Tim Geithner: Eternal Optimist, or Soothsayer?

Given the rather acrimonious and acerbic political infighting that has gripped the United States, which is increasingly a big worry around the world, one would assume that the U.S. Treasury Secretary would present a sobering perspective. Far from it. On the very day after President Obama outlined his vision for resolving the country’s long-term budget issues, Mr. Geithner chose to turn himself into a cheerleader. He batted down any and all questions about whether the U.S. Congress would raise the debt ceiling or arrive at a passable budget for the coming fiscal year by expressing his profound conviction that everything would turn out to be fine. His words were meant to reassure. The United States has the capacity to rectify its currently listing fiscal ship, he argued. The problems here are much more easily fixable, he added, than, say, in Europe — whether that is due to the euro’s troubles or people’s much higher expectations for, and dependence on, the social safety net. In the abstract, Mr. Geithner is, of course, correct. The U.S. safety net is definitely not any exercise in largesse, even if the Republicans and many financial elites are desperate to make it sound as if it were. Therefore, the holes to be plugged aren’t that earthshaking either. What irritated Mr. Geithner’s largely international audience was that where it matters, in the battlefield of politics, his remarks came across as pollyannaish. They were more like what one would expect from a chief marketing officer for U.S. financial markets. When the sitting U.S. Treasury Secretary acts more like the marketing department of the New York Stock Exchange, Americans ought to worry. Because there is such a thing as false pride, of blindly hyping a system that actually is in grave trouble. Take Mr. Geithner’s claim that, unlike Europe, the United States has done a great job in shutting down so far a total of 358 banks in the aftermath of the crisis, while Europe has done preciously little of that. Trouble is, most of the banks that have been shut down were small institutions that have been added to the balance sheet of larger firms. Consequently, as Henry Kaufman, one of Wall Street’s true sages, has pointed out, the U.S. banking system has become ever more concentrated. While the largest ten institutions held only 10% of all assets as recently as 1990, now they hold well over 70% of all assets. That is not exactly a recipe for a more stable U.S. banking system, especially considering that, in the last iteration of the 2007-8 crisis, the large banks have amply proven their inability to handle complex risks. It is odd for any top finance official to take pride in the fact that, under his watch, including previously at his perch as head of the New York Federal Reserve Bank, this concentration process has accelerated further. For other countries’ finance ministers, soberness is the order of the day — while cheerleading is (almost) a firing offense. In fact, many a finance minister instinctively acts more like an exorcist — by disabusing, brutally if need be, the other ministers of any desires to expand the budgets of the departments they head. In his defense, Mr. Geithner might claim that he is not really vested with the powers of a real finance minister, only those of a Treasury Secretary (who seeks to get the debt issued, funded and paid for). In particular, the U.S. Treasury Secretary’s role in, and control of, the budget process is far smaller than that of finance ministers elsewhere. In a parliamentary democracy, the finance minister, almost by definition, is close to being judge, jury and executioner all in one. This man, or woman, has the power to say no to a lot of desires expressed by other departments, cabinet colleagues and the parliament. Given that, by comparison, the U.S. budget process is a far more anarchical process, Mr. Geithner’s unflinching expressions of reassurance — à la we will get it done, it’s all fixable, don’t worry, our problems are small compared to other countries’ — struck many visitors from abroad as either naive or as wishful thinking. At a minimum, given the determination and conniving that shapes Republican strategies on the budget issue, it does not appear as if Mr. Geithner has the political depth or resolve to withstand the onslaught that is undoubtedly coming from the Republican side. This is all the more true as the opening negotiating position chosen by the Obama Administration on the budget issue seems already deep into Republican territory. That would foreshadow that, once the Republicans are done with their counterattacks and the execution of their legislative strategy, the eventual compromise will be found even further to the right. Optimism and tough financial times just don’t go well hand-in-hand.