By Zachary A. Goldfarb and Neil Irwin,
Barely two years after the financial crisis ended, Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke were back at it about a week ago. They were working the weekend phones with their counterparts in Europe, urging them to use overwhelming force to contain the continent’s spreading debt crisis, which was unnerving markets on both sides of the Atlantic.
Geithner and Bernanke could speak with authority. As two of the architects of the United States’ own financial rescue starting in 2008, they had eschewed half-measures, instead marshaling hundreds of billions of dollars to bail out the banks and successfully head off a new Great Depression.
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But as the pair again donned the cloak of crisis fighters, their efforts underscored what’s changed in the last three years. The men, battle-hardened and more experienced, now have little more than the power of persuasion. No longer can they muster the same range of policy tools and supporters they had in 2008 should the European crisis become an even greater menace to the U.S. economy.
As Europe’s financial worries spread to new countries and financial firms last week, U.S. and other global markets experienced one of the most tumultuous weeks of trading in their histories. Markets open again Monday with persisting concern about Europe, anxiety about the prospect of a double-dip recession and continuing fallout from thehistoric downgrade of the U.S. credit ratingby Standard and Poor’s earlier this month.
When the financial crisis hit in 2008, Bernanke was a relatively new Fed chairman, and Geithner was his chief emissary on Wall Street as president of the Federal Reserve Bank of New York. Along with then-Treasury Secretary Henry M. Paulson Jr., whom President George W. Bush tapped to lead the rescue, they organized the massive and unpopular bailout that helped stem a rapid financial decline.
Today, Geithner’s options are constrained by gridlock in Congress. Any fresh proposals to invigorate the economy would face Republican skepticism. And instead of devoting his full attention to the country’s flagging economic recovery and mounting threats from Europe, Geithner spent much of the last few months planning for the possibility Congress would not raise the federal debt limit, confronting the government with default. He also was focused on negotiations among Democrats and Republicans over a deal to tame the debt.
Geithner, 49, has wanted time off after a nonstop schedule, starting in 2007, that involved rescuing the banking and automobile industries, the design and passage of legislation to overhaul financial regulation, and several tax and budget fights. But he recently agreed to stay at the Treasury Department after a plea from President Obama. Geithner’s family is moving back to New York, and he will commute to Washington.
Bernanke, 57, meanwhile, has been pushing the Fed to take a series of steps over the past three years to spur economic growth. But he has exhausted the Fed’s usual tools — for instance, lowering interest rates, which are now near zero — and is facing new opposition from members of the Fed’s policymaking committee who are worried about the risk of inflation or new financial bubbles.
Although Bernanke tries to remain isolated from politics, he too has had to face mounting pressures as the central bank’s performance and independence have been called into question by segments of the public and some members of Congress as few times before. At the strong urging of Geithner, Obama reappointed Bernanke for another four-year term in 2009.
Lawrence Summers, who resigned late last this year as the director of Obama’s National Economic Council, said the government’s “tool chest is emptier than it was a few years ago.” But he added that “government can still very much be a potent force.”
Although both Geithner and Bernanke remain in their posts, the ranks of their advisers have slimmed as the economic recovery has slowed and the European crisis has intensified.
Geithner has lost key lieutenants, including Lee Sachs, a banker who helped craft the financial rescue, and is about to lose another, Jake Siewert, a former White House press secretary who has helped frame the Treasury’s efforts for the public.
Bernanke also has lost several of his top advisers, including vice chairman Don Kohn, a Fed veteran, and governor Kevin Warsh, who served as another liaison to Wall Street for a chairman more familiar with the academia.
“The Federal Reserve has learned a lot going through these things over the last few years,” said Kohn, now a scholar at the Brookings Institution. “Everyone learned what to look for, where the weak points in the financial system might be, how to gauge if there was a liquidity issue. But each episode is different, so they can’t just rely on experience.”
Trying to anticipate trouble
As markets gyrated last week, Geithner and Bernanke led an emergency conference call of U.S. regulators to discuss potential risks to the U.S. financial system. Officials were especially focused on any evidence of threats to the largest U.S. banks and money-market funds as well as to esoteric but crucial lending markets.
Some officials have been concerned that they would have less latitude than in 2008 to bail out troubled companies because of constraints imposed by Congress, people familiar with the matter said. Others have worried that the turmoil had come before regulators had finished beefing up financial oversight of the markets, as mandated by the financial regulation law enacted last year.
“Until we complete the task and the rules are actually implemented, and we have the funding to cover the expanded mission, the American public is not yet protected,” said Gary Gensler, chairman of the Commodity Futures Trading Commission.
For its part, the White House has been advocating measures to bolster the economy, such as extending a 2 percentage point payroll tax cut that is due to expire at the end of the year. But Obama’s options are limited by politics.
“Back in ’08, we were able to do things on the fiscal side which were interventionist and aggressive, and now the country’s pushed back on that. Policymakers’ hands are tied,” said Neel Kashkari, a top executive with the bond giant Pimco who served as a top adviser to both Paulson and Geithner. “One of the big advantages we had was that President Bush wasn’t running for reelection, so we could do things that were deeply unpopular but we knew were the right thing.”
Reluctance in Europe
Since early last year, when Greece’s debt problems started roiling the markets, Geithner has been increasingly concerned about Europe, concluding that it posed a serious risk to the U.S. economic recovery, officials said. He and Lael Brainard, Treasury undersecretary for international affairs, have been pushing European governments to take strong steps to deal with the crisis, officials said.
For Greece, Ireland, Italy and other debt-burdened countries, this would mean tough austerity programs to cut their budget deficits. For the continent’s stalwarts, Germany and France, it would mean bailing out their neighbors.
But many European leaders have been resistant to the entreaties.
“The Americans would like Europeans to be more forceful and come out with a bigger bailout pool than you have now,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics. “There’s a limit to how much the United States can really overtly push the Europeans in the direction they would like without creating a backlash.”
After Obama called German Chancellor Angela Merkel and French President Nicolas Sarkozy in late June to discuss the debt crisis, Geithner dispatched Brainard on an unannounced mission to urge senior European officials in Brussels, Frankfurt and Berlin to take new action.
But the crisis has continued to escalate. Going into the weekend of Aug. 5, it wasn’t clear to top Washington policymakers if German and French leaders would be willing to take stronger steps.
On the phone with their counterparts over that weekend, Geithner and Bernanke again made the case that taking big, risky and expensive action to stem the crisis would ultimately be less costly than managing it piecemeal, officials said. The U.S. argument prevailed when France and Germany, the European Central Bank, and the Group of Seven developed economies all announced major new measures last weekend to stabilize Europe’s financial system.
