Does Geithner Appointment Stop Washington Blame Game?

President-elect Barack Obama is moving to fill what Wall Street has been fearing was a dangerous "void." NBC News reports that the president-elect will name the New York Fed's Tim Geithner to the post of Treasury Secretary and name other members of his economic team.

These moves will hopefully start to give shape to the new Administration's economic policies and position it to start tackling the financial crises. There's some who have been saying that if the economy falls into an even deeper trough, you could lay the blame squarely on Washington.

Since before the election, economists have been worried the economy could get worse during the void—the period between election day and the inauguration of President-elect Barack Obama in January. Now, with Congress still uncertain over what to do for the ailing auto industry; no sign of a stimulus package until early next year, and as yet unformed economic policies from the Obama Administration, it would be fair to think they are reassessing their expectations.

Goldman Sachs , for one, said today it was cutting its fourth quarter forecast for GDP because of inactivity during the "void." It now sees GDP contracting at an annual rate of 5 percent, from its previous estimate of a decline of 3.5 percent. Goldman economists say they adjusted their forecast because of falling demand in the U.S. and internationally as well as a deteriorating labor picture. But the main reason for the change—"an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January."

The "void" bridges what economists expect to be the two darkest quarters of the current recession, and the deeper the trough, the longer the recovery. Goldman economists had expected a 2 percent decline in the first quarter , but now they see that number falling to 3 percent. They also see a second quarter decline of 1 percent, where they had been previously flat. The second half of 2009 should show growth of 1 percent, just slightly lower than their previous expectation.

"Although persistent downside surprises are a major driver of the current-quarter adjustment, the main reason for the downgrade to our forecast is the policy impasse that has developed in Washington and the tightening in financial conditions it has provoked," they wrote. "It is now reasonably clear that a second fiscal package will not be enacted until after the Obama administration takes office in late January. Other potential measures of support—deployment of TARP funds and more aggressive expansion by the GSEs, for example—likewise await the transfer of power."

They also expect the employment situation to worsen, and they raised their unemployment forecast to 9 percent from a previous 8 percent by the end of 2009, with even greater increases in 2010. "This forecast, if correct, makes the current recession unequivocally the worst single downturn on record since World War II in so far as increases in joblessness are concerned," they wrote.

The weakening in real activity and slowing inflation also affected their profit forecast. They took their forecast from a drop of 20 percent for 2009 to a decline of 25 percent, the biggest drop since 1938.

The economists say they expect the next round of stimulus to exceed the $200 billion they have included in their assumptions, but they have not altered their forecast because the size and timing are still uncertain.

While the economists did not address this, there had been concern that the lack of an Obama Administration Treasury Secretary nominee was creating more uncertainty around the government's efforts to bailout the financial system.

The news of Geithner's nomination may help combat that. It certainly sparked a strong rally in stocks, taking the Dow up 494, to 8046. "I think he's a terrific appointment from everything that I know about him," said Hatzius. "Clearly he's somebody who understands the financial crisis very well from his experience with the Asian crisis and he's somebody who's been intimately involved with policy over the last couple of years."

Treasury Secretary Hank Paulson has said he will not request any more funds from the TARP (Troubled Asset Relief Program). He also sent shock waves through the markets when he said last week that the mission of the TARP has changed to inject capital into institutions, not to buy troubled assets from them. Just look at the trashing financial stocks have taken since those comments were made.

Citigroup is probably the most shocking example. It is trading below $4 a share. Citigroup has lost more than 70 percent of its value since it received $25 billion from the TARP on October 29. It's market cap has gone from $70 billion to less than the $25 billion it received.

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