Qualities the Next Treasury Secretary Needs

U.S. President-elect Barack Obama's Treasury secretary must be a regulator, diplomat, defender of the dollar and master of depleted coffers, all while figuring out how to escape a nasty recession.

The past 14 months of market turmoil have dramatically changed the job description, perhaps more so than at any time since William Woodin was appointed to Franklin Roosevelt's Cabinet during the Great Depression in 1933. He resigned after less than a year due to ill health and died in 1934.

Filling the top Treasury position will be among the first critical decisions that Obama will make, most likely very soon after Tuesday's presidential election.

The economy was the top issue for many voters as Obama defeated Republican Sen. John McCain.

High on the next Treasury boss's to-do list is rewriting the rules of finance to prevent another credit crisis like the current one that threatens to trigger the worst U.S. downturn in 30 years, derailing global growth in the process.

That may explain why the list of likely candidates for the Obama administration includes Timothy Geithner, the president of the Federal Reserve Bank of New York, who has been at the
center of efforts to stabilize financial markets.

Obama's short list is also said to include former Treasury Secretary Lawrence Summers and former Fed Chairman Paul Volcker. He has spoken favorably about investor Warren Buffett as well.

Regardless of who gets the job, "the first two years are going to be horrible," said Andrew Milligan, head of global strategy at Edinburgh-based Standard Life Investments, which manages assets of roughly $210 billion.

"At the moment, I would assume that probably Geithner is as well-placed as anybody. You need someone who is really au fait (familiar) with the financial crisis."

Bills, Bills, Bills

The Bush administration and Fed have committed trillions of dollars to try to avert a financial system meltdown. That will push the national debt well above $11 trillion.

Deutsche Bank economist Peter Hooper thinks the budget deficit will exceed 7 percent of gross domestic product next year, more than double this year's and the highest in the developed world.

That will constrain the next administration's spending capacity and require some delicate diplomacy with countries such as China and Japan that hold hundreds of billions of dollars worth of U.S. debt. They have grown increasingly wary as the credit crisis intensified.

"They will have to care a lot about foreign investors," said Harm Bandholz, an economist at UniCredit in New York.

"Without foreign investors, none of these government rescue programs would work because the U.S. wouldn't be able to finance them."

How the new administration tackles regulatory reform will be a critical factor in where overseas investors decide to put their money. Current Treasury Secretary Henry Paulson has largely set the course for the rescue operation with the $700 billion bailout plan approved by Congress earlier this month.

Walking a Fine Line

The biggest task is figuring out how to tighten regulation enough to prevent another crisis without stifling the financial markets that serve as a vital driver of economic growth.

"We have no idea at the moment what the regulatory system is going to look like," Standard Life's Milligan said. "The political debate and discussions are going to be legion. There is no overarching regulatory structure. How do you regulate a universal banking system?"

Because of the other daunting tasks before the next administration, dollar policy has received little attention lately. The Bush administration presided over a steep decline in the value of the currency, something economists welcomed as an important step toward rebalancing a global economy plagued with a massive U.S. trade deficit and Chinese surplus.

A weaker dollar makes U.S. exports cheaper, and helped to prop up the economy earlier this year, but it also sparked some uncomfortable discussions on whether the greenback was losing
its primacy as the global currency of choice. The next Treasury secretary would likely follow Paulson's pattern of talking up the dollar but doing little or nothing to prevent its decline.

UniCredit's Bandholz pointed out that as the credit crisis raged over the past month, the dollar gained, which should ease any concerns that the next administration may have about the
dollar's standing among investors.

"When it comes to a crisis and investors are looking for safe havens, they buy U.S. dollar-denominated assets," he said.

"There is no doubt that the dollar will be the No. 1 global currency for a number of years."

At least that's one problem the next Treasury secretary won't have to worry about.

Copyright 2008 Reuters. Click for restrictions.