The President-elect’s Economic Advisers

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President-elect Obama has announced his team of economic advisers. Hear what ASU finance professor Herb Kaufman has to say about the choices.

Ted Simons
>> Today President-elect Barack Obama formally introduced his team of economic advisors. Federal Reserve Bank President Timothy Geithner will serve as Treasury Secretary and will be Obama's economic spokesman. Lawrence Summers will head the National Economic Council. He served as Treasury Secretary for President Clinton. And Christina Romer, an economics professor at the University of California, was chosen to chair the Council of Economic Advisors. Earlier this evening I spoke about the choices with Herb Kaufman, professor of finance at Arizona State University's W.P. Carey School of Business.

Ted Simons
>> Thank you for joining us on Horizon.

Herb Kaufman
>> Thank you.

Ted Simons
>> Let's start with the particulars. Tim Geithner to head Treasury. Who is it?

Herb Kaufman
>> The President of the Federal Reserve Bank of New York. Maybe your viewers don't know that President of the Federal Reserve Bank of New York has the unique function in the policy making group that fed call the Federal Market Committee. The president is a permanent member of that committee because all activity through the financial markets run through New York. Geithner also has an incredibly important resume'. Great background. Treasury, international monetary fund. He then went to the federal reserve bank of New York and has been intimately involved in everything that has happened in the last six months. Seems like it has to be over five years. But in the last six months with all the rescues packages and bailouts and so forth that have taken place.

Ted Simons
>> Good choice as you see it?

Herb Kaufman
>> I think he's excellent. I think he has two things going for him, among others. First of all -- maybe three. First of all, he's a very smart guy. The second thing is he's highly experienced and he was a player at every stage of this so he's quite familiar with what is happening and what is going on. He's going to inter-- to interact well. He has been a part of the interaction with the folks coming in the Obama group as well. I think he'll turn out to be an excellent appointment. When it was announced on Friday the market soared and I think the street -- which is the third thing I was going to mention -- the street knows him. You can't be the Federal Reserve President in New York and not have great interaction with Wall Street and the financial community in general. And he's had that.

Ted Simons
>> National Economic Council Lawrence Summers to head that, Lawrence Summers. Talk to us about him.

Herb Kaufman
>> Lawrence Summers was the last Treasury Secretary under Bill Clinton. He was a protege' of Robert Reuben who was sort of legendary as Treasury Secretary. Not so legendary these days as a lead director at Citibank but we can get back to that. But he did do a yeoman's job at treasury and Lawrence Summers he groomed clearly to take his place at treasury. He did -- Lawrence Summers did under the last few years of the Clinton administration went on to be President of Harvard, had a mixed reception there because of perhaps some ill-advised comments that he made. But he's no question one of the leading economists of the world of his generation.

Ted Simons
>> Do these choices signal to the markets, to the economy in general, that the Obama administration is somewhat on top of things here?

Herb Kaufman
>> I think it signals it very much. Again I point out that when Geithner's announcement was confirmed, appointment was confirmed, the markets did soar. They continued to go up today at a substantial pace. I think at least in the short-term the market is giving this an incredible vote of confidence. Of course what happens tomorrow is a whole new thing. And unfortunately, Obama cannot Milwaukee an appointment a day of the stature of Geithner and Summers. So we'll have to see. And it is going to take some time for all the stuff that he's talking about for --

Ted Simons
>> There does seem to be talk, lots of talk regarding a stimulus package somewhere around 700 billion, maybe even more, over two years. Is this time kind of thing A, that you are hearing and B, if it comes to fruition a good thing?

Herb Kaufman
>> Well, it is what I'm hearing. And do I think at this point in time we have no choice. The economy is in a severe recession. It's going to get worse before it gets better. We are certainly going to have the worst recession in the post-war years. We have no other player that can take us out more quickly than the government, I fear. I say that as a free market economist who would like not to see a government intervention, that word, too often. But I think across the political spectrum among economists on both sides of the conservative, liberal divide, there's pretty good consensus that we need this now we need it as soon as possible.

Ted Simons
>> Speak of that, we have Citi now getting a rescue effort. Talk to us about this.

Herb Kaufman
>> This seems to be the most -- of all the stopgap rescue bailouts ad hoc whatever you want to call them, packages, this seems to be the most considered one. It gives the government a major stake if city bank comes back. They're going to get -- they have preferred shares, the government does, preferred shares, they have warrants for common shares. Clearly they're going to own about 8% of Citi under any circumstances. And they are causing Citi to take a deductible, as an auto insurance policy, going to guarantee about $306 billion in Citi bank assets, questionable, no question, but they have to take the first 29 billion of losses on that and 10% going forward. It's more complicated than that but we can stop there.

Ted Simons
>> Real quickly, are we going to see some loan modification out of this as well?

Herb Kaufman
>> I'm not sure if city bank is required under this deal to do that. It seems loan modifications are spreading. We know Bank of America and -- are doing this. I think Citibank will be in the same condition. You have to understand the actual assets being guaranteed by the government are packages of these things, not individual loans.

Ted Simons
>> Last question: critics are saying these things, like Citi, they have to fail in order to send a message that you can't take these kinds of risks in the future. The market has to punish and penalize itself.

Herb Kaufman
>> I may have been on this program after we let Lehman Brothers fail. And I may have said to you that I thought that was a good signal because of exactly the reason you said. And I was wrong, okay? When Lehman failed, it totally -- destroyed confidence in the financial markets. I like that model. It is the right model. We're going to have another test of that model to the degree with the auto industry. I like the model in general. But I think the financial system is the bloodstream of the economy. A bank like Citibank that is so integrated not only in the U.S. but across the world is simply -- and I hate this phrase -- too big to fail.

Ted Simons
>> All right. Well, thank you again for joining us. We certainly appreciate it.

Herb Kaufman
>> My pleasure, Ted.

Herb Kaufman:Professor of finance, W.P. Carey School of Business, Arizona State University

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