Prospect of Geithner at Treasury buoys markets. Will it last?

An auto bailout, a second stimulus package, and foreclosure help are on hold as Washington awaits the new administration.

Larry Downing/Reuters/File
Timothy Geithner, head of the New York Federal Reserve Bank, is reportedly Obama's top pick for Treasury secretary.

At a time when the US economy is as fragile as it has been in a generation, Washington may have entered a hazardous interregnum, as the Bush administration’s ability to drive policy quickly ebbs while real power for Barack Obama remains months away.

In a move to calm the volatile stock markets, the president-elect is expected to announce his economic team on Monday. Mr. Obama's pick for Treasury secretary – apparently Timothy Geithner, president of the New York Federal Reserve Bank, according to news reports – will play a key role in directing federal efforts to rescue the economy.

US markets surged on the news that Mr. Geithner would be tapped, with the Dow Jones Industrial Average climbing 6.5 percent to close at 8046.42 on Friday.

The move, however reassuring to Wall Street in the short term, does little to change the lack of forward movement in Washington.

It’s now all but certain there won’t be any new government stimulus package until after Inauguration Day, for instance. A bailout for the auto companies? Maybe. And Secretary of the Treasury Henry Paulson says he’s going to sit on the remaining half of the $700 billion financial rescue package, saving it for the incoming Obama administration.

Meanwhile, stocks have plunged since Election Day, notwithstanding Friday's rebound. Unemployment forecasts are up. Wall Street is wringing its hands – and looking to the nation’s capital.

On Friday, for instance, Goldman Sachs lowered its prediction for economic growth in the current quarter from a 3.5 percent contraction of gross domestic product to a 5 percent decline.

“Although persistent downside surprises are a major driver of the current-quarter adjustment, the main reason for the downgrade to our forecast is the policy impasse that has developed in Washington and the tightening in financial conditions it has provoked,” wrote Goldman economists in their Friday "GS Skinny."

As evidence of the capital’s curious state, which combines frenetic movement with lack of forward progress, look at what happened this week with the auto-industry bailout. Or what didn’t happen, rather, as the effort collapsed amidst Democratic infighting.

One proposal, backed by auto state Democrats, some congressional Republicans, and the Bush administration, called for auto firms to get cash via eased restrictions on an already-passed $25 billion program meant to fund fuel-efficient cars.

But the Democratic leadership wants to save that money for green purposes. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid pushed instead for a Big Three bailout from other funds – perhaps the Treasury’s $700 billion Troubled Asset Relief Program (TARP).

Now Speaker Pelosi and Senator Reid have told the Big Three to come back to Congress in early December with more specifics about how they might spend taxpayer money. But Detroit burned through $18 billion in cash last quarter, and GM and Chrysler have warned that they could collapse within weeks.

For its part, the White House sharply criticized the Democrats for letting the issue linger while they go home for Thanksgiving on congressional recess.

“It is appalling that Congress decided to leave town without addressing a problem that they themselves said needed to be addressed,” White House press secretary Dana Perino said on Friday.

At a House hearing on Nov. 18, Secretary Paulson was pummeled by Democrats for resisting efforts to use TARP funds for the auto companies or for a broad mortgage-guarantee program.

But Paulson clearly does not see TARP as everyone’s pot of gold at the end of the rainbow. It is, he said, all about the banks – or the nation’s financial system, more generally.

“I’ve answered this a couple of times. I’ll answer it again. And I think it is very, very important to stay with the purpose of the TARP, because this is all about protecting the financial system, avoiding collapse, and recovery,” said Paulson.

Washington will eventually approve some sort of financial stimulus. The probability is growing that the package will exceed $200 billion, note Goldman Sachs economists.

But the timing and magnitude of that remain unclear – beyond the fact that it will probably wait until after Obama's Jan. 20 inauguration.

As for a stimulus helping the economy, “at the moment, any significant impact seems unlikely until [the second quarter of 2009] at the earliest,” Goldman concludes.

– AP material was used in this story.

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