“What we need is better, smarter, tougher regulation. Not modest repairs at the margin, but new rules of the game. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.”
— Timothy Geithner, testimony before the House Financial Services Committee.
Heading the Federal Reserve Bank of New York, the U.S. Fed’s eyes and ears on Wall Street, during one of the worst ever financial crises in history should rank as one of the most challenging jobs in the country. As the president of the Fed’s main policy implementation arm, Timothy Geithner managed, to wide acclaim, the central bank’s herculean efforts to stabilize the credit markets and rescue troubled financial firms during the credit crisis’ most tumultuous phase last year.
But this is not Geithner’s first brush with financial crises. Along with Larry Summers, who was then the treasury undersecretary for international affairs during the Clinton years, Geithner coordinated the American efforts to contain the Asian Financial Crisis, the last major global financial upheaval. Geithner later succeeded Summers as the undersecretary for international affairs, when his colleague became treasury secretary.
So, when President Obama picked him as the 75th treasury secretary, most expected Geithner to take to his new job like a duck to water. Despite his relatively young age, the 47 year-old seemed well qualified, and with the right kind of experience to lead the treasury during the worst economic downturn in decades. However, even Mr.Geithner must have been surprised by the trial by fire that awaited him.
Errors in his tax filings, though rectified subsequently, almost derailed Geithner’s confirmation by the U.S. Congress. The worsening economic outlook only increased the enormous expectations of the new administration, both from Main Street and Wall Street. The charged political atmosphere and the constant media glare added to the pressure to roll out plans to revive the financial system and the economy.
The lack of clarity in the Financial Stability Plan, the Geithner treasury’s first initiative to support the financial sector, upset the markets. The political storm over the bonus payments at AIG, the troubled insurance firm bailed out by the U.S. government, almost cost Geithner his new job. What saved him was the unflinching support of President Obama who insisted he would tell a resigning Geithner, ‘Sorry buddy, you’ve still got the job’.
The beleaguered treasury secretary soon thereafter received a standing ovation from the markets for his Public-Private Investment Program for Legacy Assets. The innovative plan aims to expunge distressed assets from bank balance sheets, through a process which allows market-led price discovery and sharing of risks between the treasury and private investors. Geithner’s plan has found favor with well-known economists including Michael Spence, Martin Feldstein, and Nouriel Roubini, though others like Joseph Stiglitz and Paul Krugman have made known their reservations.
Just when Geithner seemed to have left his troubles behind, he remarked that the U.S. was open to consider other currencies as an alternative to the U.S. dollar as the world’s reserve currency. In response, currency markets roiled. Though he was quick to clarify that he expects the dollar to remain the dominant reserve currency for a long time, the damage had already been done.
Undaunted by the pressures, Geithner has rebound like a cat with nine lives, to unveil the most ambitious financial regulatory reform initiative in recent history. His proposals include a single government entity with the authority to oversee the entire economy for systemic risks. Measures will be put in place for tighter supervision of large financial firms, higher capital norms, regulation of derivatives markets, and a mechanism to take control of troubled firms during economic turmoil. With these proposals, the administration is pushing the envelope of government supervision of financial markets into unchartered territory.
Yet these are extraordinary times, which require extraordinary responses, and many of those responses are likely to be contentious. When viewed from that perspective, the pressures faced by Geithner as the treasury secretary of the world’s largest economy, an ‘inhumanly difficult job’ as The Wall Street Journal described it, are only to be expected. At the same time, Geithner needs to win enough support, and most importantly, his initiatives must deliver the promised results.
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© Thomas White International, Ltd. 2019