The Turf Wars Ahead

There's a Mutt-and-Jeff quality to the relationship between Tim Geithner and Larry Summers. They are good friends who play tennis together (Summers, despite his bulk, is a surprisingly agile competitor who gives the lean and fit Geithner all he can handle). Each is aware that they bring complementary abilities to the table. "Tim admires Larry's intellectual candlepower, and Larry admires Tim's knowledge of government," says one close associate of both. By several accounts, their personalities mesh very well, too. Whereas Summers is known for his intellectual assertiveness ("arrogance" was the term freely used in his younger days) and penchant for the spotlight, Geithner is widely praised for his self-effacing willingness to credit others for the success of his policies. During the late 1990s, both men were admiring acolytes of Treasury Secretary Robert Rubin; according to their own testimony, they learned a great deal from his cool and competent handling of the Asian financial contagion.

Now Geithner and Summers will supply the one-two punch behind President-elect Obama's efforts to raise the U.S. economy out of the worst financial crisis since the Great Depression. In the early months of the administration, with so much on the line, we can expect that Treasury Secretary-designate Geithner and National Economic Council director Summers will act quickly and congenially to implement Obama's plans for a vast fiscal stimulus.

The question is, how long will all this good fellowship last? Turf wars at high levels are an almost inevitable consequence of crisis management in Washington. And there is reason to think that Summers—passed over for the Treasury secretary job he had wanted to reclaim in favor of his onetime subordinate, Geithner—is not going to be shy about seeking to dominate the new administration's economic policy, including the Treasury Department. Obama all but conceded this role to Summers at the news conference on Monday at which he announced their appointments. The president-elect called him "one of the great economic minds of our time" and said that Summers' ideas on income inequality and boosting the middle class "will be the foundation of all my economic policies." "I will rely heavily on his advice as we navigate the uncharted waters of this economic crisis," Obama added.

If all goes according to plan, Summers will supply the big think while Geithner, who earned his chops as a market interventionist in the mold of Rubin, will be the point man implementing policy in the clinches. That should work fine until the financial system stabilizes. But then the Obama administration will have even bigger challenges to tackle: How big and targeted should the fiscal stimulus be? How should the team deal with the long-term deficit? And above all, how should it remake the global financial system? That's where Geithner may start to feel like a Summers subordinate again. "The risk for Tim is that he's viewed as being No. 2," says a former New York Fed official who knows both men well. "He's going to have to develop views on fiscal policy that aren't necessarily his strong suit, where Larry is going to be dominant." If Summers is increasingly perceived that way, this former official says, "he will be undercutting Tim, whose effectiveness will be reduced. That's when the heads of Wall Street firms start calling Larry instead of Tim. That's the issue, that's the tension. How do they manage that?"

And then there is the question of Ben Bernanke, whose term as Fed chairman expires a little over a year from now, in January 2010. It's no secret that Summers covets Bernanke's job, and recently the Obama camp made him even more jittery by leaking the suggestion that he would not be reappointed next year to make way for Summers. Bernanke and Summers are longtime academic colleagues, but if the Fed chairman—like Geithner, no egotist—comes to perceive every Summers suggestion as a potential threat, then the perceived friction between them could begin to roil the markets.

Finally, on Wednesday, Obama created a whole new sphere of influence in the potential fight for economic turf. He named former Fed chairman Paul Volcker as head of his "Economic Recovery Advisory Board," with Obama's longtime campaign advisor, University of Chicago economist Austan Goolsbee, as the top staff official. This will create another power center that could come to rival what the National Economic Council became when Bill Clinton first created it in 1993. At the time the NEC was seen as fairly innocuous, a place to roost for Bob Rubin while Lloyd Bentsen was Treasury secretary. Guess who quickly became the dominant voice in the administration?

Though all of these men are, to differing degrees, centrist Democrats, there is little evidence that they agree on policy. One pleasant myth out there is that all these new players—especially Summers and Rubin—will simply be devoted practitioners of "Rubinomics,"or the idea that fiscal discipline is a panacea. Both clearly do look up to their former boss, who is now keeping a low profile over the near-implosion of Citigroup, which has been his home since he left Washington. After Summers took over as Treasury secretary in 1999, the formerly rough-edged academic gave emotional thanks to Rubin for teaching him how to manage people and crises. "I can't begin to describe how much I have learned" from him, Summers said at his swearing-in. Geithner, who worked as a relatively junior staffer under Rubin, also became his disciple after watching him herd banks into place during the Korea crisis in December 1997. On one critical day, when Seoul had just $4 billion in reserves left and was losing $1 billion a day, Rubin got on the phone from his vacation home in the Caribbean and told every major banking head around the world that they'd better extend their credit—or else. "They all said it was an amazing performance," recalls one former associate of Geithner's. As a crisis manager, Rubin is indeed the model, as well he should be. But in other areas, Rubin's influence is greatly overstated. First, the economic environment is completely different from the early '90s, when Rubin persuaded the Clinton administration of the need to appease the bond market with fiscal discipline. "I think you can throw most of those notions out the door," says the former Fed official. "At that point, interest rates were high, and bringing down the deficit was a way to bring interest rates down. In this case you've got a deflationary specter out there. Interest rates are low and it's actually a problem if they go lower." Summers, in fact, was one of the first economists with Obama's ear to propose a massive fiscal stimulus—the deficit be damned.

And in general both he and Geithner are much leerier of letting markets run free than was Rubin, who made his bones as a Goldman Sachs currency trader. Geithner "is one of the more interventionist people you'll come across in government circles," says the former official. He is known as one of the strongest voices for bailing out Korea and the Mexican peso, as well as intervening in the dollar market when both Rubin and Summers were wary. Summers, for his part, has long been a closet advocate of far greater regulation than Rubin would ever embrace. His old academic work often focused on market imperfections; in the 1980s, he even proposed a transaction tax on short-term trading (at a time when Rubin was doing it for a living).

Summers also became a quiet advocate of the views of liberal Harvard economist Dani Rodrik,-who believes in more measured globalization and tougher market regulation. Another key member of the Obama team, Office of Management and Budget director-designate Peter Orszag, once worked under Rubin as well. But Orszag was mentored before then by Joseph Stiglitz and Alan Blinder, whose work also stresses the government's role in preventing market failure. Even so, long-term fiscal sanity—the essence of Rubinomics—will no doubt be at the back of all their minds once the crisis passes, if only to rescue the dollar from another slide.

So, yes, the Obama economic crew is firmly a team of friends, not rivals. But don't expect them to operate like one for long. And don't hold your breath waiting for the return of Rubinomics.