James Pethokoukis

Is Timothy Geithner going? Well, lots of news organizations are reporting that the Treasury secretary is considering an exit (Reuters, Bloomberg, WSJ, Politico, NYT). My working assumption has been that he sticks with the administration for the duration. Here’s how Reuters puts it:

Treasury Secretary Timothy Geithner is considering stepping down later this year, but will not make a decision until contentious negotiations over the U.S. debt ceiling are completed, people familiar with his thinking said on Thursday.

Geithner said he would remain in his Treasury post “for the foreseeable future” and sidestepped a direct question about his career plans after a flurry of media reports that he was mulling leaving the Obama administration.

After the debt negotiations? That means he’s never leaving! (That’s a joke.) We’ll see. But I have been working my sources to compile a speculative short list of whom might replace Geithner should that become necessary.  Kind of a “I could see so and so …” Among the names popping up: Gary Gensler of the CFTC, OMB head Jack Lew, former Clinton economist Laura Tyson, and Facebook COO  Sheryl Sandberg.

Other names from other media outlets: NYC Mayor Michael Bloomberg, JPMorgan CEO Jamie Dimon,  investment banker Roger Altman, former Clinton chief of staff Erskine Bowles, outgoing FDIC boss Sheila Bair, current White House chief of staff Bill Daley, former Obama economist Larry Summers and GE CEO Jeff Immelt. My sources are particularly dubious about Bair, Dimon, Bloomberg, and Summers.  No one mentioned Elizabeth Warren who would be unconfirmable. And for the heck of it: Hillary Clinton. If she’s good enough for the World Bank (or not) … [An add: investment banker Roger Altman.]

Key considerations: Confirmability, crisis management skills, relations with Republicans, fit with the themes of the 2012 reelection campaign. Plus you have to find someone who wants the job. More to come …

Ed Yardeni thinks Tim Geithner is off point:

Tim Geithner thinks he can solve the world’s economic problems by getting countries with large trade surpluses to reduce their surpluses and by getting countries with large deficits to reduce their deficits. The problem is that fixing the world economy isn’t as simple as suggested by Mr. Geithner. Multilateral approaches rarely work because it is so hard to get universal agreement on what to do.

China’s competitive advantage has less to do with the foreign exchange value of its currency than the pitiful provision of social welfare by the nation’s government compared to the abundance of social welfare provided by the American government. This is the major source of the global economy’s imbalance. This is why the US trade deficit with China has totaled $1.8tn since December 2001, when China joined the World Trade Organization. That number contributed greatly to China’s record hoard of international reserves, which totaled $2.6tn during August. Think of that sum as the money that the Chinese did not spend on social welfare at home, but did so abroad, especially in the United States.

Problems must be recognized to be solved. There is, in fact, growing recognition of the causes of the global imbalance. The Chinese may be starting to move toward providing a better standard of living for their workers, though there is little discussion yet about providing a comprehensive social welfare safety net anytime soon. European social welfare states are moving to downsize their safety nets. In the US, the November 2 congressional elections will determine if Americans have the determination to bring back a modicum of fiscal discipline.

The man behind the Volcker Rule and the bank tax will soon be leaving Washington. That’s right, Obama political adviser David Axelrod is headed back to Chicago. What, you thought I meant Treasury Secretary Timothy Geithner? As for Geithner, he will more than likely be at Treasury for the duration, though in some ways he has a better skillset for the National Economic Council. Here’s a bit from my recent Reuters Breakingviews columnette on Obama’s pal:

Treasury secretaries are typically former CEOs, prominent politicos or longtime presidential pals. A career technocrat, Geithner didn’t tick any of those boxes. Instead, he was part of the crisis-response troika, along with Ben Bernanke and Hank Paulson. Effectively, Geithner was hired to be a fixer.

Nearly two years in, it’s Mission More or Less Accomplished. The St. Louis Fed’s “financial stress index” — incorporating various interest rates, yield spreads and bond indices — is currently 0.48 after hitting a peak of 5.09 in October 2008. Even the pilloried bank bailout gets better with age. (It was certainly better than outright bank nationalization). Geithner deserves considerable credit for it, especially his push for “stress tests” to be included.

But a new set of skills may be required for the next two years. Obama soon will need help from his Treasury secretary advancing a new budget agenda after his ballyhooed deficit commission issues its report in December. The job also will require pushing Beijing to trade more freely while tamping down on protectionist sentiment at home, redoubling efforts on unemployment and finely honing a tax policy.

Geithner might not be the obvious candidate for most of this modified job description. Before he got to the Fed in 2003, his education and career had been more focused on international affairs than domestic issues. And Geithner could still present political liabilities given earlier personal tax missteps and his dicey relations with Congress.

But if not Geithner, who? Wall Street bosses are still radioactive, while recruiting Clinton administration veterans could look desperate. The scarcity of obvious replacements is highlighted by the permanent presence of media mogul and New York Mayor Michael Bloomberg’s name on the Beltway circuit, despite his repeated denials of interest in the job.

Most importantly, Geithner seems still to have the full confidence of his boss. That’s probably more than enough for him to keep his spot on the team.

Me: I think Geithner has it about right on China trade, and he certainly takes the budget deficit seriously. He is even sounding better on “King Dollar, as my friend Larry Kudlow puts it. It’s really no joke that he could have comfortably been a member of John McCain’s cabinet.  On tax policy, he and the rest of Team Obama have it totally wrong.  Raising the U.S. tax burden in the current system is anti-growth and thus terrible for the nation’s long-run solvency.

Via my Breakingviews opinion-torial:

Detecting a political pulse on the proposed U.S. bank tax is hard. Yet bankers still fret a revival. They know Congress, eager to pay for expiring tax cuts, sees them as a pool of ready cash. And even if Wall Street dodges that bullet, the cost of rescuing mortgage giants Fannie Mae and Freddie Mac may still shock the levy back to life.

Britain and Germany have already introduced such taxes to reduce risk taking. And many in Europe would like to go further and implement a financial transactions fee if major economies could agree to take the plunge jointly. But the idea is nowhere on the U.S. public policy radar, especially with the Treasury Department opposed.

Even the Obama administration’s previously announced bank tax is an iffy proposition. The 10-year, $90 billion “crisis responsibility fee” was directed at banks with over $50 billion in assets. Institutions that took more risk and more “hot money” would also pay more. But it wasn’t included in the summer’s financial reform bill for fear of scaring away Republican support. In any case, the original concept was designed as a way to recoup losses on the bank bailout. The latest estimates scaled those back dramatically to less than $50 billion.

The tax received a second life as a way to help pay for various expiring tax cuts for individuals. But Congress didn’t get around to acting on those. Lawmakers might yet move during the upcoming “lame duck” session, making big banks nervous. If Congress wants to pay for various tax cuts, nicking Wall Street and other banks would be one way to do it.

It’s a long shot. But not long enough to keep America’s community bankers from firing off a fresh letter on Friday opposing any bank levy or fee. Although Republicans loathe the idea, the government remains on the hook for $150 billion of aid to Fannie and Freddie. When Washington gets around to figuring out what do with those troubled enterprises – probably after the 2012 election – the bank tax may reemerge as a way of covering losses. Maybe it isn’t so much dead as it is in suspended animation.

Does this sound to you like the Obama administration takes seriously the concerns of American business that its economic policies are hurting the private sector? Treasury Secretary Tim Geithner on CNBC’s Kudlow Report:

I think businesses are doing now what businesses always do, which is they want their taxes lower and they’d like to operate with less regulation, as they always do. Our job, though, is to make sure, again, we’re creating the conditions that make this economy work better for the country as a whole. Now, just remember, when the president stepped into this job, business of America was out of business.

Bruce Bartlett adds this on the speculation about Tim Geithner and Larry Summers:

Keep in mind that one reason for creation of the NEC in the first place was to give Bob Rubin someplace nice to hang his hat while waiting for Lloyd Bentsen to move on after being given Treasury to protect Bill Clinton’s right flank. Keep in mind also that Geithner is widely viewed as being under Larry’s protection. Without that it is quite possible that Tim would be gone already, given the generally poor grades he has gotten from across the political spectrum. Finally, remember that the appointment as NEC director does not require Senate confirmation, which may be an attractive quality in this political environment.

Someone like Roger Altman, former deputy Treasury secretary, might be a good replacement for Larry and, eventually, Tim. Knowing how badly Roger would like to be Treasury secretary, I’d start packing my bags if I were Tim and Roger became my de facto White House boss.

I think Jon Corzine may also have aspirations for being Treasury secretary, but considering how badly his term as governor of New Jersey went I suspect that considerable time will need to pass before he is politically viable again.

Me: I think all this is really premature. I think Geithner’s stock has skyrocketed and will only elevate further if the economy improves the way the WH thinks/hopes it will. Roger Altman, by the way, wants a VAT, like, yesterday.  And a BIG one.

I am writing a column on this, given the rumors about Larry Summers soon departing.  But a few quick thoughts:

1) The only folks who really seem hot for these guys to leave are liberal activist groups and union folks. Basically the Huffington Post crowd who want to break up the banks and spend another trillion dollars on stimulus.

2) I think the WH believes the economy will begin to be a slight breeze at its back in the months ahead, a not unreasonable economic conclusion. Why muddy the narrative with departures?

3) If Summers is sick of the job, he’s sick of the job. Whatever. But I don’t think there is a great desire to push him out by the WH political team or the POTUS.

4)  As for Geithner, his slow start, including tax troubles, made him a permanent subject for resignation rumors. But the success of the stress tests and perhaps now some movement on the China currency issue  have thickened his heat shield considerably.

5) What if the Dems lose both houses of Congress in the fall? The assumption is that there will be a total house cleaning on the other end of Pennsylvania Avenue as well. I am not so sure about that.  Replacements for the econ team would be tough to find given the party’s anti-Wall Street fervor, especially at Treasury. Plus, if Obama thinks his policies are right and progress is being made, then he is is going to stick. Recall that after the 1982 disaster for Republicans, President Reagan didn’t replace Don Regan at Treasury. Now after the Dem 1994 disaster, Lloyd Bentsen did leave, but he was never going to be a long-termer anyway.

Well, Simon Johnson thinks it should be Tom Hoenig, president of the Kansas City Fed:

He’s currently the only senior Fed official who has been outspoken (or even spoken out) against banks that are undoubtedly Too Big To Fail (TBTF).  Hoenig has been a beacon of clarity on this issue over the past year.  Compared with central bank officials – and almost everyone else – Hoenig stands out as a model of straight thinking and a proponent of tough action.  With his disarming but no nonsense approach, he is the perfect person to take on the likes of Lloyd Blankfein (Goldman Sachs) and Vikram Pandit (Citigroup) both in the corridors of power and in the nitty gritty of their rather sordid business models.  Hoenig is a career bank supervisor and nobody’s fool.  Blankfein and Pandit are just two more guys who run banks that have gone bad.  You know how that movie ends.

Hoenig, who sits on the Federal Open Market Committee, is also an inflation hawk – at least by today’s standards.  This makes some would be supporters – including fans of his attitude on TBTF – rather wary of advancing his name (e.g., as chairman of the Fed Board).  This hesitation is understandable although likely mistaken; you don’t keep the federal funds rate essentially zero for long when nominal GDP is growing at more than a 6 percent annual rate.  In any case, the issue is irrelevant for the Treasury job.  The Treasury Secretary’s responsibility in a modern administration is to run financial sector policy, meaning bailouts and how to avoid them.  Peter Orszag has the budget and Ben Bernanke (gulp) holds the monetary tiller.  What we desperately need is someone who can sort out our largest banks.

Tom Hoenig is almost certainly a Republican, although – as head of a regional reserve bank – the full range of his views, outside of banking and money, are not widely known.  Paul Krugman reasonably points out that if he (Krugman) were nominated for the Fed (or Treasury or anything else), this would likely run into trouble in the Senate.  Hoenig is a completely different kettle of fish, appealing to sensible Democrats and Republicans – yes, there are a few – who increasingly worry about massive banks and their electoral implications.  And while financial sector policy is job one, serious efforts to address the budget – led by people of all ilk with a strong grip on economic realities – also lie in our future.  Either that or the republic will perish.  Not a tough choice in the end, but it does need to involve at least a few Republicans.

He’s a Republican.  See point 3 above, and remember that President Obama offered Senator Judd Gregg (R., New Hampshire) the position of Commerce Secretary at the beginning of his administration.

The market will react negatively, because it will sense the era of unlimited bailouts is drawing to a close.  Sure, but that’s the point.

He’ll be captured by Big Finance, just as Geithner was. Spend some time with Tom Hoenig before you jump to this conclusion.

There will be objections to be sure.

• He’s just a regional Fed governor. True, but so was Tim Geithner.
• He’ll be captured by Big Finance, just as Geithner was. Spend some time with Tom Hoenig before you jump to this conclusion.
• The market will react negatively, because it will sense the era of unlimited bailouts is drawing to a close. Sure, but that’s the point.
• He’s a Republican. See point 3 above, and remember that President Obama offered Senator Judd Gregg (R., New Hampshire) the position of Commerce Secretary at the beginning of his administration.

David Goldman lays it all out:

Drastic steps are required to restore credibility and confidence.

1) Ben Bernanke should withdraw from consideration for a second term as Fed Chairman. President Obama should appoint former Fed Chairman Paul Volcker in his place. If Volcker, who is 82 years old, feels unable to accept the nomination for a full term, he should serve as Interim Chairman and head a search committee including bipartisan Congressional representation to find a permanent successor. If Bernanke insists on pursuing a second term, the Senate should vote him out.

2) Treasury Secretary Geithner should resign. Whether or not he engaged in wrongdoing, his capacity to execute his office is damaged beyond repair.

I took issue with Paul Volcker’s proposal to ban bank proprietary trading, but that is a minor issue. Volcker’s distinguished career and unimpeachable integrity make him the man of the hour. I’ll take Volcker’s worst moments over Bernanke’s best.

This is not a partisan issue. The alleged malfeasance occurred under the previous administration, and Volcker became Fed Chairman under the Carter Administration. America can’t afford to heap onto the present economic crisis yet another crisis – of integrity.

The U.S. Congress, particularly the Senate, has been a graveyard for aggressive financial reform. And banks are hoping President Obama’s new bank levy will suffer a similar fate. They shouldn’t count it. A clever design and a determined White House push mean Wall Street may have to pay up.

At first glance, the proposal would seem to have no better chance than a number of other relatively tough measures stuck on Capitol Hill. A transaction tax — often called a Tobin tax — and a supertax on bank bonuses are among ideas that appear to have no future. For each, support in the Senate has been lacking.

But smartly constructed policy can make the politics easier. Legislators see easily the logic in focusing a tax on the liabilities of institutions that make use of hot, wholesale sources of finance. Structurally, that looks a lot like the levies the Federal Deposit Insurance Corporation charges for deposit insurance — and the government’s recent role rescuing banks wasn’t so dissimilar from what FDIC does with deposits.  (Though it still seems likely that it will nick credit availability.)

Also, the tax is supposed to hit investment banks hardest. That means it can be billed as the Goldman Sachs Tax. In Washington as in Hollywood, an obvious villain helps sell a story.

The Obama administration views the tax as a splashy way of touting policies designed to prevent a repeat of the financial crisis. Unable to loudly trumpet an economic recovery as November’s elections loom, a populist battle against Wall Street is seen as the next best boost for Democrat candidates.

Republican objectors will be forced to side with the banks. And there just might be fewer Senators willing to do that than Wall Street needs. While there are a couple of Democrats whose support can’t be counted on, Republicans Chuck Grassley of Iowa and Olympia Snowe of Maine cosponsored a bill last year that would have taxed bonuses at banks that received government help. They and other moderates in the GOP might support the tax if they believed it would help reduce the U.S. deficit.

At the same time, any notion that the bank levy could become a permanent tax would rally Republicans against it. But as things stand, the tax — rather surprisingly — seems to have avoided being seen as dead on arrival.