In the afternoon Friday, NY time, rumours began to circulate that President-Elect Barack Obama had reached agreement with the two people who are supposed to take the central economics positions in his new administration. The rumours were almost confirmed by the Obama camp, so not it is considered as a given that the present President of the New York Fed, Timothy Geithner, will be appointed Secretary of the Treasury and former Treasury Secretary Lawrence Summers will be appointed Head of the National Economic Council.
If these appointments are made – and it appears there is no reason really to doubt the veracity of the rumours – it is a very, very different cup of tea from what we have seen over the past 8 years. For a while I pulled the joke on colleagues of asking them the name of the incumbent Secretary of the Treasury under Bush. Most had a tendency to hesitate a moment. Which was of course nothing but an indication of how far down the list of priorities the economy was to be found during the Bush Administration. This had of course been exactly the opposite of what was the case under Clinton, where Robert Rubin and Larry Summers held star status.
But now the economy is back with a vengeance, and Obama has chosen people respected as highly competent in the area. Geithner has made a quiet but very quick career. His first job was with one very influential lobbying organisation, Kissinger and Associates. He then moved on to the US Treasury Department in 1998 and in 1998 he was appointed Undersecretary, despite being a card-carrying republican. He left to join IMF in 2001 and in 2003 he was appointed president of the New York Fed.
Holding the most influential position in the US Federal Reserve system after Chairman Ben Bernanke, he has been deeply involved in virtually every major turn of the present crisis, and has gained respect as a hands on manager with a very strong understanding of the workings of the financial markets.
Geithner represents a very different approach to the markets from that professed by the current Administration (and the current Treasury Secretary). He is known as a strong advocate of an approach that definitely gives a role to government in controlling and setting the rules for the markets, and for creating a well-defined framework for the economy.
Some pundits have doubted his competence in the field of macroeconomics. One could say that for the coming two years or so, there will be enough day-to-day issues to keep Geithner focused. If not, he will have Larry Summers, his former mentor, available as a long-term planner.
Nobody doubts Summers' academic and economic competences, least of all himself. Earning his PhD in Economics at Harvard, he went on to become one of the youngest tenured professors at the same institution. He has a reputation for being a bruiser and a power player, who has alienated many former friends. After leaving the Clinton Administration He was appointed President of Harvard University and forced to leave in 2005 after a string of internal controversies that culminated in a fight over the relative merits of men and women in academics. He was, however, invited to return to Harvard in 2007 as an economics professor.
While being a strong proponent of international trade – and thus not necessarily in line with many Democrat party members, he is nonetheless a strong believer in coherent economic policies and medium term economic strategies (this term was entirely missing from the Republican vocabulary in the past 8 years). In the position of head of the National Economic Council, his role will exactly be to device such policies.
The markets cheered this new team with a strong rally, also helped by the fact that Obama went on the record to state that he will favour an economic stimulus package in order to get the economy kick-started. Summers has been on the record suggesting exactly the same. And with Citigroup on the ropes, the car industry on the verge of bankruptcy and very sign that the economy is going in reverse, there is no doubt that this was exactly what the markets wanted to hear. Friday afternoon saw a strong rally, undoubtedly helped by the squaring of significant short positions.
Nice words alone will not revive the economy. Indeed, given the need for the US household sector to redress its savings balance, a significant stimulus is needed in order to avoid a deep recession. While Obama may be ready to offer such support, it will be months away and the economy could be a good deal worse before help finally arrives.