Geithner's Bridge to Nowhere

Last November Tim Geithner saved the stock market. This week he very nearly destroyed it.

Remember last Nov. 21? I'll sure never forget it. It was a Friday. At the lows of day, the Dow Jones Industrial Average was making new bear market lows at 7392, and it appeared that the massive global bank Citigroup (C) was spinning into imminent bankruptcy. At that moment the index was down 48% from the bull market highs of October 2007, and down 36% in just the last three months. It seemed like the world was coming to an end.

Then the news came across the tape that then-president-elect Barack Obama was naming New York Federal Reserve chief Timothy Geithner to be his Treasury secretary. Over the span of the next hour or so the Dow rallied nearly 9%. Since then, it has never traded lower than the lows made that day before Geithner was named.

I had written two weeks earlier that Geithner wasn't the best man for job, having had his fingers in so many of the botched bank rescues last year — including Bear Stearns, Lehman Brothers, AIG and others. But when I saw the market's reaction, I realized that Geithner was perfect. I then wrote that because he'd made so many mistakes in the past, he had the unique on-the-job experience that would keep him from making those mistakes ever again.

And I still stand by that view. However, this week we learned that Geithner has found other mistakes to make. The market's bitter disappointment at his bank rescue plan announced on Tuesday has been so severe that it's brought the Dow back right to where it was on that awful Nov. 21. We haven't made lower intraday lows — but as of Thursday's close, the Dow was more than 1% lower than it was at the close on Nov. 21.

It's not just that the market didn't like Geithner's so-called "Financial Stability Plan." It's that there really was no plan. The fact sheet released on Tuesday by the Treasury contains almost no facts. There were seven pages of lofty promises and blanket assurances. But no plan. Nobody reading it, or listening to Geithner's speech about it to Congress, could possibly come away having any real idea of what Geithner actually intended to do.

In an abstract sense, that's actually just fine. The reality is that this business of rescuing banks is very tricky. The situation changes all the time, and what you think you would do today may not be what you actually ought to do when the actual emergency is upon you. So the best policy is no policy — it's just to announce you stand ready to do what has to be done, and to articulate a few general principles about how you'll think about it.

But that wasn't good enough for Geithner. Throughout the presidential campaign, Barack Obama excoriated then-Treasury Secretary Henry Paulson for his unpredictable and ad hoc approach. According to the Democrats, Paulson was “unaccountable.” His program wasn't "transparent."

But that's not all. The Obama campaign accused Paulson of bailing out Wall Street at the expense of Main Street. His efforts to save the banking system were portrayed as subsidies, at taxpayer expense, to incompetent firms and corrupt executives.

We can see now that all those criticisms set up Geithner to fail. It was incumbent on him to present a detailed plan that anticipates contingencies that, by their very nature, can't be anticipated. And his plan had to somehow bail out the banking system without bailing out banks or bankers. I feel sorry for him — there was just no way to win.

I suppose that, instead of trying to fake it — that is, instead of pretending to submit a non-plan plan and mouthing a lot of anti-big business slogans — he could have just thrown himself on the mercy of the court. He could have just said, “Hey, look. This is a tough job. I don't exactly know what I'll have to do, but you'll be the first to know when I figure it out. And remember, the idea here is to save the banks because we need them, not destroy them because we are angry at them.”

But he didn't do that. He faked it, and he got caught. And that's a real problem for the markets, and the economy, because in this crisis of confidence we can't afford to have our new Treasury secretary look foolish.

It's especially troublesome because it's not the first time for Geithner. During his Senate confirmation process, it came out that he didn't pay his Social Security or Medicare taxes during his years as an employee of the International Monetary Fund. I don't think anyone would accuse him of willfully trying to evade his tax obligations. He's probably sincere when he says he just screwed up. But just weeks after admitting that, he screwed up again with his non-plan plan. Not good. Two strikes.

Or is it three? In a written submission to the Senate Finance Committee considering his nomination, he made the rash statement that “President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency.” Rash, but true. Obama did indeed say that more than once on the campaign trail. But Geithner should never have said it.

That's because, by law, the Treasury has to make an official annual list of countries it finds are manipulating their currencies, and once that determination is made, there are serious diplomatic and trade consequences. It was very foolish for Geithner to all but declare, before even taking office, that Treasury under his leadership would make this finding. President Obama ended up having to personally call the president of China to apologize, and Geithner has since retracted the remark.

Is that three strikes for Geithner? Should the market say, “You're out”? There's a risk that that's what's happening. Dangerous — because once a political figure gets a reputation for screwing up, like, say, Dan Quayle, it's virtually impossible to ever restore his reputation. And right now we just can't afford to have a Treasury secretary who doesn't command respect.

Geithner has just a few days or weeks to get the market's respect back. If he can do it, then I think we'll hold above the lows of last November, and stocks will have a decent chance to recover and move higher. But if Geithner is damaged goods, then the economy will be functionally leaderless at a time when it desperately needs a leader, and we'll be looking at new lows in this bear market.