolating among congressional Democrats: use the $200 billion-plus in left-over TARP money to pay for a handful of employment-boosting measures, like infrastructure investment, a payroll-tax holiday, and a job-creation tax credit.
The administration has so far resisted the idea, prefering to use the extra TARP money to lower the deficit. But if Geithner and the White House endorsed it, they could solve both his too-close-to-Wall-Street problem and his aloof-from-ordinary-folks problem in one fell swoop. "The message would be clear," says Representative Chris Van Hollen, a member of the House leadership. "Wall Street is doing just fine thank you. It's time to use the resources to give Main Street a boost." And it would have the added benefit of stimulating the economy without requiring another wrenching congressional debate, since the money has already been approved. It sure beats having that resignation conversation over and over again.
Update: Some clarifications:
*I'd originally said "no one else with thinking about counterparties last September." But, as commenter sdemuth points out, of course the Fed was thinking about counterparties back then, since that's why AIG posed such a risk to the financial system. I should have been more precise: the point is that no one was thinking about bargaining with counterparties to save a couple billion dollars. They were trying to figure out how to prevent the whole edifice from collapsing--there were trillions upon trillions of dollars at stake--and they barely had time to do that.
**I should note that this official wasn't commenting on Geithner's views on the deficit per se. (We weren't talking about Geithner specifically.) He was just illustrating the broader point that cabinet officials and agency heads sometimes have institutional reasons for emphasizing certain positions they wouldn't necessarily go to the mat for if they were in a different job.
10 comments
What is wrong with him having conversations with the CEO's of banks while they are going under? I think this is scapegoating at its worst. "Too close to Wall Street memes" from politicians raised on phrase-mongering rather than thinking OR fall in to a depression. The goal at the time was to stop the plane from crashing in to the mountain and it worked, ugly as it was. It's so easy to take stability for granted as we sit here safe in our seats - not dead. Thank you Obama economic team. I'd like to see you fire some CEO's of the banks American taxpayers just saved and to have disgusting Goldman Sacjs publicly rebuked and mocked by you (preferably Obama). You need to make more big gestures, it will help a great deal. Give it a rest House Dems. The blame game is just that, a game. You think anything will change with a new Treasury Secretary? Look, I'd like to see these banks broken up, period - but do you REALLY think Congress has the nads to really go there? Didn't think so.
- WandreyCer
November 24, 2009 at 6:54am
Very good post. More stimulus? Politically, the best would be the employment tax (social security tax) holiday. How much? Easy, drop the social security "trust fund" fiction and lower social security taxes so that current taxes equal current benefits, or about a $180 billion per year (old age and survivors benefits only) current tax decrease. The political return would be enormous, as working Americans realize an immediate (and very noticeable) pay increase. Of course, some Americans might save a portion of the tax decrease, reducing the stimulative effect. But recovery from this recession (depression in many parts of the country) is going to take awhile, with intervening elections that could thwart proven (i.e., Keynesian) efforts to boost the economy. Is it doable? Probably not. The Republicans like to talk about a payroll tax decrease, but does anybody really expect them to actually reduce this highly regressive tax. And Democrats? Not a chance. They wouldn't "risk" social security by eliminating the "trust fund," even though there is neither "trust" nor a "fund".
- raylward
November 24, 2009 at 7:25am
"Problem is, no one was thinking about counterparties last September. " This is non sequitor, pure and simple: if there were no counterparties, letting AIG fail would have hardly have been the systemic risk that justified bailing out AIG. The web of counterparties is what made the situation so dire. Counterparty risk had to be at the top of Geithner's mind when he help negotiate the bail out. This is one of those situations where the actor is impeached by his own actions either way you parse those actions: either Geithner wasn't thinking about the effect of his action on counterparties - in which case he's manifestly incompetent, or he was, and he somehow thought it appropriate to pay 100 cents on the dollar to these big investment banks, in which case one can legitimately question his wisdom. You can't play in the big leagues, and expect to be allowed to make excuses for lapses in judgment. Judgment and knowledge of how the system works is what justifies guys like Geithner sitting in those seats of authority in the first place.
- sdemuth
November 24, 2009 at 7:33am
sdemuth is right on. Furthermore, Geithner (and the rest of the Obama administration) seem not to understand that the only way to regulate banks and other financial institutions is primarily to regulate their size. That is, basically what worked (Glass-Steagull) for 60 years after 1932 wasn't broke, shouldn't have been "fixed", and need be restored.
- gdbittner
November 24, 2009 at 10:13am
Well ok sdemuth, your post was so outstanding that I came around. I still respect the man for saving the world. The banks kind of did hose him, and he kind of did let them.
- WandreyCer
November 24, 2009 at 11:26am
"Problem is, no one was thinking about bargaining with counterparties last September." I'm still not buying this. As I recall, we loaned AIG $85B in September, then another $65B in the second week of November, and an additional $30B in March of 2009. So, granted, urgent action was called for in September, and that may have made it impossible to share the pain to the counterparties. But the Fed had had 8 weeks to think about thinks by the time the second $65B went out the door., and 6 months before the last installment. They couldn't have by then figured out who held all that crappy paper, and insisted that as part of the government keeping AIG on life support, they chip in, oh, say, 20 cents on the dollar? As for saving his ass, or redeeming his soul, if Geithner wants to convince me, at least, that he is not, and was not at some important level in thrall to the big boys in all of this, all he needs to do is come out now for strong, meaningful regulation - say, a return of Glass-Steagall-like separate of investment and commercial banking, an insistence that no risks be carried off-balance-sheet in public companies, and a requirement that private investment bankers either have their own assets at the top of the capital pool, or accept a legal limit on their leverage ratio. Leverage and risk are an unstable combination. Like oxygen and hydrogen, they both have their places, but put them together in the same container, and even a little spark makes them a deadly combination.
- sdemuth
November 24, 2009 at 4:32pm
I have no doubt that Geithner, Bernanke and Paulson made mistakes last fall. Given the speed with which the crisis unfolded, and its severity, their work looks pretty good to me a year later. Conditions are still quite shaky, but it could be a lot worse. Would we be better off now if the likes of Cantwell, Fazio, or, just to give my Republicans equal opportunity, Jeb Hensarling, had been calling the shots? My recollection is that Congress was en route, as usual, to grab defeat from the jaws of victory last fall. God save me for saying this, but Barney Frank was the only member who acted the part of a statesman. We got a chance to see what Congress can do if left to its own devices with the stimulus bill, a pork-laden mess focused on preserving their own jobs. Now some thoughts on the banks. First, their size. Bank mergers have been permitted liberally for decades because they rarely result in a dominant share of any relevant product/geographic market. When they were challenged, it was usually when the First National Bank of Nishnebatna wanted to buy the Merchants Bank of Nishnebatna and lending was still heavily localized. As for Glass-Steagall, have we really been worried about Goldman Sachs or Morgan Stanley getting into merchant banking? How about Citigroup, J P morgan Chase et al getting into investment banking? The real source of our problems have been twofold. First, the banks have been permitted, indeed pushed on a bipartisan basis, to make imprudent loans. Second, the big banks have been permitted, indeed encouraged, to make trading for their own account their principal profit-making activity. The real problem with the repeal of Glass-Steagall is that it appears to have included the repeal of any serious effort at all to regulate the business of banking. That was another bipartisan effort. It made Greenspan and Gramm happy; it made Frank, Dodd and Rubin happy. If we want to prevent another financial disaster down the road we should focus on regulating leverage and risk-taking. Get them in line and the paychecks will get in line too.
- lsernoff
November 26, 2009 at 11:17am
THE FIRST PARAGRAPH IS REPEATED 3 OR 4 PARAGRAPHS LATER --> PLEASE FIX ARTICLE OR WEBPAGE
- yerubal
November 26, 2009 at 11:26am
W/Isernoff, ... I saw no serious attempt by any federal agency or either party to regulate any form of banking business, insurance, or ... did we notice ... public utilities. Since the mid-seventies, these sources of (a) publicly-indemnified private debt (Too Big To Fail!) or (b) monopoly-rent liberally shared among the Anglo-American overclass have grown enormously at the expense of both the economy and the republic. Both political parties have supported regressive and indirect taxation and wallowed in campaign finance, nepotism, and other forms of class-patronage derived from the state capitalism we "converged" on during the Cold War. Actually, given the government secrecy Anglo-American crony capitalism is shrouded in today, I wonder we will reach our own post-Soviet Perestroika stage.
- JRBehrman
November 27, 2009 at 11:09am
I don't understand these figures on the left arguing that we should have nationalized. Taking over a bank like Citibank or BoA is like invading a country. You've got to be very prepared to govern the damn thing, and you've got to have the right people together beforehand. I doubt a new administration filling major appointments would have been ready, and it's been hard enough managing TARP it seems. Furthermore, the degree of outrage at Wall Street is so great that the government could not have run these banks in low key, profitable ways: there would have been wars over every executive paycheck and every home mortgage denied. That said, it would be great if there were some mechanism to rein in salaries on Wall Street. And it won't do to squash salaries at AIG or wherever else we have leverage and let Goldman suck up all the talent. Does anyone know of a good mechanism for bringing down pay (or taking excess profit) from Wall Street in general?
- WillPastor
November 27, 2009 at 11:37pm