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May 27, 2012 8:27 pm
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The worst is still ahead for Obama’s chief firefighter
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By Edward Luce
In the early weeks of the Obama administration, nobody attracted worse press than Timothy Geithner. Panned for his awkward speaking style, and dismissed as a creature of Wall Street, few gave him long as Treasury secretary. Today he is the last man standing among Barack Obama’s original economic team. Improbably, given that they met a few weeks before Mr Obama took office, he has turned into the president’s favourite policy adviser.
All of which qualifies as an opportune moment to fade out; Mr Geithner has said he will quit at the end of the year regardless of who wins in November. But the worst is probably yet to come.
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Whether it is Mr Obama’s electoral vulnerability to another plunge in the eurozone, or the risk that the US will head over a fiscal cliff after the election, there are miles to go. And there is little Mr Geithner can directly do to avert the spectre of either.
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Today, as Ian Bremmer argues, we live in a G-Zero world in which no-one region or bloc can impose an agenda on the rest. Nothing better illustrates that than Washington’s impotence in the face of events across the Atlantic. After his first G20 summit in April 2009, Mr Obama warned that the world was no longer a simple place. “If there’s just Roosevelt and Churchill sitting in a room with a brandy, that’s an easier negotiation,” he said.
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Nowadays there are few conference halls (or calls) large enough to contain the people Mr Geithner must regularly consult. If the bond markets are right, some time after its next election in mid June, Greece will default on its debts and exit the euro. Most observers assume that in the event of a “Grexit” the Europeans would use sufficient firepower to stem the resulting contagion. But few would dare predict how it would go.
One of Mr Geithner’s maxims is that “plan beats no plan”. Europe is not much good at plans nowadays. Nor is there the remotest prospect Mr Geithner will ask Capitol Hill for new International Monetary Fund credit lines as a contingency against European disaster. According to the IMF’s own numbers, Europe’s net worth is six times its gross domestic product – against just four and a half times for the US. Even the most internationalist Keynesian in Congress would baulk at pre-emptively bailing out such wealthy economies.
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Nor has intellectual suasian helped Mr Geithner very far with his European counterparts. Washington’s ability to influence a credible euro plan is inversely proportionate to how much new money it brings to the table, which is precisely $0. On the rare occasions Mr Geithner has spoken out, such as in Warsaw last autumn, he is quickly slapped down by his European counterparts.
Private communications are not much more effective. The Germans have made little secret that they do not see America as an honest go-between. Nor do they see America’s now winding-down $700bn Troubled Asset Relief Programme as a good way of dealing with moral hazard. Like Ben Bernanke, whom some believe he might succeed as Fed chairman in 2014, Mr Geithner believes you should do what it takes to prevent meltdown and deal with the moral hazard later on. The Germans argue that “later on” never arrives. They have a point.
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Whatever else can be said of the Dodd-Frank Wall Street reform, it ought to be renamed the Geithner Act. America’s largest banks are even larger than they were before the collapse of Lehman Brothers. Nobody believes that the collapse of a bank the size of JPMorgan Chase, or Citibank, would be allowed to happen. That implicit Treasury guarantee is why the biggest banks have a significantly lower cost of funding than all the others. And it is another reason why the Germans do not take American – or British – exhortations to heart.
If Mr Geithner can do little to stop events that might doom Mr Obama’s re-election prospects, perhaps he can work on some bookkeeping for his successor? Alas, the Treasury secretary has even less pull with John Boehner, the Republican House Speaker, than with Wolfgang Schäuble, the German finance minister. Last week, he expressed surprise that Mr Boehner had again raised the prospect of a deliberate US sovereign debt default – the current ceiling will be breached some time between September and December.
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Such talk was “deeply irresponsible”, he said. But another showdown was always on the cards. If Mitt Romney wins in November, Mr Geithner will probably be let off the hook. Congress would likely punt the momentous decisions into early 2013 for the new president to handle. Should Mr Obama win, however, the next phase of his epic tussle with the Tea Party would start immediately.
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The range of outcomes would be extreme. If Congress failed to agree on a fiscal plan it would trigger another US recession. That would also bring on the next credit downgrade. Alternatively, Mr Geithner could help broker a grand bargain that starts America down the road to tax reform and rekindles its animal spirits. Either way, he is due to exit on a big reckoning.
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Only a fool would bet on what will happen in Europe before November, or Washington thereafter. But having gained virtually unmatched experience as a firefighter, Mr Geithner’s words are worth scrutinising. In a talk to students last week, he offered some flinty advice. Mistrust those with deep convictions, Mr Geithner said. And do not expect them to behave rationally.
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It was sound counsel for whoever will succeed him – and a good description of what to expect on that never-ending conference call.
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Copyright The Financial Times Limited 2012.
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