Treasury Secretary Tim Geithner appeared this morning at the Council on Foreign Relations. The main meeting room, named after private equity kingpin and entitlement scourge Pete Peterson, was jam-packed with members, so we media hacks had to watch the proceedings on a video screen set up in the David Rockefeller Room.
Geithner’s remarks (as prepared, here; as delivered, here) mostly achieved the anodyne level customary to the genre. He’s glib in a way, but doesn’t give the impression of having a powerful or capacious mind. Though he’s 47, he still gives the impression of being a kid playing at being a grownup—or so it seemed on the closed-circuit TV.
A couple of highlights stand out amidst the boilerplate.
Pete the austere
There was much joshing about Pete Peterson and his eponymous room. Geithner: “Nice to see Pete Peterson. I hope he’s being sufficiently generous to the Council. You know, this room looks a little crowded, Pete. I think you might want to build up, maybe.” Later, Roger Altman, the former Clinton Treasury official and now head of his own private equity firm, continued teasing Peterson about the Council’s need for his money—which Geithner seconded, by recalling his own experience as president of the New York Fed when Peterson was its chair: “brutal on…basic things. A real challenge.”
But, things took a more serious turn re: Peterson when Geithner said “Of course, we are all fiscal hawks now because of Pete Peterson. There are no doves left on the fiscal side.” There are two ways to read this remark. One would be to see it as a distracting pledge of fealty to fiscal orthodoxy as Geithner’s government was about to embark on the biggest deficit spending program since the end of World War II: that is, “we’re doing this because we have to, not because we want to, so keep buying our bonds.” The other would be as a confirmation of the argument I made in yesterday’s post: that once this bout of spending is done, Obama et al will impose a serious structural adjustment program on the U.S., cutting social spending to the bone.
There were some intriguing departures from Geithner’s prepared text. Towards the beginning, he improvised this: “President Zedillo [of Mexico] had this great line in his country’s moment of financial peril [during its 1994 crisis], when he said, you know, markets overreact, so policy has to overreact.” He later underscored that point, saying that the lesson of other countries is that you have to “keep at it long enough that you’re really firmly on the other side,” and “[not] to put the brakes on too early…. [W]e’re not going to do that.” Leaving aside whether one can really tell in the heat of the moment that you are “on the other side,” it sounds like Geithner is telling the markets and the public that all this tsurris could go on a lot longer than anyone expects.
The other interesting departure from the script was the omission of a discussion of AIG, which contained the passage: “[A]top its insurance companies is an almost entirely unregulated business unit that took extraordinary risks to generate extraordinary profits.” Perhaps Geithner deemed that too friendly to the day before yesterday’s dark mood of angry populism, beyond which we have now moved into the bright land of the forward-looking and constructive.
Flies in the ointment
Some analysts have wondered whether banks will be reluctant to sell their toxic assets to the outside speculators funded by Geithner’s bailout scheme. If the prices that the markets “discover” are below the value the banks are currently carrying them at on their books, that would lead to fresh writedowns and a desperate need for fresh capital—meaning from the Treasury. And with Treasury capital comes political attention and, gasp, possible compensation limits.
Altman asked Geithner about this, and Geithner wasn’t worried. He seems to think that the major problem is uncertainty, not brokeness. So the banks are actually being forced to hold more capital than they’d like, and once the program is underway, the “uncertainty premium” will disappear. Let’s hope so. Because if it really is a matter of brokeness, we’re talking some major additional capital infusions—from the Treasury, of course. (Try getting that through Congress!) Once the uncertainty premium is gone, then banks will have no problem raising fresh capital from private sources.
Geithner didn’t explain why the banks would need to raise fresh capital if they’re now holding excess capital, except maybe because of the possibility of a “deeper recession.” But if we’re in for one of those, then how much more capital will they need? Geithner didn’t explain that either.
Finally, there were some questions about the dollar, and Geithner’s answers reinforced the impression that he’s in over his head.
A few days ago, Zhou Xiaochuan, governor of the Chinese central bank, declared that it was time for the world to move on from using the dollar as its reserve currency. Zhou’s concerns are obvious: the U.S. financial system is a mess, its international accounts are also a mess, and it’s early in a major federal borrowing binge. (Of course he didn’t put it that harshly in his statement.) Such a country isn’t the obvious candidate to be the issuer of the world’s central currency.
Yet the U.S. derives enormous advantage from that role—most relevant to the present moment, a freedom to borrow with (so far) no practical limit, since countries keep most of their reserves in dollar-denominated assets. Zhao suggested that some synthetic unit, like the IMF’s special drawing rights (SDRs), which are comprised of a basket of the world’s major currencies (the dollar, the euro, the yen, and the pound), replace the dollar in this privileged role. Such a move would reduce, materially and symbolically, U.S. imperial power (though of course you can’t put it that way in polite company), so no U.S. official would embrace it—though it makes good sense for China to put the idea forward.
Asked by an audience member what he thought of Zhou’s idea (at these events, the press doesn’t ask questions—only members of the CFR do), Geithner’s first response was that he hadn’t read the governor’s proposal, though he quickly laid on the praise for Zhou as “a very thoughtful, very careful, distinguished central banker.” Then, Geithner added that the U.S. is “open to [the] suggestion” of expanding the SDR’s role. Currency traders immediately interpreted that as a weak defense of the dollar’s role, and sold the currency.
Geither should have anticipated that. But he also should have read Zhou’s proposal, since it came from a top official in a country that holds about a trillion dollars worth of the paper that Geithner is responsible for. (It’s only 1,513 words, including title and byline—and comprehensible, according to Microsoft Word, to anyone reading at the 12th grade level or better.) Maybe that was a conscious dis rather than a careless confession of indefensible ignorance—but in either case, Geithner really needs to find a new line of work.
Altman, obviously dissatisfied with Geithner’s first attempt at an answer, closed the meeting by asking “one final question…on behalf of the market…. Do you see any change…in the basic role of the dollar as the world’s key reserve currency…?” With the question so bluntly prepared for him, Geithner finally came up with the right answer: “I do not.” The dollar promptly rallied, at least for the moment.
Maybe Geithner would like to see a decline in the dollar. It would make our exports cheaper and imports more expensive, which would help balance the trade accounts. If we just print the money, it would make it a lot easier to service the debts we owe the outside world, currently approaching $6 trillion, or 42% of GDP. (It was 15% of GDP at the end of 1999, almost two-thirds below the present level.) But it’s playing with fire for a country that needs to borrow as massively as this one to signal that it wouldn’t mind a little devaluation. A little devaluation could turn into a big one pretty quickly, and with that would come capital flight and a spike in interest rates. It’s ironic that Geithner talked this way on the same day that a British government bond auction failed—there weren’t enough buyers willing to take up the offering, which was for just £1.75 billion. That’s considerably less than the amount that the U.S. needs to borrow every day to fund its projected deficits over the coming year. He better hope the same doesn’t happen to him.
No worries, though. Altman concluded the proceedings by thanking Geithner, and assuring the audience that “we’re in good hands.” He didn’t disclose who “we” are, though.