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Timothy Geithner is a seasoned crisis manager with a temperament to match that of Barack Obama

timgeithner

STOCKMARKETS soared on Friday November 21st when investors learned that Barack Obama would nominate Timothy Geithner as his Treasury Secretary. That might seem odd. The president of the Federal Reserve Bank of New York was already a favourite for the post. And he brings no magical solution to the financial crisis: he has been battling it for over a year, with no end in sight.

The 494-point (6.5%) jump in the Dow Jones Industrial Average is more a statement about investors’ anxiety over the unsettled state of economic policymaking. News of the Treasury nominee holds out the prospect of a more coherent and forceful approach to the crisis. The current treasury secretary, Hank Paulson, is reworking the $700 billion bail-out plan on the fly, policymakers are struggling over a new approach to foreclosures, the status of the mortgage agencies, Fannie Mae and Freddie Mac, is in limbo, and Congress has just sent the carmakers, teetering close to insolvency, home empty handed. The two months before Mr Obama is sworn in seem like an eternity.

Investors were also relieved that their darkest fears of a Sarah Palin-like shock announcement did not come to pass and that Mr Obama, as in his other important appointments, has chosen ability over connections. Mr Geithner does not know Mr Obama well and has no notable ties to the Democratic Party. But for this cabinet post more than any other, an overtly political appointment would have been corrosive to investor confidence.

Assuming he is nominated Mr Geithner brings two crucial qualities. First, he represents continuity. From the first days of the crisis last year, he has worked hand in glove with Ben Bernanke, the Fed chairman, and Mr Paulson. He can continue to do so while awaiting confirmation. If Citigroup, for example, needs federal help, Mr Geithner will be involved. An unknown when he joined the New York Fed in 2003, he is now a familiar face to the most senior executives on Wall Street and to central bankers and finance ministers overseas.

Second, he represents competence. He has spent more time on financial crises, from Mexico and Thailand to Brazil and Argentina, than probably any other policymaker in office today. Mr Geithner understands better than almost anyone that in crises you throw out the forecast and focus on avoiding low probability events with catastrophic consequences. Such judgments are excruciating: do too little, and you undermine confidence and generate a bigger crisis that needs even bigger policy action. Do too much, and you look panicked and invite blowback from Wall Street, Congress and the press. At times during the crisis Mr Geithner would counsel Mr Bernanke on the importance of the right “ratio of drama to effectiveness”.

Mr Geithner looks a lot younger than his 47 years. He skateboards and snowboards and exudes a sort of hipster-wonkiness, using “way” as a synonym for “very” as in “way consequential” and occasionally underlining his point with the word “fuck”. 

In temperament he seems similar to Mr Obama: he is suspicious of ideology, questions received wisdom

 

In normal times, risk aversion damps economic cycles; in a crisis, it accentuates them, leading to withdrawn credit, evaporating liquidity, margin calls, falling asset prices, and more risk aversion. “The brake becomes the accelerator,” as he puts it. Indeed, although he worked alongside Mr Paulson on the crisis, he has at times advocated a more aggressive approach. For example, news reports say that he was not comfortable with Mr Paulson’s decision to take public money off the table in the ultimately unsuccessful effort to save Lehman Brothers. He has not always got it right: he was the most important architect of the original bail-out of American International Group, an insurer, which in time has proved flawed, requiring significant amendment.

Mr Geithner looks a lot younger than his 47 years (though not as young as he did before the crisis began). He skateboards and snowboards and exudes a sort of hipster-wonkiness, using “way” as a synonym for “very” as in “way consequential” and occasionally underlining his point with the word “fuck”. In temperament he seems similar to Mr Obama: he is suspicious of ideology, questions received wisdom, likes a competition of ideas and is keenly aware of how uncertain the world is.

Mr Geithner learned about crisis management as an aide to Lawrence Summers who rose to Treasury Secretary under Bill Clinton. Mr Summers was the other candidate for the job under Mr Obama, and his appointment would probably also have been greeted enthusiastically. He will reportedly join the administration in a White House advisory role.

Mr Geithner leaves a big hole; the New York Fed president is by tradition the financial system’s go-to crisis manager, and that job has never been more important in the modern era than it is now. A probable candidate to succeed him is a Fed governor, Kevin Warsh. Though young (he is just 38) he has been a central player in the crisis thanks to his extensive contacts in the financial world and closeness to Mr Bernanke, who puts great store in Mr Warsh’s feel for politics and markets (see our recent blog post). That appointment will be made by the board of the New York Fed.

Mr Geithner faces a huge job. He will have critical decisions to make on whether to enlarge or alter the $700 billion Troubled Asset Relief Programme, what sort of firms will qualify for its money, whether and how to bail out the carmakers, what to do with the flailing mortgage agencies, Fannie Mae and Freddie Mac, and how to deal with countless other chapters in the continuing crisis. Unlike Mr Summers he is not an economist and brings no expertise to many of the big economic-policy questions that the Obama administration will confront such as health care, fiscal policy and taxes, even though he will be the primary spokesman on the administration’s economic policies.

He is a quick learner: within a year of joining the New York Fed he could debate the intricacies of monetary policy with academic experts. But he will join an administration rapidly filling up with heavyweights on economic policy, not least of them Mr Summers. Indeed, one of the big questions of the new team that Mr Obama is expected to unveil on Monday is just how Mr Summers, a brilliant but intimidating and sometimes abrasive figure, will fit in.

Mr Obama is assembling a formidable economic team. With the economy perhaps on the precipice of its worst recession since the Depression, he will need it.

Source: Economist

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Stock markets worldwide were gripped by fear as London’s FTSE 100 Index endured its worst week since the Black Monday crash of 1987.

Recession panic and concerns over fragile banks sent investors stampeding for the exits as the Footsie tumbled 8.9% – surpassing even Monday’s record sell-off.

The Footsie has plummeted 21% over the week – wiping more than £250 / $425 billion off the value of top-flight stocks in the process.

“another ugly day”

The index eventually finished below the 4,000 mark at 3932.1 – its lowest close for more than five years.

The 21% fall comes close to the 22% slide seen by London’s leading shares in the aftermath of Black Monday.

Following heavy overnight declines in Asia, screens turned red in the City as the London market approached falls of 10% at one stage. A dire start to US trading offered no respite.

The Dow Jones Industrial Average, which fell more than 7% on Thursday, tumbled as much as 8% during a volatile early session.

City watchers were confounded by the falls ahead of crisis talks among the G7 finance ministers this weekend. David Jones, chief market strategist at IG Index, called it “another ugly day”. “There is a real sense of despair… it is difficult to see what can be done to effect a handbrake turn in sentiment in the short term,” he said.

Across Europe, France’s CAC 40 and Germany’s Dax were also showing losses of 7% and 8% respectively amid the carnage.

In London, banking stocks were among the biggest victims of the turmoil as speculation mounted over the billions they may need to strengthen their finances. Royal Bank of Scotland lost 25% and is down a mammoth 61% this week, and Halifax Bank of Scotland fell 19%, and 37% over the week. Barclays tumbled 14%, making a 42% slump in the past seven days.

Source: Press Association

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