Inside Obama's economic crusade
On the other side of the White House, in the cavernous Treasury Department, the kinetic and boyish-looking Geithner shifts in his sedate wing chair like a man who can't sit still - and he hasn't since he took office: Ethics rules were issued the first day, pay caps on executives seeking government help the 12th day, massive changes to the financial rescue effort known as TARP the 15th day - the last item the product of eight weeks of furious work.
"There is a basic lesson on financial crises that governments tend to wait too long, underestimate the risks, want to do too little," Geithner told Fortune. "And it ultimately gets away from them, and they end up spending more money, causing much more damage to the economy." The Treasury chief seems chastened by his experience of the past 18 months, when as head of the New York Federal Reserve he was a central figure in the escalating bailouts of the banking system. Geithner now believes the federal government should have acted in early 2007. "What happened was that the Fed had broader authority than the government did," says Geithner. "But this was not going to get solved by liquidity. Financial crises require governments. The tragic mistake was to not get authority earlier, not to ask."
Are there unforeseen consequences to this rush to expand the federal government's presence in a free- market economy? "I know of no evidence that more speed is the answer," says Stanford economist John B. Taylor, author of a forthcoming book critical of past government interventions. "Just last year the government acted as speedily as possible with a big stimulus package sending $115 billion worth of checks to people. It did no good. So the idea that 'all we need is speed' should be questioned based even on very recent experience."
Vincent Reinhart, former director of monetary affairs at the Fed and now a fellow at the American Enterprise Institute, warns against the lasting effects of hasty actions. "We have limited resources," he says. "Everything we spend has to be financed and the interest paid. A dollar spent inefficiently is a dollar too much. Changes to entitlements tend to stick. A bridge can be built in the wrong place. These are long-term decisions that affect the budget baseline for years to come."
Geithner was so eager to get his bank and home-owner rescue plan out the door that he unveiled it without the kind of operational detail that would soothe investors: The stock market reacted by plunging. "Geithner leaves questions, and markets make him pay," shouted a Bloomberg headline that echoed others. Likewise with the stimulus package. While top Obama officials like Summers and Furman spent hours meeting with labor leaders, executives, and economists to design the broad outlines of a stimulus package, they punted the details to Congress led by liberal Democrats.
Publicly Obama officials insisted that the new President wanted everyone's input rather than handing out a dictate from on high. Privately, however, they acknowledge that they weren't equipped during the transition to write such a large and complex piece of legislation. As a result, disgruntled Republicans labeled the Economic Recovery Act in the House "Nancy Pelosi's bill" and it failed to become the bipartisan expression-of-unity bill that Obama once promised. The bill contributed to the loss of Obama's third Cabinet nominee when his choice for Commerce Secretary, GOP Senator Judd Gregg of New Hampshire, withdrew his nomination over "irresolvable conflicts" with the President's agenda.
