A Very Good Question

The late Johnny Carson got his show-biz start with an afternoon game show, "Who Do You Trust?" Carson and his side-kick-to-be, Ed McMahon, stayed with the ABC game show from 1956-1962 when they left to take over the "Tonight" show on NBC. The rest, as the pundits say, is history. Now, we have a real-life version of the game show and the contestants are The Geezer and The Hopester. Neither contestant has avoided an unfortunate selection in choosing campaign staffers and advisors. The Hopester initially named Jim Johnson (former CEO of — gasp — Fannie Mae) to head the team vetting VP possibilities. Johnson went under the Hopester bus very quickly. The Geezer has launched a number of attack ads against supposed Hopester campaign advisors, but none of the charges resonated. On the other hand, The Geezer has thrown two advisors under his bus: Phil (ET) Gramm and Carly (Ran HP Into The Ground) Fiorina, The example of The Geezer's choice for VP is sobering; the prospect of a Geezer Secretary of the Treasury has Alexander Hamilton rolling over at this very minute. "Who do you trust?" is the question of the day. If this is (fair & balanced) interrogation, so be it.

[x Salon]
Who Do You Trust To Pick The Next Treasury Secretary?
By Andrew Leonard

As we digest the news that John McCain, who has missed more votes in Congress over the last two years than any other Senator, is suspending his campaign and wants to duck Friday's debate, in order to offer his help crafting a bailout plan, now is as good a time as any to mull over what could be one of the first significant early tests for the next President. Who would Obama or McCain pick for the job of Treasury Secretary?

If the current crisis tells us anything, it is that the job of Treasury Secretary is of preeminent importance — especially if Congress grants Paulson anything like the discretionary fiscal power he is asking for. Whether you think Paulson is just another Wall Street fat cat grabbing goodies for his pals, or is actually motivated by a concern over the state of the economy, I think we should all be breathing a sigh of relief that neither of his predecessors, John Snow or Paul O'Neill, were in charge of grappling the current crisis. A recent New York Times story exploring possible choices for the job noted that O'Neill and Snow were two of "the least regarded Treasury secretaries of recent decades." The Times was being polite.

My interest is not in handicapping who will get the job — the Times story does a good job of that, as does economist Menzie Chinn at Econbrowser earlier today. What interests me is that both the Wall Street Journal and the New York Times have speculated that Tim Geithner, President of the New York Federal Reserve Bank and a veteran of the Clinton Administration Treasury Department, is high on the list of likely Democratic prospects. Both papers observe that Geithner has been on the front lines of dealing with the current crisis.

But neither paper notes what to me is his greatest qualification — his early warning about the potential for exactly the kind of crisis we are currently enduring. On Sept. 15, 2006, Timothy Geithner gave a speech on hedge fund and derivatives regulation.

As I wrote at the time:

Geithner acknowledges that the explosion, over the past 10 years, of hedge fund trading in exotic financial instruments may well have contributed to the general resilience that the U.S. (and global) financial system has demonstrated in response to external shocks since the Asian financial crisis of the late '90s. And yet he surmises at the same time that the very flexibility of the current system may actually make it more vulnerable to a really, really big shock.

Financial panics start when traders and bankers who call in loans or sell off their holdings at the first sign of trouble set off a cascading effect in which everybody else follows their example and the system implodes under the strain. Paradoxically, Geithner appeared to be saying, the more flexible the system, the more quickly such a cascade could happen, and the harder it could be to stop.

The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by and complicate the management of very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones.

That's a subtle argument, and we're not going to know whether it holds water until the flood is already 5 feet high and rising.

Imagine, a man with the foresight to worry about how unregulated credit derivatives could increase the chances of systemic failure. Imagine having a President who might pick such a person as Treasury Secretary.

Or, conversely, imagine the surprises a John McCain could deliver. Maybe he'd pick a Robert Zoellick (a Goldman alum who is currently president of the World Bank) or a John Thain, (who just sold Merrill Lynch to the Bank of America.) Wall Street would likely not be upset at either choice. Or maybe he'd pick someone completely out of left field. As McCain demonstrates for us on daily basis, there's really no telling what surprises are up his sleeve.

[Andrew Leonard is a freelance writer based in Berkeley, CA. He is a contributing writer for Wired Magazine. His work has also appeared in the Far Eastern Economic Review, the Nation, British Esquire, the New York Times Book Review, the Columbia Journalism Review, Asia Inc., the San Francisco Bay Guardian, and numerous other publications. He has been technology editor for the online magazine Web Review, Packet culture columnist for HotWired, and was the writer of the ill-fated Secret Files of Bill Gates for America Online. His first book, Bots: Origin of New Species, was published in 2007. Leonard attended the University of North Dakota.]

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