What the US Treasury needs: magician and economic genius

James Doran assesses the qualities needed to be Obama’s Treasury secretary at a time of unprecedented crisis, and wonders whether the front-runners measure up New York As situations vacant go, the position of Secretary of the United States Treasury is unique. The job requires a politician of presidential fortitude, a world-class economist and a magician capable of making a $1 trillion national deficit disappear. Short of genetically engineering the unholy product of Nobel laureate Paul Krugman and conjuror David Copperfield, such a singularly qualified individual is almost impossible to find: no small wonder that Barack Obama was in no rush to make this crucial Cabinet appointment.

If every election hinges on ‘the economy, stupid’, as James Carville observed back in 1992, then this election was no exception. The American economy is in its worst shape since the 1970s; not as bad as the Great Depression of the 1930s, as many doom-mongers would have us believe, but bad enough to impose tight restrictions on the Obama administration throughout the coming four-year term.

The markets, eager to banish the bear back to its cave, forgot this in the first week of November, and forged the view that somehow confidence would be restored as soon as the political vacuum was filled. This is why the Dow Jones industrial average soared by more than 300 points on the day before the election in anticipation of an Obama win.

But the morning after, like a drunk regretting his indulgences of the night before, the markets plunged almost 500 points as the realisation dawned all too quickly that simply electing a new president was not enough to cure America’s economic ills.

It was then that the pundits and the markets demanded to know who the next Treasury secretary would be, as if this revelation would provide the economic panacea that the election night had failed to summon. But, of course, America’s troubles will not be reversed by any simple political appointment. America’s economic problems boil down to a complete evaporation of consumer confidence at every level, which has led to slumping earnings and corporate failures in every sector. What started as a complex series of crises in the financial sector is now a pandemic. The corporate contagion is now causing a rapid rise in unemployment, which further compounds the downward spiral of consumer confidence and spending, which leads to yet lower earnings and more corporate failures, which leads to more unemployment. Do you see a pattern emerging?

To get out of this predicament, American governments have traditionally spent money on things like public works schemes — as Franklin Roosevelt did during the 1930s — and on tax breaks and other stimuli to get the American consumer off his substantial back side and back into the shopping mall. But with a deficit of $438 billion, set already to balloon past $1 trillion in the next year, providing such stimuli to the nation’s wallet and job market is not so simple.

Couple that with the fact that the Democrat-dominated Congress will be baying for more and tighter regulation, plus stiffer taxes on businesses and capital gains, and you see how the new Treasury secretary will have his hands tied.

As we go to press, the position of US Treasury secretary-in-waiting is still vacant. The President-elect is encircled by more than a dozen economic advisers to choose from, including Warren Buffett, two former Treasury secretaries and one former Federal Reserve chairman. So his choices are not exactly limited. The top two contenders are Lawrence Summers, former Treasury secretary under Bill Clinton, and Timothy Geithner, president and chief executive of the New York Federal Reserve. Jon Corzine, a former co-chief executive of Goldman Sachs, now governor of the state of New Jersey, is still in with a fighting chance and some say 81-year-old Paul Volcker, the former Fed chairman, may step in as an interim measure to lead the Treasury transition team. None of these men fill me — or many in the market — with a great deal of confidence, however.

Larry Summers, 53, is a colossal intellect with an equally gargantuan personality. He also comes with a certain amount of baggage, such as his forced resignation from Harvard after making the outrageous claim that men have a better capacity for mathematics and science than women. But this faux pas — egregious though it is — does not have as great an impact on his suitability to be Treasury secretary as the chattering classes have implied. More important is his closeness to the Clintons, Bill in particular. Barack Obama fought valiantly to keep the Clintons and their advisers at arm’s length during his campaign, so as not to appear to be benefiting from any helping hand from his predecessors. He wanted to win on his own account. And so he did. Whether he will choose to stick by this maxim in appointing his Cabinet is another matter.

Some Democrats also worry about Summers’s position as managing director of hedge fund DE Shaw, claiming he is too close to Wall Street to be able to run the Treasury effectively. His policy positions are fairly predictable — he heavily favours government spending and increasing the deficit to drag America out of the doldrums. As he wrote recently in the Financial Times: ‘The more people who are unemployed, the more desirable it is that government takes steps to put them back to work by investing in infrastructure, energy or simply through tax cuts that allow families to avoid cutting back on their spending.’ He is perhaps more sceptical than most Democrats of over-regulation and, again quite predictably, does not think hedge funds should face strict capital requirements.

Geithner, 43, learned at Summers’s knee and shares many of his mentor’s views on the economy. As current head of the most powerful Federal Reserve in the US, though, he is very close to both Wall Street and current Treasury Secretary Henry Paulson. He is also one of the architects of the current $700 billion bail-out bill and had a very close hand in allowing Lehman Brothers to go belly up.

Liberal voices within the Democratic party — such as New York Senator Chuck Schumer — have privately suggested that neither man is fit for the job. The main objection from this camp is that Obama promised a new dawn in Washington and here we have either a man who is helping to run the current rescue package for the Bush administration or Bill Clinton’s former Treasury boss. Not exactly what Obama might call ‘Change you can believe in’.

Vincent Reinhart is an economist at the American Enterprise Institute, a Washington think-tank, and previously a top Fed official under Alan Greenspan. He shares the view that neither of the popular front-runners is the right man for the Treasury. ‘Both these men have great qualities but they are not necessarily what is needed today,’ he says. ‘This is surely the biggest crisis any economist or Treasury secretary has experienced and so you would hope the appointee would have good skills as a crisis manager.’ Equally important is to find someone who, in Reinhart’s words, ‘works and plays well with the other side’. There are, after all, more than two months between now and inauguration day, which means the new Treasury secretary will have to build a cordial working relationship with Paulson and key figures in the Bush White House. Summers does not suffer fools gladly and is prone to temper tantrums, according to insiders, which renders him far from ideal.

Geithner, on the other hand, is friendly and approachable, a consensus-builder and certainly not one to blow his top. The same critics who slam Summers for his volatility, though, claim that Geithner may be a shrinking violet whom Treasury officials might walk all over. In many ways it is a shame they cannot both take the job as they seem to work best together, their styles and abilities complementing one another. This was perhaps best witnessed in 1997 when Summers and Geithner together persuaded former Treasury secretary Robert Rubin to support financial aid to South Korea.

Whoever it is that Barack Obama finally entrusts with the Treasury, one thing is certain: never before has the job resonated with such historic responsibility. Take a look back at the list of previous incumbents and few are remembered for their achievements at the Treasury: Alexander Hamilton is perhaps the one exception.

With the economy of the United States in such a perilous state, and the economic fortunes of the rest of the world hanging on the new administration’s every word, let us hope that whoever is chosen at this crucial time will break with Treasury tradition and make a distinctive mark.