Tim Geithner: a legacy of financial failure containment
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Version 0 of 1. As Tim Geithner departs from the US Treasury, it is instructive to reflect on the legacy of a long career which has been unusual for the US, resembling more that of the most successful and powerful permanent civil servants in other G7 countries. Geithner (whose father was a Ford Foundation executive in Asia) was only in his 20s when he joined the Treasury in 1988 and dispatched to Tokyo as the assistant Treasury attaché in the US embassy. He rose rapidly through the international division of the Treasury under Robert Rubin and Larry Summers, becoming under-secretary of international affairs in 1998. With the change in administrations he moved his office a few blocks from 1500 Pennsylvania Avenue to the IMF headquarters, where he served as director of the policy development and review department. In 2003 he was appointed president of the New York Federal Reserve – the pivotal operational position in what has been called "the Treasury-Fed-Wall Street nexus". This passage to the pinnacle of power in these key institutions of the American state only compares with Paul Volcker's illustrious career, moving back and forth as he did between the Fed and the Treasury between the 1950s and the 1980s. Indeed, it might be said that Geithner's key international role at the Treasury in the 1990s was built on the foundation established when Volcker was there in the 1960s, bringing together senior officials from the leading capitalist states to discuss the implications of their governments' policies for international financial markets in suitably "intimate settings", as Volcker described them. Volcker continuted: <blockquote>"These people were not politicians; they mainly had long careers in government. They all had an unusual sense of commitment and common purpose, and they built up a reserve of mutual trust that paid off later in an ability to reach quick decisions."</blockquote> But whereas Volcker's career was primarily defined by the need to manage the crises produced by the inflationary pressures of the Keynesian era – in which the concern to defend the dollar as the key currency of global capitalism stood paramount – Geithner's career was defined by the crises produced by the volatility of global finance in the neoliberal era. For all the handwringing that has attended US trade imbalances and fiscal deficits, the dollar has remained very stable in recent decades amid vast foreign capital flows into Wall Street and Treasury bonds. It has rather been the constant danger that a financial spark anywhere could cause the great conflagration that finally occurred in 2007-8 that kept Geithner and his colleagues up at night. Perhaps the most important report on what the Treasury was up to in the 1990s – prepared in the teeth of some of most dangerous financial crises of the mid-1990s, and published as American Finance for the 21st Century in late 1998 in the wake of the Asian crisis – made a sharp distinction between the old practice of "failure prevention" and the new one of "failure containment". To persist in trying to make "the financial system safer by tying the hands of institutions will inevitably put a damper on innovation, at considerable cost to the economy as a whole and potentially to America's world leadership in financial services." Supervision and regulation needed to be of a kind that supported the financial sector's expansion – and insofar as its "mercurial growth" inevitably gave rise to financial crises, the main goal of financial policy should primarily be "failure containment". Superintending global finance to this end was always a multilateral exercise, but one in which the Treasury was very much <em>primus inter pares</em>. As the Asian crises began to unfold in 1997, Geithner (then assistant secretary for international affairs and the key Treasury figure at the meeting where Japan's loans to Thailand were arranged) made a legendary quip to his Japanese counterpart: "How does it feel to be a superpower?" But Geithner also played a major role in ensuring that a proposal advanced by the Japanese finance ministry for an Asian Monetary Fund was defeated. As Business Week revealed (in a piece deliciously titled "The Swat team from Washington: How a trio from Treasury is helping to contain the damage), Geithner orchestrated the opposition to this by other Asian states (including China), thereby ensuring that the Treasury was able to deny "any charge that the imperial Americans were blocking an Asian solution". As Geithner moved from the Treasury's international desk to take charge of the New York Fed, he was well aware of the tightrope the Wall Street banks were themselves walking. Indeed, in September 2005, he summoned the bankers doing the most derivative business to attend a meeting at the New York Fed offices for the first time since the 1998 Long-Term Capttital Management (LTCM) crisis, and was able to get them all to agree to overhaul their back-office procedures for confirming trades on credit derivatives. Yet the operative watchwords were still much more "failure containment" than "failure prevention". It was from his position at the New York Fed that Geithner tried to douse the 2007-8 financial conflagration, together with Henry Paulson at the Treasury and Ben Bernanke at the Fed in Washington – who, while older, were both neophytes compared to him in the halls of power. Indeed, the New York Fed effectively acted the world's central bank as the financial crisis unfolded from August 2007 onwards. Not only were the major US banks lining up for loans at its discount window but so were Germany's Commerzbank and Deutsche Bank, Calyon of France, and even the Bank of China Ltd. (The Fed's loans to the New York branches of foreign banks were only revealed under court order in 2011, having been concealed lest they stir up domestic populist resentments as well as further market turmoil.) When President Obama called on Geithner to become his first treasury secretary, this was enthusiastically greeted on Wall Street, and beyond. As a senior economist at the Bank of Tokyo-Mitsubishi in New York put it at the time, he was seen as "a crisis manager par excellence who will hit the ground running". In fact, Geithner's financial stability plan largely followed what had gone before. The main goal, as he told bankers from 27 countries at a 2011 American Bankers Association meeting, remained to find "better ways of managing the inevitable failures that will happen in competitive markets", which above all meant recognising that "the challenge of reducing the risk of contagion from a financial crisis requires much more global co-ordination internationally than has ever been the case". Of course, what also made "failure containment" especially challenging was how to handle Congress at home. A favourite phrase inside the Treasury, as Geithner rose through its ranks in the 1990s, was that of Congress "cutting off the water to the fire department when the city is burning down". Yet this Congressional opposition had in every instance been overcome. Indeed, Robert Rubin accurately described Congress's resistance to the Treasury's loan to Mexico to stop the 1995 peso crisis (the largest bailout of a sovereign in history to that point) as "meant to oppose us without actually stopping us". We can be sure, as Geithner takes his leave from the Treasury, that he must have regarded his own skirmishes with Congress in much the same light. However harrowing, they were nothing compared to trying to manage the chaotic volatility of global finance over a quarter of a century. |