Stephen Foley: For Obama, and for the recovery, this is not the time for Geithner to quit

Saturday 22 October 2011 21:21

US Outlook: Don't go, Tim. The news that Tim Geithner is considering stepping down as Treasury Secretary should fill us all with dread.

The global financial system is too fragile, the US economy too weak and the political system here too dysfunctional for President Barack Obama to let him go now. And by the way, Mr Geithner is too good to lose.

It has never been especially fashionable to support Mr Geithner. He was appointed to the administration as if by default, to ensure continuity during the financial crisis, having previously been head of the New York Federal Reserve and one of the crucial players containing the panic of 2008. The personal tax disputes that emerged during his confirmation hearings made him an early butt of political jokes, and he has been a lightning rod for anger at the sluggish pace of the economic recovery, too.

But his babyface disguised his deep experience, which stretched back to dealing with the Asian debt crises of the Nineties. He knows the contours and the character of the debt markets like no other public official, and he was important in applying the US pressure for Europe to get ahead of its own crisis with a big bailout fund.

Obviously, the eurozone's future is still deeply uncertain, but so too is the wider financial system. International agreement is needed to marry up all the different proposals for regulating derivatives, hedge funds and the like. And in the US, the Treasury Department is still to flesh out the workings of a new council of regulators to watch for systemic risk. These are more than a few loose ends, and no one is more qualified that Mr Geithner to help tie them.

And then of course there is the US government debt. Mr Geithner apparently believes that a deal to raise the debt ceiling and implement a deficit reduction plan would be a good moment to leave his post. Let's assume that such a deal does come by the president's deadline of 22 July, or at least by early August, when the options run out and the federal government has to stop paying some of its bills. (Let's assume that, because God help us if it doesn't.) The outcome is not likely to be more than a stop-gap measure. If Republicans have their way, we could be doing this all over again before the presidential election next year. Even if the ceiling is raised through the roof, to accommodate all projected future borrowing needs, it doesn't eliminate the need to actually get the $14 trillion debt down and – and this is Mr Geithner's speciality – to persuade the Chinese and others to continue to fund the US during that process.

Mr Geithner is often criticised for being too close to Wall Street. As far as I can tell, this is simply because he has not swallowed some of the fashionable but unproven theories about the causes of the credit crisis, such as that there is an oligarchy of bankers that must be smashed or that banks themselves have to be split in two. His focus is on what we can all agree to be true – that there is a shadow banking system of hedge funds and structured finance vehicles that needs to be brought under a modern regulatory system, and that derivatives have to be traded openly through a clearing house so that institutions can be disentangled from each other in future crises. He is a problem solver in a world of problems.

The irony is that many of the candidates being mooted to succeed Mr Geithner, a career public servant, have investment banking on their CVs. That might make it politically tricky to nominate Clinton-era chief of staff Erskine Bowles or former deputy treasury secretary Roger Altman.

It might be tempting for the administration to use Mr Geithner's exit as an opportunity to signal a change of economic policy, perhaps by appointing a business leader who can talk jobs, jobs, jobs going into an election that will be determined by economic issues. But seductive symbolism must surely be trumped by the practicalities of operating the federal government's finances in fragile markets.

In a divided Senate, with a presidential campaign under way, Republicans will be licking their lips at the prospect of confirmation hearings for a new Treasury supremo. The administration cannot even fill seats on the Federal Reserve board, given the gridlock. There is the risk of a power vacuum at the Treasury for months while the process is used to dissect Mr Obama's economic record and inflict as many wounds as possible on the president.

It is hard not to feel sympathy for Mr Geithner, who is now the last man standing out of the administration's original economic team. He has lost his babyface through the pressures of office, and now his family are moving back to New York, forcing him into a gruelling commute between there and Washington. Let's hope he can be persuaded to tough it out.

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