A measured and deliberate Timothy Geithner offered a glimpse of the Obama Administration's plans for tackling the financial crisis during his Jan. 21 hearing on his nomination as Treasury Secretary, even as he promised to work with Congress on shaping a massive economic stimulus bill and offered repeated apologies for failing to pay $34,000 in self-employment taxes in the past.
Geithner, the president of the New York Federal Reserve and a key player in the federal government's response so far to the financial crisis, told the Senate Finance Committee during a 3-hour session that Obama would "lay out a comprehensive plan…we hope in the next few weeks" to jump-start lending and stop a disastrous cycle of foreclosure and price declines in the housing market.
A Promise of Bold Moves, Fundamental Reform
Geithner, who was introduced to the committee by former Federal Reserve Chairman Paul Volcker, promised that the Administration's response to the crisis would be bold, calling any "tentative and incrementalist" approach dangerous. "In a crisis of this magnitude, the most prudent course is the most forceful course," Geithner said. At the same time, Obama is "committed to fundamental reform" of the financial rescue initiative implemented by the Bush Administration late last year, known as the Troubled Asset Relief Program, or TARP.
But Geithner declined to give much in the way of detail. "We've seen the cost of uncertainty created by tentative signals not followed up by clear action," he said, a veiled reference to the confusion sown last fall as the Bush Treasury appeared to change course repeatedly.
There was no indication that Geithner's expected confirmation by the committee or the full Senate were harmed by his appearance. "You will be confirmed," Senator Pat Roberts (R-Kan.) told Geithner. However, Roberts said that constituents were upset at the idea that the man who would be in charge of the Internal Revenue Service had tax problems of his own. The committee could vote as early as Thursday on the nomination.
Segregating Toxic Assets, Modifying Mortgages
Asked if the government was considering any of several "good bank/bad bank" proposals that would segregate some or all of the financial industry's questionable financial assets, Geithner said it was, and that it "is possible that it is something that will be part of the solution going forward." He acknowledged that such a move could be costly, but avoided addressing Senator Charles Schumer's (D-N.Y.) suggestion that the price tag could reach $3 trillion to $4 trillion.
Geithner also indicated that the Administration's proposal could include a measure put forward by Senator Dick Durbin (D-Ill.) to let bankruptcy court judges modify home mortgages. Responding to questions on the measure from Schumer, who supports it, Geithner reaffirmed Obama's campaign trail support for the concept and said it "is likely to be an important part" of the "comprehensive housing package" the Administration plans.
Failure to Pay His Own Taxes
Wednesday's hearing had been postponed by a week after questions surfaced about Geithner's past tax payments. Geithner acknowledged failing to pay self-employment taxes on income earned from his time at the International Monetary Fund, despite repeated guidance from the organization about the taxes for which he was liable. In 2006, following an audit, he paid back taxes for 2003 and 2004. But he didn't pay back taxes for the two previous years until after he was nominated for the Treasury post.
Geithner said he used TurboTax software to prepare his own taxes in two of the years in question—provoking a laugh from the audience, perhaps amused that one of the most powerful men in the U.S. economy used off-the-shelf tax software—but stressed that the errors were his, not the software's.
"It was very clear, and I had many opportunities to catch that initial mistake," Geithner said. "I want to apologize to the committee for putting you in the position of having to spend so much time on these issues when there are so many more pressing issues facing the country."
For the most part, committee members ignored the tax issue or scolded Geithner sternly but briefly before moving on to other topics. But some, including Senator Jim Bunning (R-Ky.), were more scathing in their approach. Bunning said he was skeptical of Geithner's nomination to begin with, but found his failure to pay taxes disturbing. "It reflects a degree of negligence toward the law he will be charged with enforcing," Bunning said.
He called Geithner's explanation unsatisfactory, particularly from "a high-ranking public official who the American people demand and deserve to hold to a higher standard."
Criticism of Fed's Timid Response
Geithner acknowledged several times that the federal response to the unfolding housing and financial crisis had proved too timid, saying that "supervision could have been more effective"—including bank supervision by the Federal Reserve. He cast himself as having pushed repeatedly for bolder action and suggested the Bush Administration had resisted it. "Although policy did move, it did not move aggressively enough across the entire board, and we're living with the consequences of a deeper recession in part because of that," Geithner said.
But the Fed official defended his own role on several fronts. He said efforts he led to bring order to the huge and now dismal market in credit default swaps and other complex derivatives had been "very, very effective," and demurred when Senator Maria Cantwell (D-Wash.) asked if he thought the effort hadn't gone far enough.
At the same time, he echoed many of the Bush Administration's explanations for why the investment bank Lehman Brothers failed spectacularly in September, plunging into bankruptcy and shaking the entire financial sector. Like Henry Paulson, President Bush's last Treasury Secretary, Geithner said the company failed because the financial markets weren't willing to provide the capital it needed without government assistance, and the government lacked the authorities to provide it.
Geithner also said he expected that, if confirmed, he would be "part of the team" Obama consults "to figure out energy policy." Some Washington insiders have predicted Obama's economic team and his energy and environmental advisers could ultimately clash over the cost of fostering new energy sources.
Stimulating Consumer, State Spending
Geithner faced some questions over Obama's proposal for spending close to $1 trillion to stimulate the moribund economy. While past tax rebates have largely been saved, not spent, he argued that the Administration's proposal to suspend some withholding taxes would have a more direct impact on spending, in part because it would show up in each taxpayer's regular paycheck, rather than as a one-time lump sum. Still, he acknowledged, "none of us will know for sure what the impact on [spending] behavior will be."
He also downplayed Senator Jon Kyl's (R-Ariz.) suggestion of encouraging fiscal discipline among the states by providing aid as loans rather than grants. The state assistance is intended to prevent further layoffs and service cuts at a time when such moves would only worsen the recession, and loans likely wouldn't have the same effect, Geithner said.