Sunday, August 07, 2011

Is It Time for Geithner to Go?

Is it time for Treasury Secretary Tim Geithner to go? He is now the last remaining member of the original Obama economic team in place. The calls have begun for his resignation, accelerated by the truly dismal economic events of the past week.

After weeks of claiming a debt ceiling deal was crucial to keep the stock market stable, the deal didn't. The stock market did a nose dive when the deal wasn't strong enough on the reform side for S&P, resulting in a downgrade of our country's credit rating for the first time ever in our history.

The reality is that no one can know for sure how much this recent wave of stock market pessimism reflects disappointment over the debt-ceiling deal. Markets can be fickle and could easily turnaround as fast as they headed south. What we can say with certainty is that the market rally that Washington said to expect after a bill was passed has not materialized. Once again, Washington's conventional wisdom was wrong. And that is something you can almost always take to the bank.

Geithner confidently proclaimed that there was absolutely no risk of a credit rating downgrade before there was, in fact, a credit rating downgrade. HERE is the tape.

An accounting error seems to be the sticking point that resulted in the decision of S&P to go forward with the downgrade. That is the Treasury Department's story and they are sticking to it.

The error came about because S&P took the amount of deficit reduction CBO calculated from the Budget Control Act and applied it to the wrong starting point, or “baseline.”

Specifically, CBO calculated that the Budget Control Act, including its discretionary caps, would save $2.1 trillion relative to a “baseline” in which current discretionary funding levels grow with inflation.

S&P incorrectly added that same $2.1 trillion in deficit reduction to an entirely different “baseline” where discretionary funding levels grow with nominal GDP over the next 10 years. Relative to this alternative “baseline,” the Budget Control Act will save more than $4 trillion over ten years – or over $2 trillion more than S&P calculated. (The baseline in which discretionary spending grows with nominal GDP is substantially higher because CBO assumes that nominal GDP grows by just under 5 percent a year on average, while inflation is around 2.5 percent a year on average.

The impact of this mistake was to dramatically overstate projected deficits—by $2 trillion over 10 years. As anybody who has followed the fiscal discussions knows, a change of this magnitude is very significant. Nonetheless, S&P did not believe a mistake of this magnitude was significant enough to warrant reconsidering their judgment, or even significant enough to warrant another day to carefully re-evaluate their analysis.

So, are they saying that it was a source of stubborn pride that forced S&P to go ahead and issue the downgrade? The agency's pride got in the way and admitting the error was not in the equation, though the next day they did do so? The other credit agencies have not followed suit with downgrades.

Republicans are calling for Geithner's resignatinon. Senator Rand Paul issued this statement Saturday:

This is not the first time Secretary Geithner and his team have failed to correctly diagnose or manage an economic problem. During his tenure at the Federal Reserve and as Treasury Secretary, Secretary Geithner has had a direct role in the failure of the Fed to diagnose and act on the housing crisis. He presided over bank bailouts, auto bailouts and failed trillion-dollar stimulus plans.

Last year, he announced to the American people “welcome to the recovery,” when in fact the our economic crisis has continued. He has contributed not only to the first-ever debt downgrade, but is on the record as clearly disputing it could ever happen.

“There is plenty of blame to go around. Both parties have contributed to our $14 trillion debt. But it is hard to say this crisis wasn’t predictable, because it was. House and Senate conservatives clearly predicted this, and also offered the only solution that could have prevented our downgrade with our Cut Cap and Balance plan,” Sen. Paul continued. “We must rescue our finances through a Balanced Budget Amendment, and we must do it soon. We must cut spending immediately. And we must get new leadership, and put in place people who have seen problems coming and offered credible solutions, rather than those who continue to misdiagnose and mismanage our economy.”

Friday, GOP Presidential candidate Michele Bachmann called for Geithner's resignation.

Speaker of the House Boehner called for Geithner's resignation, though not for the first time.

Boehner has called on Geithner to step down before, but an aide to the Ohio Republican told The Hill Saturday morning that the speaker really wants Geithner to leave in the wake of Standard and Poor’s downgrading of the U.S. credit rating from AAA to AA+.

Is it time for Geithner to go?

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