Timothy Geithner: FAIL
Why exactly did Wall Street stage a massive rally in the final hour of trading on Friday?
By all accounts, it had to do with the strategically-timed leak that New York Fed chief Timothy Geithner would be the new president's Treasury Secretary. Or was it simply that the Treasury Secretary would no longer be Hank Paulson?
I'm guessing the latter. So why the celebration when even a cursory examination of Geithner's history indicates the new boss will be the same as the old boss? As the New York Timesreported just days after the election:
Though a nonpartisan Federal Reserve official, Mr. Geithner is tightly linked with the policies of the current Treasury secretary, Henry M. Paulson Jr., and the Bush White House. Among the public, there remains deep skepticism over the wisdom and fairness of the bank bailouts.
Many on Wall Street still question Mr. Geithner's role in allowing the investment bank Lehman Brothers to collapse into bankruptcy, an event some believe exacerbated the financial crisis. Some also say Mr. Geithner relies too much on financial executives for guidance and, except in the Lehman case, is too quick to come to their rescue.
"He is too tied to Wall Street and too tied to this administration," said Joseph Mason, banking professor at Louisiana State University and a critic of the bailout plans. . .
Let's linger over the Lehman episode for a bit.
See, it's not just that Geithner is an interventionist extraordinare like Paulson, Bernanke, and the rest. It's that even by interventionist standards, he's been a first-class f—up. Looked at from an interventionist standpoint, the decision to let Lehman collapse brought on all manner of disastrous unintended consequences. Lehman was a major counterparty to AIG, which nearly went under a day or two after Lehman and has since turned into a $120 billion-and-counting rathole. Lehman was also a major counterparty to money-market funds, which needed their own rescue operation to avoid falling below their $1 net asset value ("breaking the buck") the week of Lehman's collapse.
Will anybody even ask him about this during his confirmation hearings? I'm not holding my breath.
But really, how much of this should be a surprise? Bloomberg reports that during the campaign, Obama ignored advice from his campaign team to publicly distance himself from Paulson. Instead, he consulted with Paulson every day for two weeks. Goldman Sachs employees were his #2 source for campaign cash, after employees of the University of California system.
Obama formally introduces the world to Geithner and the rest of his economic team in Chicago at Noon EST today. Looks as if Geithner's mentor Larry Summers will head up the National Economic Council (a position that won't subject him to potentially messy confirmation hearings).
And Peter Orszag will likely take over the Office of Management and Budget, after a gig at the Congressional Budget Office. Hey Pete, now that you're going to be in the executive branch, are you going to stick to your guns about incorporating Fannie and Freddie into the federal budget? Come on, I dare you to increase the national debt by 50% in one fell swoop. No, I double-dog-dare you!