As summer approaches, markets rise and volume dissipates I caught a very interesting interview with US Treasury Secretary Tim Geithner on Monday.
I’ve got to be honest, I am increasingly impressed by this man. I know he is not universally popular amongst market commentators, but a lot of what he says makes sense. Although I don’t agree with some of his responses to dealing with the Credit Crisis (notably the PPIP, which I am sure is going to end badly), I have to respect the manner in which he has implemented them.
It is clear he has a deep understanding of what is happening in the Global Economy and has had the courage to make some very difficult decisions. More importantly he has demonstrated a willingness to stick by these. The situation he inherited is unique and the extent of the mess staggering, but he is starting to exhibit some of the qualities of leadership, which have been so desperately lacking to date.
A conversation with an ardent, Obama-supporting friend of mine a week or so ago had started to give me a fresh perspective on some of the Administration’s appointments. Where I had previously been very negative about the “same old faces” taking key roles of responsibility, my friend pointed out that Obama had little choice but to do so. While he is pursuing his radical agenda in other areas (War on Terror, Climate Change, civil liberties etc.) to have been too radical at this stage with the economy would have jeopardised his prospects for re-election in 2012.
At the very least he has the opportunity now to allow the current initiatives to fail, at which point he can then make the argument of having tried to work with the people and system he inherited and the failure being no fault of his own. The flip side to this argument of course, if that if the current initiatives work he can claim all the credit.
While this sort of “West-Wingesque” version of politics tends to be the realm of dramatic, script writers, listening to Geithner on Monday, there might well be some substance to this idea.
Throughout the interview he struck a very balanced but reformist tone. Above all he stressed the need for economic growth to be restarted, but in a measured manner. The growth he talked of is to be more sustainable and less-driven by credit. He recognised that America (and for that read the UK as well) needs to make some very hard choices in the coming years and that we all need to reassess how we live our lives. The process of moving from old spending habits to new saving ones is bound to be difficult, but the long term advantages cannot be underemphasised.
Interestingly he talked about the future withdrawal of fiscal stimulus measures. This has been a particular concern of mine in the last year. Geithner acknowledged that this is going to be a very difficult set of decisions to make. Withdrawing too soon, will have a severe impact on any fledgling recovery, whereas leaving it in place for too long will have as adverse an affect on long term prospects. While he would be drawn on any specific plans he might have for disentangling the public purse from the wider economy, it is comforting that this topic is at least on the minds of policy makers.
What I liked most about the interview was Geithner did not allow himself to be carried away by any of the recent optimism, which has flooded markets. Several times the interviewer tried to draw him on the recent rally, but Geithner stuck to his basic message that although the risk of catastrophic failure had been abated, there are still notable dangers lurking out there. Complex derivatives, a failed regulatory framework, heavily indebted consumers (especially those with large credit card bills) and excessively leveraged foreign banks are all going to dampen any recovery.
The last point was particularly notable. Geithner made a point of highlighting the state of balance sheets of foreign banks. While part of this argument felt like a retort to Gordon Brown’s “this is an American problem” argument, there was also an underlying suggestion that the worst is over for US banks. I have still to write about the results of the Stress Tests, but on this point I am still not so convinced.
I am still out of the market for the time being, but I have the feeling this interview is going to have a lasting affect on my long-term views.