A Letter to My Friend Tim Geithner

Dear Tim,

I was going to say "Congratulations" on your nomination to be Treasury Secretary (who knew when we were in Tokyo together in the early '90s that you'd end up with your name on U.S. currency someday?). But I'm not sure congratulations is exactly the right word, given the fiendishly parlous economic times in which we now live. I do wish you luck, though, and in this little missive I'll try to offer a bit of advice.

I know this has been a horrifically grueling year for you; I also know that you, Henry Paulson and Ben Bernanke are doing your utmost and don't get a lot of sleep, even on weekends. I've been watching this astonishing (and dispiriting) U.S. financial meltdown mostly from afar. But I've been watching pretty closely nonetheless, and a couple of things occur to me. (See photos from the financial meltdown.)

First, because the crisis has metastasized so swiftly, you three guys have failed to adequately explain the systemic risks that lie behind the decisions to spend billions of taxpayer dollars. The three of you, before Congress and in the press, have spent a lot of time asserting that those risks were there, but I don't think you've ever really explained them. AIG, for example, is now getting $150 billion of our money. But it would actually be nice to know, specifically, why that's the case — and yes, please, bore me with details. Lots and lots of them. The chucklehead brigade on cable news and in the blogosphere may make fun of you for doing so, or they may ignore you. Do it anyway.

Why? Because I think those details would be useful, and not just for the intellectual edification of policy wonks. Details could also help tamp down what I suspect is a rising (though not yet obvious) anger in the U.S. among those who (as a President you worked for in the '90s once put it) "work hard and play by the rules." Nowadays, I suspect that a lot of us, who try to do exactly that, believe we're being played for suckers. We work hard, play by the rules — and get stuck with the bill. And as this recession deepens — and the economic pain spreads far and wide — that perception is dangerous. I'm just a guy who lives in Shanghai, but from a recent, relatively long visit to the U.S., I think a potentially poisonous populism — a very, very angry populism — lurks just beneath the surface these days. I'm astonished, in fact, that it hasn't really surfaced yet in a more obvious way. It may yet.

Finally, it would be nice if, upon inheriting Paulson's job in January, you provided a bit more coherence to just what exactly you guys are trying to do, and how. I know this is much easier said than done, given the startling rapidity with which things have headed down the drain. But the bailout of Citibank about a week ago makes the point; at the start of this, the so-called TARP (the Troubled Asset Relief Program) was going to be used to buy bad assets from financial institutions. Those institutions could then be recapitalized and, with their balance sheets repaired, set about lending again to qualified individuals and businesses, providing the economy with the seed corn it needs to grow. Then, a couple of weeks ago, Secretary Paulson said that that wasn't going to be how the TARP funds would be used. He announced, in effect, that the TARP was going to be rolled up, having not spent some $300 billion in funds that Congress, after much drama, had allocated. Then Citibank teetered, and out came the TARP again, this time in pretty much its original guise: to ring-fence the toxic assets on Citi's books. This made some sense, because leaving toxic assets on banks' books, at a time when additional assets may well be losing value because the economy is weakening, means that recapitalizing the banks doesn't have the same effect that it would if those bad assets were removed from the books in the first place. It's like stripping old paint off a wall before applying a new coat, isn't it? Isn't this one of the lessons we both learned from Japan's mistakes in the '90s? And if not, what am I missing?

Questions are not fewer because of the recent switch in tactics — if anything, they've increased: What was the point of the TARP in the first place? Where do we go now that Citi's been bailed out? Do toxic assets remain on other institutions' books? And if so, why? Is it too difficult for the government to price them and run the auctions that would get rid of them? So Tim, do us all a favor. Make two long, sober speeches: one explaining systemic risk, and one explaining, conceptually, what you will be up to once you take over at Treasury. The chuckleheads of American pop culture and political journalism be damned; these times — alas — demand seriousness. And you, thank God, are up to that.

Bill