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.
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 the historic downgrade of the U.S. credit rating by 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