Geithner Galls Gadflies

I want it all
I want it all
I want it all
And I want it now
-Queen

It's only a month before spring but we can already feel the fog beginning to lift. Of course, today's fog is the heaviest and thickest fog seen in a while, but it feels good to see a potential positive, in any case.

I'm speaking, of course, with regard to Treasury Secretary Timothy Geithner's speech last week. The quote above applies to many who waited breathlessly during the five-day buildup to this speech, expecting some sort of magical plan to appear. The reality is that no silver bullet plan exists and pretending it does would only bring further disappointment and loss of confidence in the future.

Certainly, society is not so focused on immediate satisfaction that an initial speech from an incoming official could be his death knell?

On the contrary, I saw many positives in last Tuesday's address. Here are a few:

1.Most importantly, there were no specifics.
Yes. You read that correctly. Because no one has all the answers today, to come out and state that you do only sets yourself up for assured destruction. Instead, Geithner has set a course toward recovery, while increasing his credibility with those who understand the depths of today's economic woes. He seems to be taking the tack of a CEO who is navigating in uncharted waters with limited vision in every direction. In fact, that is the situation today not only for business owners, but for government officials too. To repeat, no one has all the answers. The government must react and adjust, but keep an eye toward a single course at the same time. Perhaps Geithner is the man who can lead us in this manner.

2. There were no four- or five-letter designations mentioned.
Over the last fifteen months we have had no less than 16 government bailout programs announced with acronyms from CPFF to TALF. The market has alphabet-fatigue. Instead, he has one name for the government's efforts: "Financial Stability Plan."

Sure, this is simply a marketing fix, but who doesn't realize boosting market confidence is a marketing game? After Lehman, a multitude of new programs were created pointing at every corner of the markets. Instead of realizing we had economy-wide issues to deal with and creating an economy-wide approach, the government attempted to use a scalpel on our individual problems. Geithner, it seems, is starting from scratch with a view from thirty-thousand feet. In the short run, I expect the market to lose confidence (as it did last week) as this is yet another shift in strategy. But if he sticks to his guns, inviting every market challenge under the same tent, eventually investors and consumers will realize he has created a flexible tool to address all of the challenges we face today and tomorrow.

3. He has created a simple three step approach.
Understanding where every market challenge fits is quite important for the institutional investor. We want simple fixes for simple problems. Instead, what we have today is a mishmash of approaches that are somehow supposed to come together and provide support across the markets. Investors are not buying it.

The three step plan simplifies the government's toolbox so that investors can more easily grasp their commitment toward resolution. The three steps, which necessarily have not been fully fleshed out, are: 1) create a "Financial Stability Trust" to oversee the government's investment in financial institutions, 2) create a "Public-Private Investment Fund" to make it less risky and/or more profitable for private investors to transact in the marketplace as opposed to asking the government to take on this task directly, and 3) create a "comprehensive housing program" aimed directly at the housing sector and the many potential problems to come from future bankruptcies and foreclosures.

Hopefully, Geithner will move down this path consistently, certainly correcting course as necessary, but no longer abruptly changing directions. This will help instill confidence in both the business and consumer sectors of the economy.

Key Developments

The trade deficit in December narrowed slightly to $39.9 billion, much lower than its peak of $67 billion in the fall of 2005. Many who have wished for an improving trade deficit certainly did not envision an overall slowing of global trade as their preferred cause. Instead, the hope for greater productivity and more appropriate pricing of overseas goods was their goal. Today's lower deficit is simply a reflection of lower consumer and business spending around the globe.

In a surprise move upward, retail sails actually increased one percent in January after falling each of the previous six months including a three percent decline in December. In the context of sizable declines through the fall of 2008, January's jump, while encouraging, is not yet indicative of any sort of recovery on the consumer side.

The House and the Senate passed the latest economic stimulus plan which totals $787 billion to be spent over the coming years. While a headline politically, most market participants realize a one-time injection totaling approximately seven percent of one year's GDP will not provide a turn in the economy. Only an attitude reversal of dejected consumers and investors will get the economy back on track and this is why the actions of Treasury Secretary Timothy Geithner are placed genuinely in the front seat.