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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Examining Geithner’s Career



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The past two decades have seen an enormous expansion of financial engineering and an escalating series of financial crises. Through it all, one man has been at the center: Timothy Geithner.

From Asia’s financial crisis to present problems, Tim Geithner has been at the center of policymaking. His tenure has left a mixed record, as Simon Johnson notes

1. The Asian Financial Crisis. To Geithner fans, his Asia and finance backgrounds left him well prepared to handle the fallout of the 1997 crisis in Asia. Critics, like Paul Keating, argue otherwise. Geithner, through his influence over the IMF, argued that Asia was facing similar crises to those faced by countries like Argentina and Mexico in years prior. The problem, as Geithner emphasized, was extraordinary amounts of government borrowing and debt.

As Keating and other have argued—this was based on a misunderstanding of the problem. Asian countries faced instead a problem of liquidity in meeting short-term capital requirements—their long-term budget situation was in fact very manageable. Yet IMF loans came with strict austerity restrictions on government spending.

This was not a simple mistake with no broader ramifications. As a direct result of painful IMF-induced spending cuts, Asian countries resolved to avoid ever coming to the IMF in a position of weakness. They built up enormous reserves to handle their short-term financing problems. These reserves, held in dollar assets, contributed to the so-called “savings glut” that experts like Ben Bernanke and Raghuram Rajan have held up as a key contributing cause of today’s financial crisis.

2. The New York Fed. In his position as chairman of the New York Fed, Geithner was in the position to reign in risk taking at financial firms before the crisis, and handle their collapses during 2008. His performance in these roles was mixed at the very least.

Interestingly, in retrospect, Geithner spent his tenure at the New York Fed advocating a stronger approach to combat the sources of financial instability. Yet his actions while in office paint a different story. Geithner in fact worked to lower capital reserves at banks. Though Geithner developed excellent relationships with banking executives, he largely failed to address issues of risky lending that fueled problems.

During the crisis, Geithner was a forceful advocate of using taxpayer dollars to backstop losses incurred by private players. He was a key advocate of the TARP program, along with then-Treasury Secretary Hank Paulson. Yet as Luigi Zingales and John Cochrane have pointed out, the initial TARP program—framed in terms of asset purchases—was a disastrous idea, which fueled public panic.

Had the government gone ahead and purchased mortgage-backed assets from banks in late 2008—it would now face hundreds of billions of dollars in losses. Geithner also played a key role in bailing out AIG—a decision that may prove to be valuable, but which will cost the government billions.

3. Treasury Secretary. After a rough confirmation hearing, based on his failure to pay taxes, Geithner announced a PPIP program as a part of a plan to fix the banking sector. This was another failed attempt to purchase toxic assets, and also sparked market panic. Geithner followed this with a set of “stress tests” which were carefully managed by banks to reveal that institutions were fundamentally sound. Whatever the value of this exercise, it has contributed to a Japanese-style zombie-banking problem.

Geithner then followed by setting the Administration’s tone on the financial reform package. The message was—capital requirements are essential, and need to be handled in an international forum, like Basel-III. This effectively killed measures to introduce meaningful capital or liquidity requirements as a part of Dodd-Frank.

Geithner has certainly faced a difficult fifteen years, and it is much easier to evaluate policies in retrospect than to set policy in the midst of a panic. He may be the best man for the job. But his behavior calls into question our regulator and bailout-friendly policy responses. If a talented bureaucrat worried about the potential of fiscal stress failed to make headway, how will future regulators? If a policymaker dealing with an ongoing crisis could not help handing billions of taxpayer dollars over to private firms, how will other policymakers avoid during so in future crises? And if Geithner could not institute capital restrictions despite focusing on this issue for over a year, how will we ever get them? 



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