Bloomberg interviews Bernanke and Geithner.
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Source - Bloomberg Business Week
On the morning of Nov. 4, two days after the midterm elections, Timothy Geithner was scheduled to fly to Kyoto for a dinner with Asian-Pacific finance ministers. At the last minute, Geithner postponed his trip; there was just too much going on in Washington. The dimensions of the electoral drubbing that President Obama had taken were still sinking in when the Treasury Secretary arrived at the White House to plot strategy at the President's cabinet meeting.
Obama then extended an olive branch to newly empowered Republican leaders, inviting them to meet later in the month. Geithner had no illusion that peace was breaking out. In fact, as he returned to the Treasury Dept. for a private lunch with Federal Reserve Chairman Ben Bernanke, the next political battle was already taking shape.
Bernanke would be the new target.
Bernanke and Geithner, who sat for separate interviews for this story, won't say what they discussed at their Nov. 4 lunch; an official describes the meeting as routine. As the Administration's point man in its dealings with the Fed, Geithner lunches with Bernanke almost every week. The Treasury Secretary says there's one topic that's off-limits: "I don't give him advice on monetary policy for two reasons. One is out of respect for the basic independence of the Fed. The other is because I'm not living and breathing monetary policy every day."
Bernanke and Geithner forged a relationship during the peak of the financial crisis of 2008-09, when Geithner was president of the New York Fed and then, from January 2009, Treasury Secretary. Together with former Treasury Secretary Henry Paulson, they used the Fed's balance sheet and taxpayer money to prop up the financial system and save the U.S. from another depression. "The main thing we share," says Geithner, "is that we went through the searing experience of the panic together, trying to design a strategy to contain it and clean up the mess afterward. We have the bond you get from that kind of combat."
"He's taken a lot of heat," Bernanke says of Geithner. "He did things I firmly believe needed to be done. We have a lot of mutual trust."
The two men took different paths to their foxhole. Bernanke spent 17 years teaching and writing about the Great Depression at Princeton University before becoming a Fed governor in 2002. Geithner spent most of his career as a government official and policymaker, honing his crisis-management skills in the 1990s as an aide to Treasury Secretary Robert Rubin during the fiscal meltdowns in Mexico, Asia, Russia, and Brazil. In those years, Geithner also helped author a hands-off policy toward the Fed, in which the Clinton Administration refrained from commenting on central bank moves. "If there's a big fight between the government and the central bank, then you have a problem," says Edwin Truman, who has served at both the Fed and the Treasury and is now a senior fellow at the Peterson Institute for International Economics in Washington. "It creates all sorts of uncertainty and financial market volatility about who's on top and who's on the bottom."
In February 2009, Bernanke took Geithner's side when the Treasury Secretary was fighting calls for the government to take over large, ailing banks—a step that Bernanke's predecessor, Alan Greenspan, had suggested might be necessary. Geithner's alternative, dreamed up on a beach in Mexico while he was between his New York Fed and Treasury jobs, was to put the biggest banks through Fed stress tests before forcing them to take on more capital. He ultimately prevailed, but only after a nine-hour White House meeting on Mar. 15, during which Geithner and his consigliere Lee Sachs faced down skepticism from the rest of Obama's brain trust, including White House National Economic Council director Lawrence H. Summers.
The favor was returned later that year when Obama, advised by Geithner, nominated Bernanke to a further four-year term as Fed chairman, choosing him over Summers. In backing Bernanke, Geithner was favoring a new ally over the man most responsible for his own rise through the ranks at Treasury. With the economy still fragile and Bernanke's credibility with investors high, Geithner felt it wasn't the right time to make a change, officials say. Geithner took to the phones when Bernanke's renomination looked in jeopardy in the Senate last January. "Tim played an important role in persuading some reluctant senators to support Bernanke's confirmation," says Alan Krueger, a former Treasury chief economist under Geithner who returned to Princeton last month. The Geithner-Bernanke alliance was further cemented during the year-long debate over financial reforms, which Obama signed into law last July. Led by Geithner, the Administration fought off congressional efforts to rein in the Fed's independence. Bernanke emerged stronger than ever.
Occasional dinners with the wives
Bernanke and Geithner aren't fixtures on the Washington social scene, but they do see each other when there's time. Bernanke routinely invites Geithner to baseball games at the Washington Nationals' ballpark south of Capitol Hill; Geithner has been able to attend only once, arriving in the third inning and leaving in the seventh. Occasionally one will have dinner at the other's house with their wives. A guest at one such gathering at the Geithner household: Liaquat Ahamed, author of Lords of Finance: The Bankers Who Broke the World, which details the mistakes that led to the Great Depression. Both men read the book, though Geithner found it so unsettling that he sent Ahamed a note saying he could not finish it until the worst of the current crisis was over.
As their relationship deepened, Geithner and Bernanke learned to understand each other through gestures. A knowing chuckle by Geithner suggests skepticism. The financial crisis generated a number of Geithnerisms, such as "spray foam on the runway," meaning taking steps to limit the fallout when a financial firm crashes. "Two of Tim's favorite aphorisms bear repeating," says Bernanke. " 'Life's about alternatives' and 'A plan beats no plan.' To me, these two aphorisms pretty well sum up what we know about respectively, economics and political science."
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