Obama’s Troika May Push for Deeper Role in Economy (Update3)
Nov. 24 (Bloomberg) — Barack Obama today unveiled an economic team steeped in fighting crises and likely to push for an unprecedented government role in reviving growth and stabilizing the financial system.
New York Federal Reserve Bank President Timothy Geithner was picked for Treasury secretary, former Treasury chief Lawrence Summers will be White House economic director and Peter Orszag, head of the Congressional Budget Office, will be in charge of assembling President-elect Obama’s budget.
“Obama has picked a very strong troika to pull the sled,” said Peter Wallison, a Treasury general counsel in the 1980s and now a fellow at the American Enterprise Institute in Washington.
They’re going to need all their skills, and coordination, to get ahead of a financial market meltdown that has confounded outgoing President George W. Bush’s policy makers. First up: putting together and passing a stimulus package that may run to $700 billion or more, in an attempt to head off millions of job losses as the credit crunch freezes the economy.
“We do not have a minute to waste” because the economy is “trapped in a vicious cycle,” Obama said at a press conference announcing his team in Chicago today. “We have to make sure that the stimulus is significant enough that it really gives a jolt to the economy.”
Obama’s program will be far larger than the $175 billion package of tax cuts and stepped-up government spending he proposed just a month ago. Some of his advisers, and Democratic Senator Charles Schumer of New York, have suggested a figure of $700 billion. Bush’s February stimulus was just $168 billion.
Obama declined to put a number on the stimulus today, saying it will be up to his economic team to provide a recommendation. “It’s going to be costly,” he said.
The incoming administration may also enlarge the $700 billion financial-rescue fund enacted last month. It may surge to perhaps $1.2 trillion, said Martin Baily, who served as White House chief economist under Clinton and is now at the Brookings Institution in Washington.
Outgoing Treasury Secretary Henry Paulson already plans a new program to aid consumer-finance companies, signaling he may request from Congress the remaining half of the funds.
Summers, in a Bloomberg Television interview last month, urged “extraordinary steps” to ensure the flow of credit and address the cycle of mortgage foreclosures. He will take on a wide-ranging portfolio at the White House, coordinating economic policy across the administration.
Summers, 53, will also be positioned to take the helm of the Federal Reserve in 2010 when Chairman Ben S. Bernanke’s term ends. Geithner may stay on at the New York Fed until Obama takes office Jan. 20.
For Bernanke, today’s designations mean a shift in his ties with Geithner, who until now has been his top lieutenant on Wall Street. Any perception that Obama wants him replaced could also undermine his authority.
Still, any decision on the Fed chairman post is likely a year away, leaving time for Bernanke to build on his increasing outreach to Democratic positions — and for any opposition to Summers to emerge. Summers, now a Harvard University professor, has repeatedly stirred controversy that has affected his career; he was forced out as Harvard president in 2006 after clashes with the faculty.
Obama has shifted gears as the economic crisis mushroomed. Initially inclined to steer clear of influencing policy while Bush was president, Obama indicated Nov. 22 that his team might start working with Congress on a stimulus program now. That would make it more likely it could be signed soon after he takes office Jan. 20.
The stimulus package will act as a down payment on Obama’s longer-term proposals to cut taxes for the middle class, improve the country’s infrastructure and lessen U.S. dependence on foreign oil, according to his radio address Nov. 22.
“We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children and building wind farms and solar panels,” Obama said.
Investors gave the Geithner pick a vote of confidence, driving the Standard & Poor’s 500 Stock Index up 6.3 percent from its lowest level in 11 years on Nov. 21. The index gained another 6.5 percent to 851.81 today in New York.
“Tim is a strong and decisive leader and a consummate problem solver, and has the strong support of the business community,” said General Electric Co. Chief Executive Officer Jeffrey Immelt, who also sits on the New York Fed’s board. “Tim manages complex issues with sharp analysis and common sense, and is a great listener who considers a variety of perspectives in developing policies.”
Obama’s team will need to avoid the type of internal squabbling that characterized the early years of the Bush administration and which could delay speedy action to counter the economic travails facing the country. Both Geithner, 47, and Summers had been in the running for Treasury secretary, people close to the Obama camp said earlier this month.
“It’s certainly not going to be Nirvana, but policy making never is,” said Michael Barr, who worked with Geithner and Summers at the Treasury in the 1990s and is now at the University of Michigan Law School in Ann Arbor. At the same time, “a strong president is best served by a strong series of team members and that’s what Obama is getting.”
Fannie Mae, Freddie Mac
Bush’s team began the crisis seeking to avoid government intervention, then oversaw an intrusion into the financial system unprecedented since the Great Depression. Yet even after seizing mortgage financers Fannie Mae and Freddie Mac, taking over insurer American International Group Inc. and creating the $700 billion financial-rescue fund, the financial turbulence has morphed into a global recession.
Since the Nov. 4 election, reports have shown the jobless rate climbed to 6.5 percent in October, the highest level since 1994, with retail sales and consumer prices plunging the most on record. Fed policy makers now anticipate the economy will contract through the middle of 2009, with private analysts forecasting the worst recession in at least a quarter century.
David Axelrod, who will be a senior adviser to the president, left open the possibility that Obama will refrain from repealing tax cuts for the wealthy right away — as he suggested he would do during the campaign. Instead, he may allow them to lapse at the end of 2010 when they are scheduled to expire under current law.
‘On the Road’
“The main thing right now is to get this economic recovery package on the road, to get money in the pockets of the middle class, to get these projects going, to get America working again,” Axelrod, Obama’s chief strategist during the campaign, said in an interview with “Fox News Sunday” yesterday. “That’s where we’re going to be focused in January.”
Summers has already advocated a massive stimulus package, saying it needs to be “speedy, substantial and sustained” to counter the forces buffeting the economy. He’s also played down concerns about what’s shaping up to be a record federal budget deficit, arguing that demand for Treasury securities currently far outstrips supply.
The stimulus program won’t be the only thing swelling the deficit. Obama has said he wants to do more to help homeowners who are facing foreclosure and the loss of their houses. The big three automakers — General Motors Corp., Ford Motor Co. and Chrysler LLC — are seeking assistance from the government.
Geithner and his onetime mentor Summers were top advisers to former Treasury Secretary Robert Rubin when the Clinton administration tapped a government fund to rescue Mexico from default in 1993-94. Later, they corralled banks into extending financing to South Korea, and worked with the International Monetary Fund to prop up emerging markets during the 1997-98 Asian financial crisis.
“There were two people who could make fun of Larry: Bob Rubin and Tim — one from above, the other from below,” said Jeffrey Shafer, who served with Geithner and Summers at the Treasury from 1993 to 1997 and who is now vice chairman of global banking for Citigroup Inc. in New York.
Geithner has, along with Paulson and Bernanke, been one of the top decision-makers in handling the current crisis. He helped lead the rescue of Bear Stearns Cos. in March, the ultimately unsuccessful attempts to prevent a Lehman Brothers Holdings Inc. collapse in September, and the subsequent takeover of AIG.
A collapse in Citigroup shares this month may leave what was once the nation’s biggest bank next on the list of casualties.
It will be up to Geithner in his role as Treasury secretary to try to make sure that the flood of securities coming from the U.S. government doesn’t spook America’s foreign creditors, including those in China and the Middle East, who may be already worried about what they see as an unprecedented borrowing binge.
That’s a part for which the former Treasury undersecretary for international affairs is well suited. Geithner has studied Japanese and Chinese and has lived in East Africa, India, Thailand, China and Japan.
“He is a substantive and savvy negotiator on the international scene, understands the substance and nuances well, and knows the key players,” said Mohamed El-Erian, co-chief executive officer of Newport Beach, California-based Pacific Investment Management Co, which runs the world’s biggest bond fund.
At the New York Fed, Geithner’s departure will leave a gap at the central bank’s main link with Wall Street. Among potential leading candidates to succeed him is Kevin Warsh, a Fed governor who previously worked at the White House and as an investment banker with Morgan Stanley.