Barack Obama's Wounded Treasury Man
Over a third of the Senate voted against Tim Geithner’s confirmation as Treasury secretary, though he did pass the test by 60 to 34 early Monday evening. That is the closest post-WWII margin for a Treasury secretary. According to Bloomberg, seven of the last 23 Treasury-secretary nominees -- under which actual Senate roll-call votes were taken -- were confirmed by an average vote margin of 95 to one. (The others were confirmed without an official vote count.)
Interestingly, three Democrats voted against: Tom Harkin of Iowa, Robert Byrd of West Virginia, and Russ Feingold of Wisconsin. Independent Bernie Sanders also voted no. Noteworthy on the Republican side, Susan Collins of Maine voted against Geithner, accusing him of "inexcusable negligence" in his non-payment of taxes ($43,000) during his IMF days.
Arlen Specter told reporters early on Monday that he would vote yes, but he changed his mind and voted no. Robert Byrd, by the way, captured the sentiments of John Kyl, Jim Bunning, and many others when he said: "Had [Geithner] not been nominated for Treasury secretary, it’s doubtful that he would have ever paid these taxes."
The surprising number of no votes suggests that both parties will keep Geithner on a short leash. And it was President Obama who ran over to the Treasury Department to swear Geithner in right after the Senate vote. This was unusual, but it’s clear the new president is trying to stop the bleeding of his new Treasury man. Instead of a hoped-for early confirmation to get the next stage of the financial-bailout package moving, Geithner wound up being one of the last cabinet officers confirmed.
But Geithner’s gaffes are not all tax related. He tripped up again last Friday when it was discovered that he attacked China in written responses to Senate Finance Committee questions. This caused quite a stir on Wall Street, as gold soared and the dollar fell. Mr. Geithner will be the biggest bond salesman in American history as he attempts to successfully finance what will be trillions of dollars in new debt obligations. That’s why it’s hard to understand how he would poke a stick in the eyes of his biggest banker, namely China, by labeling them a "currency manipulator."
Currency manipulator is an actionable phrase that could trigger a 27 percent tariff on Chinese imports, according to the highly protectionist resolution sponsored by Republican Lindsey Graham and Democrat Charles Schumer. Henry Paulson took great care to avoid that phrase during his tenure.
The yuan appreciated close to 20 percent in recent years, before falling as China moved to help its sagging economy by stopping its deflationary currency policy. And during Obama’s presidential campaign there were numerous protectionist overtones aimed at halting trade deals with Colombia, Panama, and South Korea, and at rewriting NAFTA. But the China card is a new one.
During the Clinton years, Treasury man Robert Rubin and economic advisor Larry Summers, under whom Geithner served, maintained a strong and stable dollar policy. So with all these government bonds to sell, you would think Mr. Geithner would also want a stable currency to help his funding efforts. But his attack against China undermines the stable-dollar idea, and could force Treasury rates much higher during his term.
Since Geithner is something of a wounded warrior from the tax non-payment controversy, Team Obama’s economic policy is shifting toward a Larry Summers power-center right now. So it is equally important to note Summers’s clear statements on Meet the Press on Sunday, when he called for repeal of the Bush tax cuts on investors and successful high-end economic activists.
However, investor capital is on strike against stocks, real estate, and distressed toxic assets. So it’s puzzling that Summers told NBC’s David Gregory that the Bush tax cuts must be repealed. He left open the date. But he left no uncertainty about the intent.
Of course, this could have a significant deterrent effect on investor decisions. It certainly connects the dots between Obama policy and the rantings of House Speaker Nancy Pelosi, who has similarly called for repeal of the Bush tax cuts. One would think, in today’s deflationary investor environment, that pro-growth economic policies would seek to reward investors, not punish them.
If Summers and Geithner propose a new government "bad bank" to purchase toxic assets, then somebody in the private sector is going to have to buy them at resale. This is why some economists have proposed a multi-year capital-gains tax holiday, including a significant increase in capital-loss write-offs against future tax liabilities. Or at a minimum, the new administration could spur interest in distressed assets by extending the Bush tax cuts, not repealing them.
But even before Mr. Geithner settles into his new job, prosperity-killing threats from investor tax hikes, protectionism, and a weak dollar could throw a wet blanket over economic recovery.