Secretary of Bailouts

A Treasury pick who was present at the creation of the panic.

Barack Obama's widely leaked selection of Timothy Geithner as his Treasury Secretary is certainly a sign of the financial times: About Mr. Geithner's views on taxes and economics, the world knows very little. His specialty at the Clinton Treasury and as President of the New York Federal Reserve has been negotiating bailouts and otherwise navigating through financial panics.

Timothy Geithner with Ben Bernanke.

His first and primary task, in other words, will be to serve as Secretary of Bailouts. For that job, Mr. Geithner is probably the best choice short of Paul Volcker, and he guarantees the smoothest transition from the current Treasury team. He won't have to be introduced to the various Wall Street and Federal Reserve players, and he knows as well as anyone which banks are vulnerable and likely to threaten the larger financial system.

This continuity is especially important given that the credit markets have taken a major step backward since Barack Obama's election. Stocks are off some 15%, credit spreads have widened again, and bear raids are once more targeting Citigroup and other financial companies. The uncertainty over Mr. Obama's team and its direction has itself been fueling the lack of confidence, so we're glad to see the President-elect getting on with the show.

Mr. Geithner's political style is to listen first, which by itself makes him a better choice than Harvard economist Larry Summers, who would find a way to condescend to Albert Einstein. Mr. Summers is reportedly slated to run Mr. Obama's National Economic Council in the White House. The Treasury Secretary has typically been the most prominent Administration voice on the economy, but Mr. Summers is not the sort merely to play honest broker. Mr. Geithner, who once worked for Mr. Summers, will have to work to avoid being seen as second fiddle.

Mr. Obama's political adviser, David Axelrod, also sent a useful signal yesterday by hinting on "Fox News Sunday" that an immediate tax increase may be off the table. In his Saturday radio address, Mr. Obama said that his first priority will be a huge new spending and middle-class tax cut "stimulus" -- perhaps as large as $500 billion. "The main thing right now is to get this economic recovery package on the road, to get money in the pockets of the middle class, to get these projects going, to get America working again, and that's where we're going to be focused in January," added Mr. Axelrod.

The prospect of a tax hike during a recession has been a prominent source of investor anxiety. The President-elect would be smarter still if he announced that he won't allow the lower Bush tax rates to expire after 2010 as they are scheduled to do. The last thing frightened investors want to see now is a lower after-tax return on risk-taking and investment.

What Mr. Geithner thinks about taxes is something of a mystery -- and that's not the only one. As a protégé of Mr. Summers and Robert Rubin, the 47-year-old may share their view that tax rates don't matter much to investment choices. On the other hand, he hasn't declared himself in public on the issue as far as we know.

For that matter, most of his work in public life has been done in backrooms or as a loyal Sancho Panza. During the Clinton years, he assisted Mr. Summers on various international bailouts. And during the current panic, he has properly deferred in public to Fed Chairman Ben Bernanke or Treasury Secretary Hank Paulson. Now Mr. Geithner will have to become the Administration's chief financial spokesman, so it will be useful for the Senate to sound him out during confirmation hearings.

All the more so because some of his bailout decisions have been less than successful. Mr. Geithner was the driving force behind the government takeover of insurance giant AIG -- a "rescue" that has itself twice had to be rescued with more taxpayer capital. The most frustrating part of the AIG episode has been the New York Fed's lack of transparency, both about the nature of the "systemic risk" that required the takeover and why it was superior to bankruptcy. This is another subject worthy of confirmation scrutiny, not least as an indication of Mr. Geithner's standards for future interventions.

Mr. Geithner was also on the Fed's Open Market Committee when it made its fateful decisions to keep real interest rates negative for so long, fueling the credit mania that has since turned to panic. Those monetary decisions are typically led by the Fed Chairman, but Mr. Geithner never dissented. While a Treasury Secretary doesn't directly make monetary policy, his private advice can be critical to Fed decisions. This is another area ripe for Senate exploration.

We suppose in that sense there is some rough justice in Mr. Geithner's nomination. Having been present at the creation of the current mess, he can help clean it up by avoiding some of the same mistakes.