Enter Geithner, pursued by a bear

THE FINANCIAL PAGE

By James Surowiecki

updated 6:13 p.m. ET Dec. 1, 2008

When news broke that Timothy Geithner was Barack Obama’s pick for secretary of the treasury, the stock market jumped more than 6 percent in the space of an hour. Obviously, this was a good thing, but there was also something weird about the spectacle of the Street’s once fearless free marketeers exulting over a government appointment, as if they were nomenklatura members cheering a new Politburo chief.

It showed just how central a few government officials have become to the well-being not just of the markets but of the economy as a whole. For better or worse, we now live in a world in which the treasury secretary controls hundreds of billions of dollars in spending and shapes the fate of some of the nation’s biggest companies. That’s quite a job to ask someone to do.

If anyone is up to the task, Geithner seems to be. A decade ago, as a treasury undersecretary, he helped orchestrate the successful response to the Asian financial meltdown. As head of the New York Federal Reserve, he was prescient about systemic risks to the financial system. And, during the current crisis, he’s the third member of the fire brigade led by the outgoing treasury secretary, Henry Paulson, and the chairman of the Federal Reserve, Ben Bernanke.

Geithner will be well-partnered: Christina Romer, who will be running the Council of Economic Advisers, is an expert on the Great Depression, and Larry Summers, who is both a superlative academic economist and a former treasury secretary, will be running the National Economic Council. It’s not surprising that Obama’s economic team is already drawing comparisons to the New York Yankees. (Let’s hope they’re the 1927 Yankees, rather than the more recent edition.)

Still, no treasury secretary has ever entered office with as much responsibility as Geithner will have. That’s partly because the crisis is so huge, but it’s also the result of an evolution in the role that we expect government to play in the economy.

For much of American history, treasury secretaries were nondescript, and their powers circumscribed. When the Panic of 1907 nearly froze financial markets, it was to J.P. Morgan, not Treasury Secretary George Cortelyou, that investors turned for a solution.

Our contemporary preference for government rescues has its roots in the Great Depression, when Treasury Secretary Andrew Mellon became notorious for his contention that, even as the economy was collapsing, the market should simply be allowed to do its work. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he coldly advised. The perceived failure of this approach discredited non-intervention, and ended up enhancing the influence of Mellon’s successors.

In recent years, as the frequency and the severity of financial crises have increased, so, too, has the prominence of the treasury secretary’s role. During the Clinton administration, Robert Rubin engineered a backdoor bailout of the Mexican economy before helping to manage the global financial crisis of the late '90s. Paulson seems to unveil a new government program nearly every day, and his actions over the past year have meant life or death for financial institutions.

The problem is that for this kind of power to be effective in a crisis, the markets need to be confident that the government has a coherent strategy in place. And while Paulson has certainly acted aggressively in the past two months, at times it has seemed as if the treasury were making things up as it went along.

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