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The world needs a US Treasury secretary history will remember

Friday, 23 November 2012 - 4:53pm IST | Place: Washington, DC | Agency: The Daily Telegraph
The most pressing issue facing Washington is to steer the economy away from the fiscal cliff, a debt accord would ensure his place in history.

There are some US Treasury Secretaries the American public are likely to remember. Alexander Hamilton, the first person to hold the post, tops any list. Possibly Nicholas Brady, inventor of the famous Brady bonds used to bail out Latin America in the 1980s.

Or, more recently, Hank Paulson, the former Goldman Sachs boss, who went down on one knee as he begged Congressional leaders to pass a financial rescue package in September 2008.

They, though, are the exceptions to the rule that the holders of the office depart without capturing Americans' imagination. It is in stark contrast to Britain, where the parliamentary system hands the Chancellor of the Exchequer a national profile and, more often than not, the commanding role in the government's economic policy.

It is why the question of who will be the next Treasury Secretary has so far been as relatively low profile as the incumbent, Timothy Geithner. The former head of the New York Federal Reserve, Geithner has lent technocratic competence and knowledge of the workings of Wall Street to an Obama government that has grappled with the consequences of America's worst financial crisis since the 1930s.

To his critics, Geithner was too close a friend of Wall Street, bailing out the banks in early 2009 without breaking up the larger institutions or even demanding permanent changes to the way bankers are paid.

What is not in dispute is that Geithner presided over a vast expansion of the power of the office. Thanks to the Dodd-Frank financial reform legislation passed two years ago, the Treasury Secretary now has greater authority, including the ability to impose tougher supervision on the largest banks.

"The secretary has a lot of control over the banking system," says Peter Wallison, who was chief lawyer at the Treasury during Ronald Reagan's presidency. "It is now a completely different role than in the past."

It is one of the reasons the identity of Geithner's successor is more important than the column inches that have been dedicated to it. The other is the challenge the US faces over the next four years in deciding how it will begin to reduce the more than $16?trillion (pounds 10?trillion) of national debt it has racked up.

If financial regulation dominated Geithner's term, America's fiscal challenge is shaping up as the defining issue for his successor. Given that, there is encouragement to be taken from the fact that Jack Lew, the current Chief of Staff at the White House, is the front runner for the job.

Lew has had two spells as head of the Office of Management and Budget, which crunches the numbers on fiscal matters for the White House. "He [Lew] has the confidence and trust of the president," says Ted Gayer, who worked for Paulson as the financial crisis engulfed Wall Street, the wider US economy and the final year of George W Bush's government.

"You would expect him to be very tied in to policy making."

Although there have been signals that Obama and Republicans in Congress may be willing to compromise on a debt deal, the election maintained the division of power in Washington that led to little but gridlock over the past two years.

The last-ditch scramble to raise America's debt ceiling in August 2011 suggests there is a gaping hole in the Obama administration for someone with fiscal expertise who is also equipped with the negotiating skills that can forge the compromises the US needs.

The most pressing issue facing Washington is to steer the economy away from the fiscal cliff, the chilling name for a combination of tax rises and spending cuts that are due to take effect at the start of 2013. Recession is forecast to follow if Washington fails. Geithner has said he will stay on until a deal to skirt the cliff is reached.

Even if politicians see sense and avoid the cliff, a short-term fix is the best that can be hoped for this side of Christmas. American households and companies will still face uncertainty over the size of their tax bills next year and which government services will be axed.

A mix of fiscal expertise and the willingness to sit down and negotiate, will arguably be more important in striking a long-term debt deal - what in Washington has come to be known as a "grand bargain" - than it will be in avoiding the cliff.

With Europe in recession, Britain still flirting with one and China slowing, a deal matters. Investment by US companies stalled in September, according to figures from the Commerce Department, as chief executives reacted to the deepening fog over US fiscal policy.

A deal that delivers a sensible path - one that includes tax increases and the removal of the more egregious exemptions - to putting the US on a sounder fiscal footing could yield real benefits. Fed chairman Ben Bernanke said this week that such an agreement could make 2013 a "very good" one for the US economy.

It is why the next Treasury Secretary really needs to be able to help cut a deal. If it is going to be Lew, Republicans say he will need to show he is willing to get his knees dirty in the often messy business of negotiation. Critics say it is something Obama has avoided.

"It has to be someone Republican leaders feel they can work with and trust," argues Phillip Swagel, who was an adviser to Paulson in the Treasury.

Whether Obama opts for Lew or someone else from a remarkably short list, the Treasury Secretary will have advantages that European finance ministers have not enjoyed.

Despite America's debt rising to

about 70pc of its gross domestic

product and forecast to get worse,

there is little evidence that the world's bond investors will be hounding Washington into a deal. A combination of the dollar's status as the world's reserve currency, the mess in Europe and the Fed's continued appetite for buying bonds has seen to that.

As Jeff Rosenberg, the chief bond strategist at BlackRock, puts it: "The consequences of unconventional monetary policy is to postpone the disciplinary aspect of the bond market."

While those in the finance ministries in Madrid, Athens and even Rome may look on in envy, it is a double-edged sword for politicians in Washington. It leaves them having to rise to the challenge of reaching a long-term debt deal over the next four years without being forced to.

The next Treasury Secretary could play a key role. Geithner is likely to be one that Americans remember. Let's hope his successor is, too.

The Daily Telegraph

222000 GMT Nov12


 


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