Geithner, Bernanke have little in arsenal to fight new crisis

By Zachary A. Goldfarb and Neil Irwin,August 14, 2011
(Page 2 of 2)

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.

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