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SCENARIOS: Geithner's outlook at Treasury
January 20, 2009 / 10:05 PM / 9 years ago

SCENARIOS: Geithner's outlook at Treasury

(Reuters) - With the U.S. economy in shambles, Treasury Secretary nominee Timothy Geithner faces tough questions not only about his failure to pay some taxes, but major financial challenges if he is confirmed.

Below is a summary of some of the knottier dilemmas in front of the next treasury secretary.

BANKS

Geithner would dive right in to retooling outgoing Treasury Secretary Henry Paulson’s $700 billion bailout package, which President Barack Obama wants to result in more lending from banks. Obama advisers have made clear they want greater accountability from institutions benefiting from government help.

The Obama administration is expected to redirect its focus to underlying causes of the credit crisis, the bursting of the housing bubble and the surge in defaults from mortgages and mortgage-related assets. One possibility is setting up a bank to absorb toxic securities.

Meanwhile, Geithner would need to grapple with a banking system that remains in deep distress despite months of official efforts, including central bank interest rate cuts and hundreds of billions of dollars of government spending.

DOLLAR/FOREIGN EXCHANGE

Geithner cut his teeth under former Treasury Secretary Robert Rubin, who indicated support for a strong dollar with metronomic regularity.

Now, with economies around the world tumbling into recession, the dollar has strengthened. A stronger dollar is potentially an impediment to recovery in the United States, where exports had until recently been a strength.

A worry for Geithner would be the risk that after a big run-up in U.S. borrowing to fund efforts to halt the economic crisis, investors would pull back, which could hit the dollar hard.

CHINA

Geithner would have to walk a tightrope in dealing with China, which buys large quantities of U.S. debt and runs a large trade surplus with the United States. Former Treasury Secretary Henry Paulson’s pressure on Beijing to let the value of its yuan currency appreciate paid modest dividends for Washington, and Geithner is likely to want to keep those efforts alive, perhaps branding it with his own stamp.

Trade and foreign exchange frictions seem inevitable with China’s recent imports falling much faster in the recessionary environment than its exports to the United States.

Geithner, who was a Treasury official during trade disputes with China and Japan in the 1990s, is familiar with the subtleties of satisfying domestic political pressures while preserving negotiating momentum.

DEFICIT/DEBT/BUDGET

The economic recession and the massive fiscal stimulus are expected to push the budget deficit, and levels of U.S. debt, to unprecedented levels. This raises the risk that investors could someday withdraw from lending to the United States.

But creditors in Asia don’t look like they will be able to curtail lending flows any time soon. With many developed economies in recession, however, China and Japan may boost Treasury buying in months ahead to stop their currencies from appreciating and their exports from getting too expensive.

Reporting by Mark Felsenthal; Editing by Neil Stempleman

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