Paulson's True Successor - The American Spectator | USA News and Politics
Paulson’s True Successor

When news outlets reported Friday that President-elect Barack Obama had chosen Timothy F. Geithner, president of the Federal Reserve Bank of New York, to be his Treasury Secretary nominee, the Dow Jones Industrial Average soared nearly 500 points.

In a week of endless market “bottoms,” where the Dow sank below 8,000 for the first time in more than five years, a decision naming just about anyone to the post would have given the market a likely boost because of the uncertainty removed. But traders also seemed to favor — at least for the moment — Obama’s abrupt abandonment of his promise of “change you can believe in.” For the Geithner decision will almost certainly mean “more of the same” Paulson-style financial bailouts.

Geithner, in the words of the Washington Post, is “a primary architect of the Bush administration’s response to the financial crisis” and “has worked closely with Treasury Secretary Henry M. Paulson Jr. to devise responses to the most critical events of the market turmoil.” In his current post, Geithner organized the Bear Stearns bailout and was Paulson’s primary cohort in the American International Group (AIG) and TARP bailouts. Even though he served as under secretary under Treasury Secretaries of the Clinton administration, it is Paulson who is most responsible for Geithner’s recent rise to power. And in choosing Geithner, Obama almost might as well have nominated Hank Paulson to another term!

The Geithner nomination would be “more of the same” of the worst aspects of the current Bush administration — more bailouts, more lack of transparency in the bailouts, and more corporate welfare. And the effect Geithner’s selection had on the market may also be similar to that of the announcements of other Paulson “rescues” — a temporary gain in the Dow followed by a backslide even further when investors realize that fundamental problems haven’t been solved and have in fact been exacerbated by interventionist policies.

In many respects, Geithner’s credentials for the job are quite thin.  He has never been a corporate executive nor an academic economist. As liberal columnist Robert Kuttner noted recently in the American Prospect, Geithner “has neither a doctorate in economics nor an M.B.A.” Instead, Geithner’s career has been almost entirely in the bowels of the bureaucracy.

This is a sharp departure from the experience of previous Treasury Secretaries, most of whom came to the job with résumés brimming with accomplishments in business, academia, and/or electoral politics. They had been successful CEOs (C. Douglas Dillon in the administration of Obama’s hero John F. Kennedy, Robert Rubin in the Clinton administration, and Paulson and his two predecessors under the current President), distinguished professors of economics (George Shultz under Nixon and Larry Summers under Clinton), or seasoned statesmen who rose through the ranks of elected office (Lloyd Bentsen under Clinton).

By contrast, Geithner’s career rise has consisted largely of falling upwards in his civil service jobs after organizing bailouts, even if the bailouts fail or prove to be unnecessary. What’s gushingly described by press accounts as his “good relationship with Wall Street” is largely due to his persistent efforts to circumvent rules to ladle out government dough to financial firms that he decrees are “too big to fail.”

With a B.A. in government and Asian studies from Dartmouth and an M.A. in International Economics and East Asian Studies from Johns Hopkins, Geithner went to work at Kissinger Associates — the firm founded by Richard Nixon’s pragmatic secretary of state– before coming to the Department of Treasury at the tail end of the Reagan’s tenure in 1988 and serving under the George H.W. Bush and Bill Clinton administrations. In 1999, he was promoted to Under Secretary of the Treasury for International Affairs under Clinton Secretaries Robert Rubin and Larry Summers. Geithner was an active player at Treasury around the time of the bailout of Long-Term Capital Management hedge fund, which didn’t involve any taxpayer money but set the precedent for government intervention in bringing banks together to prop up failing non-bank firms.

He became president of the New York Fed in 2003, but elevated himself to become one of the top government financial officials early this year by organizing the Federal Reserve’s bailout of Bear Stearns that Paulson and Fed Chairman Ben Bernanke quickly signed off on. Despite questionable evidence of whether Bear would even go bankrupt — its creditors may have delayed their collateral calls if they would have been wiped out too — the Fed guaranteed JP Morgan $29 billion from the government to take over Bear, and the government set the stock price Bear’s shareholders would get. According to Condé Nast Portfolio, “It was Geithner’s Federal Reserve bank, not the Treasury, that came up with the $29 billion loan that made the deal possible or, more precisely, acceptable to J.P. Morgan.” The magazine noted that Geithner “was the central figure in that drama” who “brought the parties together, [and] hashed out the details.”

The Bear deal faced criticism from the left and right as both an abuse of Fed power and as a precedent that spread “moral hazard” leading to the further bailouts down the line — bailouts that Geithner would be heavily involved in, working hand-in glove with Hank Paulson. Conservative columnist Robert Novak wrote, “The Federal Reserve’s unprecedented bailout of Bear Stearns was crafted not at the White House or Treasury, but in secret by a New York central banker.” The precedent of Geithner’s plan, Novak wrote, “can effectively substitute the central bank for the market in determining financial outcomes.”

But Geither’s actions received similar criticism from former Fed Chairman Paul Volcker, an adviser to Obama who himself was considered for the Treasury job. In a speech to the Economic Club of New York, Volcker said Geithner took actions that “extend to the very edge of its lawful and implied powers, transcending certain long-embedded central-banking principles and practices.” Volcker later told Condé Nast Portfolio that the Bear deal “was a proper action, but it was extraordinary — something that’s never been done before, in terms of calling upon that emergency power.”

Further, there is ample evidence that the March bailout of Bear Stearns’ creditors simply prolonged, postponed and added to the pain, as firms didn’t make the hard choices about restructuring, believing the government would rescue them from their mistakes. As Manhattan Institute scholar Nicole Gelinas, a chartered financial analyst, wrote in the Wall Street Journal, “the Fed, by being so quick to jettison the bankruptcy process, cut off a valuable source of new information to financial markets and blurred the critical distinction between sophisticated and unsophisticated investors.” And in a recent paper (pdf) presented at the prestigious Jackson Hole Symposium held by the Federal Reserve Bank’s Kansas City branch, professors from the University of Pennsylvania’s Wharton School and the University of Frankfurt conclude that, “Given the characteristics of the markets where Bear Stearns operated, it is quite possible that…no contagion would have occurred.”

But having inserted himself in the Bear deal, Geithner got used to being a major player and argued for more power for — you guessed it — the Federal Reserve. In a Financial Times op-ed, Geithner declared, “Because of its primary responsibility for the stability of the overall financial system, the Federal Reserve should play a central role” in a new regulatory framework. As I wrote at the time, “Geithner uses the bailout he rammed through to argue that the Fed’s role has changed, and now that it has assumed the responsibility for bailing out investment banks, it needs to add regulations as well.”

Also disturbingly, and disturbingly for his role as Treasury Secretary, Geithner made no mention of the Fed’s own role in the financial crisis through its monetary and interest rate policies. Nor did he address transparency issues in the Fed’s operations — highlighted recently by Bloomberg in reporting on the secretive nature of ongoing bailouts — that would be especially necessary to address if it assumed a larger role.

Geithner became the go-to guy for failing financial firms, and was at the “center of action” for the AIG bailout, according to the New York Post. He “quarterbacked and advised” the government’s “taking control of tottering insurance giant AIG for a bailout deal,” the Post wrote. But more and more, it looks like Paulson and Geithner “quarterbacked” with a flawed playbook with AIG that moved the meltdown much further down the goal line.

Taxpayers are on the hook for $85 billion, and the government granted AIG another $40 billion. But taxpayers are not the only parties who lost from this “rescue.” The government bailed out creditors holding AIG-issued credit default swaps as well as top employees who are still partying hearty at fancy resorts. But the government’s effective nationalization of AIG — taking 80 percent of its stock and stopping the issuing of dividends — left millions of ordinary shareholders high and dry. As Alan Reynolds of the Cato Institute writes, this bailout gave “bondholders more protection than they’d otherwise see — at stockholders’ expense.”

The arbitrariness of the government’s action has made it much harder for other financial institutions to raise money through issuing stock, because investors have to take into account the risk of a government wipeout of their shares as well as market risk. As Reynolds writes, “This new risk of forced mergers or a government takeover artificially depresses the stock prices of vulnerable firms.”

Market conditions worsened, and this led Paulson to come up with the Troubled Assets Relief Program (TARP), which Paulson rammed through Congress, and which again, Geithner was heavily involved in designing. Geithner, reports the Wall Street Journal, was “at the center of the government bank rescue, which has drawn criticism from Democrats — as well as Republicans.”

And Republicans and Democrats who dislike corporate welfare and like transparency in government should express a bipartisan concern about Geithner’s nomination. Conservatives will probably disagree with most of the views of anyone President-Elect Obama chooses, but candidates like Volcker and Summers would bring more experience to the job and aren’t tied to Paulson’s sordid dealings. One thing Obama should not want to do is fulfill the prophecy from that profound political philosopher Pete Townsend of “Meet the New Boss” —  as in, “Meet the new boss, same as the old boss.”

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