Banking on a banker
Does the Treasury secretary’s past career matter?
SO THE new Treasury Secretary, it seems, will be Timothy Geithner, currently president of the Federal Reserve Bank of New York. As the top economic official in Barack Obama’s administration at a time of economic crisis, he must be up to the task at hand, and his expected appointment has been widely welcomed. But does his previous career, mostly as a government bureaucrat in the central bank, really equip him for the job?
The first Treasury Secretary, Alexander Hamilton, was a politician, economist, lawyer, businessman and banker. His successors have typically been at least one of those—though they have disproportionately come from Wall Street.
But the tenure of the current Treasury Secretary, Hank Paulson, proves, if nothing else, that having a Wall Streeter in the Treasury is no guarantee of success. Mr Paulson may have been more familiar with the complexities of the financial system than his two predecessors, John Snow and Paul O’Neill, but that did not stop him making some catastrophically bad decisions—notably failing to rescue Lehman Brothers and, last week, reviving uncertainties about Citigroup by saying that the Treasury would not buy the toxic assets from banks it had earlier pledged to purchase.
In an effort to demonstrate that the “real” economy, not finance, drove policy, President George Bush’s first two Treasury secretaries were selected for their big business background. Mr O’Neill headed Alcoa, an aluminium giant, while Mr Snow led CSX, a rail-transport company.
Apart from being businessmen, however, they had little in common. Mr O’Neill was outspoken and often publicly at odds with his president. Mr Snow concentrated on being boring, which was probably why the president wanted him in the job.
Before them was Larry Summers, an economist, whom Mr Obama reportedly passed over this time, opting instead to make him head of the National Economic Council (NEC). One of the main tasks of the Treasury Secretary is to reassure the markets and the public. Economists, by contrast, are at their best—and there are few better than Mr Summers—when they are thinking the unthinkable, challenging conventional wisdom and doing other things that are anything but reassuring.
Public statements by Mr Summers occasionally flustered the markets when he was Treasury Secretary, and that was during unusually upbeat economic times. Mr Obama was surely wise to leave provocative economic thoughts to the NEC.
The most reassuring Treasury Secretary in recent memory was Robert Rubin, who preceded Mr Summers. He oozed credibility, not least during the Asian financial crisis and collapse of a hedge fund, Long Term Capital Management, which helped bring about a rapid recovery of confidence in the markets. The precise source of Mr Rubin’s credibility—which he retains to this day, despite having spent the past few years at the top of Citigroup—remains unclear, though it was thought to stem from his understanding of Wall Street, having formerly headed Goldman Sachs.
Mr Paulson, another former boss of Goldman Sachs, was supposed to bring a similar ability to reassure. Perhaps this hope reflected too simplistic an understanding of what Messrs Rubin and Paulson did at Goldman. Mr Rubin rose to the top through risk arbitrage. As a trader, he knew that the important thing was to understand the big picture, and get big calls right. He knew to keep his mouth shut: talking about your ideas might let someone else steal your profits. This may be the perfect skill set for a Treasury Secretary, which is why the trader currently running Goldman, Lloyd Blankfein, might one day make a good one.
Mr Paulson, by contrast, rose to the top of the firm through investment banking, which is largely about dealmaking. The caricature of a dealmaker is someone who only wants to get the deal done, and cares not one fig for the consequences. Indeed, a lot of investment-banking deals involve undoing mergers put together by previous dealmakers.
The meltdown in the financial markets was arguably due in large part to dealmaking while ignoring the bigger picture. And Mr Paulson has stumbled from one crisis to the next, often fixing one in a way inconsistent with his approach to the next, with little indication of having a bigger strategy.
Mr Paulson’s poor showing is perhaps also evidence of the risks of putting a very rich man in charge of the Treasury. Like Andrew Mellon on the eve of the Great Depression, Mr Paulson has struggled to communicate with, or understand the needs of, the common man. Perhaps Warren Buffett, once tipped for the job, would have done better, though Mr Obama was probably wise to pass him over.
So instead it is the turn of a central banker. Mr Geithner is well liked and respected. His ability to keep his mouth shut and avoid controversy certainly gave him an edge over Mr Summers. Yet it is not clear whether the skills of a central banker are those needed by a Treasury Secretary.
There is a worrying precedent. In 1979, George Miller, then the chairman of the Federal Reserve, was appointed Treasury Secretary by Jimmy Carter (after he had informed the president of some unsavoury personal details about the previous Treasury Secretary). Mr Miller had done a lousy job fighting inflation at the Fed, where he was replaced by Paul Volcker.
He also became embroiled in controversy surrounding the government bail-out of Chrysler. Mr Geithner is likely to preside over a similar rescue, albeit also of General Motors and Ford. Let’s hope that will be the only way in which history repeats itself—and that Mr Geither will prove that a central banker can be an effective Treasury Secretary.