Timothy Geithner

At great cost to my own credibility with Salon readers, I’ve defended Tim Geithner for a lot longer than I should have. I thought he did a reasonably good job stabilizing the financial sector at a time when panic reigned supreme. I thought he had as a good a handle as anyone on the danger that unregulated derivatives trading posed to the overall financial system — dating all the way back to the first post of mine that mentioned his name, way back in 2006. But at this point, he’s worn out his welcome.

One should still be cautious. Maybe these leaks are the work of people within the administration who are looking to embarrass Geithner. Or maybe, although I’ll admit this is unlikely, he’s pulling some kind of jujitsu move to give Obama cover with the left (See, if Geithner doesn’t like it, it must be good policy). But I don’t think so. If the Reuters story is true, Geithner has made it clear where his allegiances lie — with Wall Street. It’s time for him to go. Paul Volcker looked pretty full of energy Thursday morning, and he did a pretty good job as Federal Reserve chairman way back when. Maybe we should get a chance to see how he does as Treasury secretary.

This has always been a ridiculous notion, but Geithner’s letter provides the most in-depth and strongly worded rebuttal we’ve heard from the Obama administration so far.

Some key excerpts:

Dear Senator DeMint…

I have expressed my concerns about this idea before, but I will restate them to be clear: this “prioritization” proposal advocates a radical and deeply irresponsible departure from the commitments by Presidents of both parties, throughout American history, to honor all of the commitments our Nation has made…

At its core, your letter is based on an untested and unacceptably risky assumption: that if the United State were to continue to pay interest on its debt — yet failed to pay legally required obligations to its citizens, servicemen and women, and businesses — there would be no adverse market reaction and no damage to the full faith and credit of the United States. Again, this idea is starkly at odds with the judgment of every previous Administration, regardless of party, that has faced debt limit impasses.

“Prioritization” also fails to account for how payments on principal would be made if investors were to lose confidence in U.S. creditworthiness. In August of this year, for example, more than $500 billion in U.S. Treasury debt will mature. Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United State would be defaulting on a broad range of its other obligations, there is no guarantee that investors would continue to re-invest in new Treasury securities. In fact, some market participants have already indicated that they would be disinclined to do so. As one of the major ratings agencies concluded in a recent report, failure to pay non-debt obligations “would signal sever financial distress and potentially imminent debt default,” prompting the U.S. sovereign rating to be placed on “Rating Watch Negative.”

If investors chose not to purchase a sufficient volume of new Treasury securities, the United States would be required to pay the principal on maturing debt, and not merely the interest, out of available cash. Yet the Treasury would be unable to make these principal payments without the continued confidence of market participants willing to buy new Treasury securities. Your proposal assumes markets would be unconcerned by our failure to pay other obligations. But if this assumption proved incorrect, then the United States would be forced to default on its debt.

Geithner is undoubtedly correct on this. As he notes elsewhere in the letter, the U.S. government is currently is borrowing 40 cent on every dollar. Without an agreement to raise the debt limit, the government would thus have to cut its current spending by 40 percent. Never mind the fact that spending cuts on that scale would immediately plunge the economy into recession. The fantasy that “market participants” would stand by and watch such the U.S. government commit fiscal suicide without running for the hills screaming in holy terror represents new heights in GOP ludicrousness.

In the past, it’s always been easy to dismiss Jim DeMint as a resident of the extreme right-wing of the Republican Party — and therefore unrepresentative of mainstream reality. But right now, in a political climate in which Michele Bachmann is considered to have a legitimate shot at winning the Republican nomination for president, it’s much harder to find an oasis of complacency from which to watch this madness.

Geithner’s stated position is that without long-term action on the deficit, the government will not be able to continue to support social welfare programs.

Geithner says Obama must tackle the deficit now if he wants the government to be in a position to support the economy in the future and to continue to protect the elderly and the poor.

“It’s been my view for some time that unless he played a major role in shaping and negotiating the broad fiscal framework… we would be left without the capacity to do a whole range of things that are really important,” Geithner, 49, said in an interview. “I have been a consistent advocate of him doing that early and often.”

There is a level on which Geithner’s rationale makes sense. The Republican strategy is to seize upon (and create) big deficits as a tool to eviscerate government. Their successful execution of this strategy poses a serious challenge to the safety net. If no action is taken by Democrats to get spending and revenue aligned in the long term, then Medicare and Medicaid will be in big trouble.

I don’t think any left-of-center economists would seriously disagree with that. Their position has always been that the smart strategy is short-term stimulus paired with a long-term plan to stabilize government finances. With government borrowing costs at historically low levels, now is the time to put as much energy into job creation as possible.

But aside from what should be the overriding government responsibility to deal as forthrightly as possible with massive unemployment and economic hardship, there’s also a realpolitik issue that Geithner seems to be missing. Voters care more about how the economy is faring when they head to the ballot box than they do about the state of the deficit. And as is already clear from the initial campaign salvos from credible Republican presidential candidates such as Mitt Romney and Tim Pawlenty, the 2012 election is going to be a referendum on the economy.

By ruling out any further stimulus — and, even worse, by abandoning efforts to keep the economy growing far too early — Geithner has helped to make Obama and the Democrats extremely vulnerable in 2012. If Republicans take the White House and the Senate in 2012, then it really won’t matter whether Geithner’s deficit pivot could have preserved “the capacity to do a whole range of things that are really important.” Healthcare reform will be dead. Banking reform will be dead. Medicare and Medicaid will face a deeply uncertain future.

Geithner doesn’t deserve all the blame here. Obama picked him and Obama backed him to the hilt. There’s also a very real political question as to whether anything that could meaningfully have altered the economic growth path could have been pushed through Congress. And it’s also not Obama or Geithner’s fault that an earthquake and tsunami forced Japan into recession, or that oil prices spiked, or that Europe’s sovereign debt woes or a possible slowdown in Chinese economic growth have put a damper on global economic conditions.

But the electoral problem for Obama may not hinge on whether or not the president has the actual power to make manifest his will on job creation, but rather on whether he is perceived to be trying. Is he giving it his best shot? Is he making it clear to the general public what constraints have been placed on him by the opposition party and external events?

The answers are no, and no. And judging by Goldfarb’s Geithner profile, the White House is fine with that. It’s going to be a tough platform to run on, if the economy continues to slump as the campaign heats up.