No Treasury secretary in living memory has entered office with bigger economic problems, or faced as harsh a reaction, in his first month as has Tim Geithner. But can he really be fingered as the guy who started the global financial train wreck?
That, essentially, is what the former prime minister of Australia, Paul Keating, said in a speech last Thursday, as reported by the Sydney Morning Herald. (Thanks to Yves Smith at Naked Capitalism and several readers for the tip.)
Let's take a trip in the way-back machine, to 1997, when the Asian financial crisis was ravaging the world. In the initial media reaction to Geithner's appointment as Treasury secretary, he received high marks for his efforts handling the crisis while an underling in the Clinton Treasury Department. Keating demurs.
In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."
What Keating means is that Geithner prescribed the classic, IMF medicine for ailing developing nations: In return for an IMF bailout loan, you must cut your government spending. But in Keating's view, it was the wrong medicine for Indonesia, and the fallout had long-lasting consequences.
The tough conditions imposed by the IMF on many Asian nations encouraged them to make every effort to avoid needing to ask for such help ever again. So they began building up huge stores of foreign reserves.
Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.
China invested most of its reserves in U.S. debt markets. Keating again: "So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it.
"That is the fundamental cause of the problem -- the imbalance is the fundamental cause."
Geithner's tenure at Treasury during the Asian financial crisis has been previously noted by economist Dean Baker (who treated him with kid gloves in last November -- how times have changed). But this is the first commentary I've seen in which Geithner is made the fall guy for IMF policy, or pinned as at least partially responsible for creating the global imbalance that enabled unsustainably cheap credit to flourish for so long in the United States. And it's probably overdone. Robert Rubin and Larry Summers were likely far more responsible for steering U.S. policy and influencing the IMF during the Asian financial crisis than Tim Geithner.
But the question posed by Dean Baker last November was "whether Geithner has learned anything" since his days as a Clinton administration staffer. We have yet to learn the answer to that question, and now, the credit markets are once again tightening. The New York Times reported on Monday that despite everything on Geithner's plate, he "has not appeared daunted" and is "seemingly relaxed and unflappable."
If I were him, I'd be starting to sweat.