In his confirmation hearing with the Senate Finance Committee, Treasury Secretary Nominee Tim Geithner said that a "strong dollar is in America's National Interest." As potential Treasury Secretary, we expected Geithner to adopt the stance of his predecessors, which is to pay lip service to the strong dollar policy. Over the past few years, the consequences of the US government’s fiscal and monetary actions is a weak and not strong dollar. For any country that is slowing or in recession, a weaker currency is more helpful than a strong one. Therefore there is no real meat to Geithner's comments especially as the Federal Reserve embarks on their "credit easing" policies. It would also have been a mistake for Geithner to say anything otherwise about the dollar at his hearing because rocking the boat could risk his confirmation.
Tim Geithner: Will He Be Confirmed, Impact on Dollar
Uncertainty about the future of President-elect Barack Obama’s cabinet and staff are mounting. We are now met with controversy over one of the most crucial positions, Treasury Secretary. It was recently reported that the nominee for the position, Timothy Geithner, failed to pay a large portion of his taxes, casting doubt upon the certainty for his seemingly inevitable nomination. These indiscretions involved $34,000 of unpaid social security and Medicare payments. One senator iterates the irony of having a tax-delinquent Treasury Secretary who has responsibilities for the tax policies of the IRS. In response to these developments, Geithner’s confirmation hearing has been postponed until the day after Obama’s inauguration. The strength of Obama’s proposed “Dream Team” of staff and advisors is beginning to show some weakness. The Geithner news follows Bill Richardson’s withdrawal as Commerce Secretary, Ray LaHood’s possible withdrawal as Secretary of Transportation, and scandals with the Attorney General nominee Eric Holder. In the event that Geithner is stripped from his nomination, it is likely that Stuart Levey, the Treasury’s Undersecretary for Terrorism and Financial Intelligence will take the position.
Geithner Possesses “Unique Qualifications”
Despite the very embarrassing and hypocritical nature of Geithner’s problems, there is very little speculation surrounding the possibility of his confirmation. Stuart Levey, the stand-in until someone is officially appointed, lacks one major quality that makes Geithner a perfect choice, the ability to satisfy bipartisan requirements. In fact, Geithner’s status as an independent policy maker is most likely the reason why he will be confirmed as Treasury Secretary. Combined will his experience in dealing with the financial crisis, he is still the undeniable choice. The urgent economic challenges ahead may be enough by itself to overshadow his tax problems. Senator Lindsey Graham mentions that, “These are not the times to think in small political terms.” A decision to remove him as nominee would serve as a destabilizing factor for the financial markets, something that the Obama administration will prevent from doing at all costs.
Since no better candidate exists, if he is not confirmed, uncertainty about who will be the next Treasury Secretary could hurt the US dollar.
Although his experience with domestic tax policy will be directly targeted, many policymakers are still convinced that he has “unique qualifications” that makes certain discrepancies worth overlooking.
Geithner Policy Responses
As Treasury Secretary, the policies of Tim Geithner will probably mirror his efforts during his tenure as President of the New York Federal Reserve. Geithner played an instrumental role in the round of corporate bail-outs that have become the hallmark of government action during the crisis. His involvement in securing the purchase of Bear Stearns by J.P. Morgan essentially founded a course of action to be followed in the mists of the inevitable storm. It is possible that he will continue to provide a sympathetic ear for struggling companies approaching the government with their hands held out. Furthermore, another pressing question that will have to be addressed is where the additional $350B in the TARP program is spent. Obama’s current political stance is to deviate from the use of the funds on the banking sector to direct stimulus for the housing market and consumers. Congressional Democrats are more interested in using the remaining funds on helping homeowners facing foreclosure. Fed Chairman Ben Bernanke believes that for any fiscal stimulus to work, the financial markets need to stabilize first. He is a big supporter of continuing to use the TARP funds on the financial sector. It remains to be seen whether Geithner will side with his former colleague at the Federal Reserve or his new boss, Barack Obama.
Here is more information on Geithner:
Timothy Geithner has been serving as the President and Chief Executive Officer of the Federal Reserve Bank of New York since 2003. Up until the latest financial crisis, he has been relatively unknown especially when compared to Summers and Volcker. However he has been instrumental in helping Hank Paulson resolve the current financial crisis by first brokering the JPMorgan Chase acquisition of Bear Stearns. Since then he has called for overhauling the regulation in the financial industry, been intimately involved in the government’s decision to let Lehman Brothers fail and played a key role in the dispute between Citigroup and Wells Fargo over Wachovia.
Geithner is also a protégé of Lawrence Summers and has been involved in the bailouts of Brazil, Mexico, Indonesia, South Korea and Thailand in the 1990s as the Undersecretary of the Treasury. He has far less enemies than Summers and works well with both Republicans and Democrats. Geithner is credited with warning Wall Street Banks in 2006 and 2007 to figure out what would happen to their portfolios if one their main competitors failed. He was worried about the smoke and mirrors that complex credit derivatives can have on balance sheets. Geithner’s only shortfall is that he has worked too closely with Paulson in resolving the current financial crisis which has both strong supporters and critics.