With the nomination of his successor this morning, Timothy Geithner is presumably eyeing the exits at the Treasury building even more eagerly than he has for the last couple of years, which was already pretty eagerly.
But make no mistake about it: Geithner has been among the most important Treasury secretaries in history. Even if he never holds another public job, he has secured a place among the most consequential shapers of economic policy of the 21st century.
Geithner took office at an extraordinary time, with an extraordinary assignment. In the fourth quarter of 2008, when Geithner was tapped for Treasury, the U.S. economy was contracting at an 8.9 percent annual rate, the steepest decline since the Great Depression; the contraction would continue at a 5.3 percent rate in the first quarter, when President Obama was inaugurated and Geithner took office at 1500 Pennsylvania Avenue. On Jan. 26, 2009, the day Geithner took office, the Standard & Poor’s 500 index closed at 836.59, which was down 47 percent from its 2007 high.
Obama hired him for a very specific task: to stop the bleeding. Geithner was, fundamentally, a crisis fighter, a man who has spent a lifetime wrestling with how to address a financial system in the midst of collapse. It is what he did as a young Treasury attache in Japan in the early 1990s, as a more senior Treasury official dealing with emerging markets crises later that decade, at the International Monetary Fund in the early Bush years, and at the New York Fed in the six years before joining the Obama administration.
For all that background, though, it’s easy to forget now what a disaster his first few months as Treasury secretary were.
After a career as a behind-the-scenes operator, Geithner seemed unprepared to be the front man, uneasy on the grand stage. For all his technical skill, he seemed deaf to how the vague plans would come across. On Feb. 10, 2009, he unveiled the administration’s financial rescue plan—or rather, its rough outlines. It threw out some big numbers, such as expanding a joint Treasury-Fed emergency lending program to up to $1 trillion, but didn’t give much of a sense of how that and other aspects of the plan would work. Disappointed by the lack of detail, markets sold off, down another 5 percent that day.
Things got even rougher for Geithner from there. A month later, it was disclosed that AIG, the giant insurer that Geithner had bailed out as president of the New York Fed, would be paying millions in bonuses to its employees. For the young Obama administration, it was a reminder of the costs of bringing one of the architects of the response to the financial crisis into the administration; AIG had been bailed out under Bush, but with Geithner as Treasury secretary, it was very much Obama’s problem.
Here’s the thing, though. The $1 trillion emergency lending plan in Geithner’s February 2009 financial rescue blueprint never rose to anywhere near that size. Another aspect of the plan, less noted at the time, was to make major banks take a “stress test” -- having regulators scrutinize their ability to withstand even a very deep economic downturn, and to force those that needed more capital to raise it either from private markets or the government. Geithner’s insight was that a big chunk of the problem in the financial system was not merely that banks were sitting on big losses but that there was no confidence in markets over which banks would survive and which would not. The government would, essentially, use the regulatory process to figure out which banks needed more capital and which were fine.
Those stress tests, the results of which were announced in May 2009, were a major step in rebuilding confidence in the U.S. banking system. It turned out that the low point for markets was right around the time of the AIG outcry in March of that year. An economic expansion began in July.
Geithner is, in his bones, a crisis fighter, and his greatest legacy is for conquering the biggest one of them all.
He then pivoted toward passing financial regulatory reform to try to prevent a crisis like that from happening again. There is plenty to criticize about what would become the Dodd-Frank Act. But it carries the unquestionable imprint of Geithner. He insisted that the Federal Reserve have broader powers over companies that endanger the financial system and that there be a new council of regulators to be led by the Treasury secretary. It may as well be called the Dodd-Frank-Geithner Act.
He also took on a major role in trying to guide European authorities toward solutions for the debt crisis that exploded in 2010 and threatened the world economy. Often working the phones, Geithner used his longstanding connections among global finance ministers, central bankers and at the IMF to encourage the Europeans toward more concerted action, on a scale commensurate with their challenge. That’s not to say they always listened, and at times the assertiveness of the Americans may have even been counterproductive. But on balance European officials have described Geithner’s involvement as a helpful in clarifying issues and forcing action.
Then there’s fiscal policy. Watching out for the federal purse is, of course, the major job of a Treasury secretary, though ironically it is an arena in which he has little direct power. Congress and the administration set tax and spending policies, and within the administration it is the Office of Management and Budget, which has direct primacy over the president’s fiscal policy.
But Geithner has been one of the president’s closest advisers on all things economic, including fiscal policy, so he shares responsibility for ballooning debt. The IMF estimates net U.S. government debt at 65.9 percent of GDP in 2009, when Obama and Geithner took office, and a projected 86.7 percent in 2013.
In the short run, the rise in debt levels is mainly attributable to the weak economy, but it is also true that Obama and Geithner have not been able to find a path toward longer-term balance. Legislative dealmaking has never been Geithner’s specialty (though he did play a lead negotiating role in the recent deal to avert the fiscal cliff), and there has been an absence of it on the fiscal front. He was also the first Treasury secretary to preside over a downgrade of the U.S. credit rating, by Standard & Poor’s in August 2011, after last-ditch negotiations to raise the debt ceiling in which House Republicans threatened to allow a default.
It has been said that the Treasury secretary is, at the end of the day, a bond salesman, representing to global investors the credibility of U.S. Treasury bonds. By that measure, Geithner is a success; 10-year bonds yielded 1.89 percent on Thursday, near historic lows.
It has been a remarkable four years, and the U.S. economy and financial system will never be the same. Geithner's vacation in Cape Cod was interrupted by the first ripple of what would become the global financial crisis on Aug. 9, 2007, and he has barely taken a day off since. He has earned another vacation.