New President Looks in Vain for Head of Treasury

President Barack Obama is inheriting the worst recession in decades and it's possible that in his first few days -- and potentially weeks -- he won't have a Treasury Secretary to guide fiscal policy.

Obama's Treasury Secretary-designate Timothy Geithner, who is still officially the chairman of the New York Federal Reserve, last week admitted that he didn't pay Social Security and Medicare taxes from 2001 to 2005 when he worked for the International Monetary Fund. In addition, he employed an immigrant housekeeper who, though she was legally in the U.S., continued to work for Geithner during a three-month period when her papers were expired.

The N.Y. Fed President discussed the tax and immigration issues at a closed-door meeting with the Senate finance panel last Tuesday, which has delayed his confirmation hearing, now scheduled for Wednesday morning at 10 a.m. EST.

"It was a big mistake, it was an embarrassment, but he is the right guy for this job, which is why he has bipartisan support," said Rahm Emanuel, Obama's chief of staff, on NBC's Meet the Press on Sunday.

Avery Shenfeld, senior economist at CIBC World Markets, said Geithner is likely to be approved on Wednesday, but even if there is a delay there shouldn't be any material block to how the TARP funds are injected into the economy.

"There is an acting Secretary who will be the face of the Department for the days it takes to either confirm Geithner or come up with an alternative, and in any event, the wheels are already in motion on the details of the second TARP allocation as well as the fiscal stimulus bill," he said.

Markets were uninspired by the inaugural address from the 44th president on Tuesday. The S&P, Dow, and Nasdaq each saw their worst one-day drop since Dec. 1.

"Both Obama's team, and Congress, are in the mood to get things done, given that the crisis mood on both Wall Street and Main Street is only deepening," Shenfeld added.

Following the meeting last Tuesday, Senate Finance Committee Chairman Max Baucus (D-Mont.) said the issue shouldn't be disqualifying, and Senator Orrin Hatch (R-Utah) said Geithner was "competent" and that he would support his nomination.

Others, however, were less gracious. "It's serious, and whether or not it's disqualifying is to be determined," said Senator Charles Grassley (R-Iowa).

According to reports of the closed meeting, Geithner admitted the mistake but said it was not intentional.

Geithner was considered "self-employed" when he worked with the International Monetary Fund between 2001 and 2004, the Wall Street Journal reported. "The IMF and World Bank reimburse employees, including U.S. citizens, for their U.S. income taxes. They don't, however, make contributions toward Social Security and Medicare taxes, which individuals are expected to pay on their own."

When Geithner discovered his mistake in 2006, he paid the taxes owed for 2003-04, but he failed to pay $25,970 owed for omitted taxes from 2001-02, which he was not legally required to pay due to the IRS's statute of limitations.

Once he was approached by the Obama administration, Geithner paid the taxes, plus interest.

By Patrick McGee, pmcgee@economicnews.ca, edited by Sarah Sussman
©CEP News Ltd. 2009