Geithner and Bernanke have little in arsenal to fight new crisis
Monday, August 15, 2011
Geithner, Bernanke have little in arsenal to fight new
crisis
By: Zachary A. Goldfarb and Neil Irwin, Washington
Post
Barely two years after the financial crisis ended, Treasury
Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S.
Bernanke were back at it about a week ago. They were working the
weekend phones with their counterparts in Europe, urging them to
use overwhelming force to contain the continent's spreading debt
crisis, which was unnerving markets on both sides of the
Atlantic.
Geithner and Bernanke could speak with authority. As two of the
architects of the United States' own financial rescue starting in
2008, they had eschewed half-measures, instead marshaling hundreds
of billions of dollars to bail out the banks and successfully head
off a new Great Depression.
But as the pair again donned the cloak of crisis fighters, their
efforts underscored what's changed in the last three years. The
men, battle-hardened and more experienced, now have little more
than the power of persuasion. No longer can they muster the same
range of policy tools and supporters they had in 2008 should the
European crisis become an even greater menace to the U.S.
economy.
As Europe's financial worries spread to new countries and
financial firms last week, U.S. and other global markets
experienced one of the most tumultuous weeks of trading in their
histories. Markets open again Monday with persisting concern about
Europe, anxiety about the prospect of a double-dip recession and
continuing fallout from the historic downgrade of the U.S. credit
rating by Standard and Poor's earlier this month.
When the financial crisis hit in 2008, Bernanke was a relatively
new Fed chairman, and Geithner was his chief emissary on Wall
Street as president of the Federal Reserve Bank of New York. Along
with then-Treasury Secretary Henry M. Paulson Jr., whom President
George W. Bush tapped to lead the rescue, they organized the
massive and unpopular bailout that helped stem a rapid financial
decline.
Today, Geithner's options are constrained by gridlock in
Congress. Any fresh proposals to invigorate the economy would face
Republican skepticism. And instead of devoting his full attention
to the country's flagging economic recovery and mounting threats
from Europe, Geithner spent much of the last few months planning
for the possibility Congress would not raise the federal debt
limit, confronting the government with default. He also was focused
on negotiations among Democrats and Republicans over a deal to tame
the debt.
Geithner, 49, has wanted time off after a nonstop schedule,
starting in 2007, that involved rescuing the banking and automobile
industries, the design and passage of legislation to overhaul
financial regulation, and several tax and budget fights. But he
recently agreed to stay at the Treasury Department after a plea
from President Obama. Geithner's family is moving back to New York,
and he will commute to Washington.
Bernanke, 57, meanwhile, has been pushing the Fed to take a
series of steps over the past three years to spur economic growth.
But he has exhausted the Fed's usual tools - for instance, lowering
interest rates, which are now near zero - and is facing new
opposition from members of the Fed's policymaking committee who are
worried about the risk of inflation or new financial bubbles.
Although Bernanke tries to remain isolated from politics, he too
has had to face mounting pressures as the central bank's
performance and independence have been called into question by
segments of the public and some members of Congress as few times
before. At the strong urging of Geithner, Obama reappointed
Bernanke for another four-year term in 2009.
Lawrence Summers, who resigned late last this year as the
director of Obama's National Economic Council, said the
government's "tool chest is emptier than it was a few years ago."
But he added that "government can still very much be a potent
force."
Although both Geithner and Bernanke remain in their posts, the
ranks of their advisers have slimmed as the economic recovery has
slowed and the European crisis has intensified.
Geithner has lost key lieutenants, including Lee Sachs, a banker
who helped craft the financial rescue, and is about to lose
another, Jake Siewert, a former White House press secretary who has
helped frame the Treasury's efforts for the public.
Bernanke also has lost several of his top advisers, including
vice chairman Don Kohn, a Fed veteran, and governor Kevin Warsh,
who served as another liaison to Wall Street for a chairman more
familiar with the academia.
"The Federal Reserve has learned a lot going through these
things over the last few years," said Kohn, now a scholar at the
Brookings Institution. "Everyone learned what to look for, where
the weak points in the financial system might be, how to gauge if
there was a liquidity issue. But each episode is different, so they
can't just rely on experience."
Trying to anticipate trouble
As markets gyrated last week, Geithner and Bernanke led an
emergency conference call of U.S. regulators to discuss potential
risks to the U.S. financial system. Officials were especially
focused on any evidence of threats to the largest U.S. banks and
money-market funds as well as to esoteric but crucial lending
markets.
Some officials have been concerned that they would have less
latitude than in 2008 to bail out troubled companies because of
constraints imposed by Congress, people familiar with the matter
said. Others have worried that the turmoil had come before
regulators had finished beefing up financial oversight of the
markets, as mandated by the financial regulation law enacted last
year.
"Until we complete the task and the rules are actually
implemented, and we have the funding to cover the expanded mission,
the American public is not yet protected," said Gary Gensler,
chairman of the Commodity Futures Trading Commission.