Lunch With the Treasury Secretary

When I wake up at 4:30 am each morning to check the overnight markets and review the opening salvo of incoming emails, I often have trouble focusing in my groggy state. So I had to blink twice when the first message in my inbox politely inquired if I had time to meet the Secretary of the Treasury in Palo Alto for lunch that day, apologizing for the short notice.

Tim Geithner was in San Francisco for a day to meet with a small group of venture capitalists and other business leaders. I can’t say who else was invited. Suffice it to say that I was the only one without an NYSE or NASDAQ listing.

When I greeted lithe, athletic, but diminutive Treasury Secretary, I could see the six secret service agents in the room visibly tense up. At 6’4” I towered over him, but he shook my hand firmly. I knew he was an avid surfer, and asked if he had stowed his board on Air Force One so he could shoot “Steamer Lane” in nearby Santa Cruz after the meeting. He laughed, confessing that he rode the waves in a less than adequate fashion.
Geithner succinctly laid out the administration’s position on a wide range of financial and economic issues. The economy is now healing, has been growing for 20 months, but conditions were still very tough, especially if you were in construction, real estate, or small banks. Private sector investment grew of 20% in H1, but then slowed down to 10% in H2. Exports are strong.

The economy is undergoing some difficult, but necessary changes. The crisis was caused by excessive debt levels, the adjustment of which is now mostly behind us. The savings rate has soared from below 0% before the crisis to 4%-6% today. The debt burden is falling. Still, further measures are required.

Geithner thrilled his audience by proposing a permanent investment tax credit for domestic R & D. On top of that, he wants to add a one year tax credit for capital investment. It was music to the ears of those present, who were primarily engaged in the business of starting new companies. He would also eliminate tax preferences that encouraged companies to build plants overseas. At the very least, the playing field should be level.

Stepped up spending on infrastructure is a big priority, which has suffered from decades of neglect and under investment. The US is not a country with unlimited resources, and this is where the taxpayer gets the highest return on money spent. He also highlighted the urgency to extend tax cuts for the bottom 98% of the working population. The country entered the crisis with an unsustainable fiscal situation, and this would help address that.

Geithner says that the US would not engage in a debasement of its currency.  It is very important that our counterparties believe that we will fulfill our long term obligations. The US benefits from the dollar being used as a reserve currency, and there will be no non dollar reserve currency in our lifetimes.

The Dodd-Frank bill was an essential reform, as a huge financial industry had grown up outside the existing rules. Banks needed bigger shock absorbers. Governments do a very bad job at picking industries to protect, which only supports the weak at the expense of consumers.

Geithner said that by any measure, the Chinese Yuan was undervalued, and that was unfair to all of the country’s trading partners. Although this was enabling China to reap short term benefits, long term it meant that the US was setting its monetary policy. A flexible exchange rate would give China economic independence and soften the impact of imported inflation. When asked what exchange rate he would be happy with, he would only say “HIGHER”.

The 49 year old Geithner has devoted much of his life to public service. He spent his childhood abroad while his father was a micro finance administrator for the Ford Foundation, growing up in Zimbabwe, Indonesia, and India, and finally graduating from high school in Bangkok. He did his undergrad at Dartmouth, and obtained a master’s in Asian studies at Johns Hopkins, where he gained fluency in Chinese and Japanese. I first met Tim myself two decades ago, when he was a low level Treasury attaché at the Tokyo embassy who spoke the local language flawlessly. After that, his rise was meteoric, from Undersecretary of the Treasury for International Affairs, to President of the New York Fed, to his current gig.

Geithner put on quite the performance. No matter what the question, he was able to caste it in the context of its historical background, the lead up over the past two decades, the current policy response, and parallels with other major and minor countries. We jumped from the Japanese stagnation, to the Swedish banking crisis in the early nineties, to Indonesia’s explosion of hyperinflation in the sixties, to the Mexican debt crisis, all within a minute. His canned answers to standard question rolled effortlessly off his tongue, while original problems delivered an intensity of thought one rarely sees.

Before he left, I pulled out all the cash in my wallet and pointed out to Geithner that while I had bills signed by previous Treasury Secretaries Larry Summers, Paul O’Neil, and Robert Rubin, I lacked one with his illegible scrawl. Did he have any which he could exchange with me? He sheepishly admitted that while such bills existed, they we being held back from circulation until the Treasury’s existing stockpile of Hank Paulson bills ran out, in order to deliver taxpayers good value for money. I would only see his bills once the economy recovers and the growth of M1 starts to accelerate. That is truly an answer one would expect from the 75th Treasury Secretary.