Timothy Geithner is calling for the US government to perform an economic juggling act – taking bold and costly action to rescue the economy in the near term while seamlessly preparing to grab hold of a longer-term problem of high budget deficits.
As if to punctuate the high stakes involved in his job, Geithner’s words on Wednesday came as bank stocks rebounded after a sharp plunge on Tuesday.
Stabilizing the US financial system remains an unfinished task, and one on which a solid economic recovery depends.
Promise of a plan
The nominee did not divulge details, but said that he and other policymakers are working on a comprehensive financial recovery plan that Mr. Obama will present to the public within a few weeks.
“The most prudent course is the most forceful course,” Geithner said to members of the Senate Finance Committee.
He said the history of financial crises is one of governments responding too slowly and with too little force.
He also said that short-term stimulus and stabilization were not the only key ingredients for economic recovery. Also vital, he said, are longer term policies to promote new industries and budget plans that will steer the federal government away from big deficits toward fiscal sustainability.
“We as a nation will return to living within our means,” he said, citing the need for an exit strategy from the extraordinary commitments of federal dollars to rescue the financial system during the current recession.
All these demands on the new administration won’t be easy to meet, as the stock market’s inauguration-day tumble suggests.
Despite large infusions of federal money, which Geithner helped to promote last year as head of the Federal Reserve Bank of New York, the nation’s banks continue to be burdened by bad mortgage-related assets and the prospect of more credit losses this year in areas such as business loans and consumer credit cards.
Stimulus vs. budget discipline
Richard Berner, an economist at Morgan Stanley in New York, agrees with Geithner’s view that the task of reviving the economy in the short term while also looking out for the government’s long-term budget health is a tricky, but unavoidable, balancing act.
“Fiscal stimulus and other measures likely will require the Treasury to issue $4 trillion or more in additional federal debt,” Mr. Berner writes in a new research report. “For now investors are buying.”
Much of US debt in recent years has been financed by foreigners, and as US debts rise as a percentage of GDP, the creditworthiness of the nation could come under review – affecting the borrowing costs faced by the Treasury and by Americans in general.
Income tax questions
In the hearing, Geithner also responded to questions regarding a lapse in his personal income-tax returns a few years ago.
Despite some tough questions posed during the hearing, it appears likely that his nomination will be confirmed, possibly as early as Thursday.
Seeking to hasten that vote, Former Federal Reserve Chairman Paul Volcker spoke in support of Geithner at the opening of the session.
“The financial system is broken,” Mr. Volcker said, and the crisis “will not wait.”
In fact, even as Obama and his team are readying their proposals, Congress is also working on its own ideas for reforming the financial rescue program passed last fall.
The Troubled Asset Relief Program, or TARP, has committed about half of its $700 billion in funding, and policymakers are weighing how to make best use of the remaining $350 billion.
Geithner pledged that the administration’s proposals will address concerns that the money given to banks has not done enough to promote new lending to businesses and that the program lacks transparency for the public.
He acknowledged the need to protect taxpayers but also cited a risk in the other direction: that failing to spend money to assist banks could make the financial crisis worse.
The crisis response involves choosing among various less-than-perfect options. But Geithner said the Obama team is weighing those choices carefully, with the knowledge that restoring the nation’s economic confidence is at stake.
Key focus: troubled assets
Senators grilled the nominee on whether there’s a practical way to remove bad loans – the so-called troubled assets – from bank balance sheets. That was the initial goal of the TARP, but the Bush administration changed course when faced with the difficulties of deciding how much to pay for the assets. Instead, the TARP money went out mainly in the form of capital infusions.
Now, policymakers are considering new approaches to that still-lingering issue of troubled assets.
Charles Schumer (D) of New York said the idea of setting up a “bad bank” run by the government to buy up these loans sounds interesting until you start adding up the costs. He said the total could run as high as $3 trillion or more.
Geithner said the Obama team is aware of the difficulties.
In the testimony, he also walked a fine line in defending his own actions at the Federal Reserve. He conceded that he and others should have done better at supervising banks before the crisis emerged, but he also cast himself as one who urged earlier and stronger steps to deal with the crisis a year ago – well before last fall’s near-meltdown of the system.