Timothy Geithner sees political gridlock as a threat to the United States

The biggest danger to the United States and its economy is the breakdown of the political system in Washington, former Treasury Secretary Timothy Geithner said in Tallahassee Wednesday.

“Nothing is more important than improving the quality of the decisions you get in Washington,” Geithner told members of the Economic Club of Florida during a luncheon.

“There’s no threat to us outside the United States that is greater … than that basic challenge. We have no capacity to think about those other threats from outside without taking care first of that fundamental part of the American system,” he said.

“It’s a nice rule in life — start at home. Start to figure out how you can rebuild that basic trust and confidence in this place and it’s capacity to do things. If we do that, then we’ll preserve the confidence and the growth in this place, and we’ll have enough strength that we can deal with any potential threat out there.”

The country’s leaders managed to do that during the 2008 financial crisis, which Geithner helped manage as head of the Federal Reserve Bank of New York.

“We had a political system that ultimately was able to come together — which is kind of rare today, too — across the parties, across administrations, and kept at it to figure out what would work,” Geithner said.

“It was messy, and terrible, and traumatic, and painful, and we’re still with the scars of it. But it made me more confident in our country, because we had pretty good institutions and they didn’t let politics get in the way.”

Geithner served as Treasury secretary between 2009 and 2013, and now is president of the Warburg Pincus hedge fund.

He believes in strong “fire stations” — institutions and regulations to respond to crises that can result when people’s optimism leads them into dangerous risks and financial collapse.

“Regulation can dampen that, but it can’t save us completely. Water will find its way around a stump in the river. People’s desire to earn a better living will sometimes find its way around regulation. That vulnerability, you can’t take out of the system. You should try hard to prevent that stuff from going too far. You have to protect against the risk that prevention fails. You have to have a very strong fire station.”

Asked about the bull market in stocks, particularly since Donald Trump’s election, Geithner said investors expect a stable economy with modest growth and low inflation, and that “things don’t fall apart.”

However, “reality tends to frustrate that.”

He sees political gridlock as a huge problem.

“We’ve lost the capacity in this county for principled compromise,” he said.

“We’re an afraid, wounded, divided country. We’re not a country built to survive long periods of paralysis in politics.”

He cautioned against indulgence in protectionism, “raising a lot of barriers to the world.”

“There’s no plausible external threat to the United States economically or strategically now. That’s likely to be true for some time unless we erode it,” Geithner said.

Asked about the Dodd-Frank financial regulations, now being targeted by Republicans, Geithner said they were written quickly and “came out pretty messy.”

“It’s a good idea to take a look at these things occasionally, and refresh them and redesign them. I always thought that time would come,” he said. “It’s not a bad idea to take a look at it.”

But he cautioned against eroding “the stuff that makes the system more stable.”

“You needed to have more capital in banks, and more conservative funding. That’s existential. You would not want to erode that,” he said.

“We have a dramatically more stable system today. That’s worth a lot. I think it’s overwhelmingly been positive, on balance. Look at other countries’ experience in this context — we have much stronger credit, and the price of credit is very attractive. Could it be better? Sure.”