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March 23, 2009

The Geithner Paradox: Damned If You Do...

By David Paul Kuhn

How quickly Timothy Geithner has fallen out of favor.

The youthful Treasury secretary was once seen as the embodiment of the new best and brightest. His boyish persona is now noted for the absence of gravitas.

The New York Times initially reported that Wall Street welcomed Geithner's Federal Reserve experience. It was a "measure of continuity." By mid February, after the first rescue plan flopped, the Times saw obstacles in his "closeness to financiers" and the use of "jargon" indicative of his past "behind the scenes" role.

Back in 2007, the Times wrote admirably of Geithner's deliberative composure. "Calm Before and During a Storm," headlined the profile of Geithner. Today, when Geithner is concerned, deliberation is indecisiveness and calm is a failure to "connect."

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Thus the man initially described bullishly as "heartening news for financial markets," is now commonly depicted as a reason those markets remain bearish.

It therefore seemed remarkably normal this weekend, that barely two months on the job, Obama was asked what if Geithner tendered his resignation. The president told CBS' "60 Minutes" he would say, "Sorry buddy, you've still got the job."

Geithner's job is center stage this week. He has unveiled a plan to remove toxic assets from the books of failing banks. In his words, "we have to act." Indeed, it was in part his failure to act over the past month that brought the wrath of Wall Street.

This is the Geithner paradox. There is wide disagreement over what action Geithner must take, but nearly everyone demands he take action. Geithner is chided for being unclear about his plans, but as Federal Reserve's veteran Vincent Reinhart put it in an interview, "he can't be too clear."

"The fundamental problem is that the American people are not willing to direct resources to financial institutions to help markets," said Reinhart, a former director of the Fed's division of monetary affairs. "Because of that real anger, which A.I.G. has only intensified, Secretary Geithner has no cards to play."

The White House new public-private plan, stewarded by Geithner, will finance between $500 billion and $1 trillion in problematic loans and securities, the toxic assets at the core of the economic crisis. The U.S. government will shoulder the risk in order to persuade private investors to purchase the troubled assets, which could later prove lucrative.

The political environment has forced Geithner to use as much as $100 billion of Treasury's own coffers, as well as Federal Deposit Insurance Corp. reserves. Congress is in no mood for bailouts. Outrage over the $165 million in staff bonuses by American International Group Inc., the largest recipient of aid, has undercut what little public support remained for using tax dollars to effectively loan money to banks. And it's Geithner, more than any other, who has been held to account for those bonuses.

Geithner is now a man perpetually against the ropes. Earlier this month, the Wall Street Journal forecasting survey of 49 economists graded the Ivy League Geithner a failing 51 out of a 100. Several Republicans have asked him to resign. Democrats are not rallying to his defense. By last week, the mounting criticism forced President Obama to express his "complete confidence" in the Treasury secretary. Hardly encouraging. Expressions of presidential confidence often signify a lack thereof.

Geithner's foremost problem is not the president's confidence. "Geithner doesn't have the confidence of the markets," Reinhart said. "And in that job, having the confidence of the president ranks as number two."

So far the markets have positively received the latest plan, as well as Geithner's presentation of it. The Dow Jones Industrial Average soared nearly 500 points Monday, almost 7 percent, largely on the backs of financials. Still, it will be at least months before the plan's effectiveness can be gauged.

Geithner though remains in the hot seat. He is scheduled to testify twice this week before the House Financial Services Committee. He will face some harsh criticism in light of the bonuses backlash. But even his critics have no clear replacement in mind. And to some analysts, the rap against Geithner is fundamentally absurd.

"What do people want? A Nordic god figure?" asked Mark Blyth, a professor of comparative political economy at John Hopkins University. "Geithner is sitting there with a shit sandwich of unbelievable proportion. I don't understand any of this Geithner bashing. So yeah the guy doesn't come out and sound like Charlton Heston with two stone tablets but is that the level we are at?"

To an extent, yes. "Managing the psychology of the market is as important as managing the flow of funds," said Marc Roberts, a Harvard professor of political economy.

The role then is Geithner's to play. So Geithner carries on, understaffed, facing a crisis of almost unprecedented scope and forced to act amid disagreement on how to act. He is blamed for decisions that are not his to make. The left hits him for doing too little. The right hits him for doing too much. And middle ground seems inadequate, like a partial invasion on D-Day.

But Washington is never fair to fall guys. For a period, presidents benefit from lightning rods. But the storm can in time become too much. And there is a sense in Washington that, unless he quickly recovers, Geithner's time is nearing.

"The next two weeks are key," Roberts said. "If Geithner presents his plan clearly and forcefully and defends it forcefully, all this will be forgotten."

Reinhart described Geithner as "damaged but not dead, yet."

"He has not done anything that has irretrievably damaged his reputation," Reinhart added. "If he comes up with a plan and a sign of forceful action all this will be forgotten." But if the pitch or plan fails, "then someone will have to go and it would be him."

Geithner's future also depends on the degree Obama wishes to invest his political capital in the bad politics of bank bailouts, as well as join his image with Geithner's.

And that's the ironic rub for the Treasury secretary. Geithner is reminiscent of his boss. He and Obama are the same age. Both men are defined by their measured equanimity. Geithner too shot up the Washington food chain. Yet the shared characteristics are now condemned in Geithner and still admired in Obama.

It was the Times that once captured Geithner as a "cerebral Dr. Phil." Now Geithner's critics have to, perhaps imperfectly, choose whether they want the "cerebral" financial regulator from the trenches or Dr. Phil. Geithner was always only the former. There is no paternal FDR-like figure counseling the nation today. But really, is that Geithner's job or Obama's?

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