The Federal Reserve made a rare promise on Tuesday to hold short-term interest rates near zero through at least the middle of 2013, in a sign that it has all but written off the chances of an expansion strong enough to drive up wages and prices.
It is now conventional wisdom among forecasters that the economy will plod along through the end of President Obama’s first term in office. Millions of Americans will not find work. Wages will not rise substantially.
By its action, the Fed is declaring that it, too, sees little prospect of rapid growth and little risk of inflation. Its hope is that the showman’s gesture will spur investment and risk-taking by convincing markets that the cost of borrowing will not rise for at least two years.
The Fed’s statement, with its mix of grim tidings and welcome aid, contributed to wild market oscillations as investors struggled to make sense of the economy and the path ahead. The day ended in a huge upward surge on the New York Stock Exchange — the second busiest day this year after the record volume on Monday, during a deep sell-off — that could not be tallied completely until well after the markets had closed.
The Dow swung as much as 600 points in the wake of the Fed statement, at first sinking over 200 points. But after traders absorbed the decision, they quickly reversed course, and the Dow closed the day up 429 points, or 4 percent, to 11,239.77, as some investors expressed hope that the pledge to keep interest rates low could relieve some of the gloom over the economic outlook.
“The economy is in tough shape and the Fed had a difficult job of showing that they understood that without appearing to be alarmist,” said Steven Lear, who helps to manage a $150 billion fixed-income portfolio for J.P. Morgan Asset Management. “We think that they’ve played that hand about as well as they could.”
The policy announced Tuesday is an incremental step that economists described as unlikely to drive significant growth. The Fed already has held rates near zero since December 2008, and the economy is awash in cheap money. The great impediment, beyond the Fed’s easy reach, is the lack of demand from indebted consumers, nervous businesses and a shrinking public sector.
The Fed demurred, however, from taking stronger steps to aid the struggling economy, a decision that reflected deepening divisions on its policy-making committee, which generally tries to move only by unanimous consent. The vote to promise two more years of low rates passed by a margin of 7 to 3, the first time in almost 20 years that at least three members recorded votes in dissent.
The internal controversy parallels the broader debate in Washington between those pleading for the government to redouble its support for the faltering economy, and those who doubt the utility of additional aid and fear the consequences of the vast efforts already made. The three Fed members in dissent all have expressed concern that the central bank is not paying enough attention to inflation.
The Fed said in a statement that it would continue to consider additional measures to support the economy, but the split vote suggested that the Fed’s chairman, Ben S. Bernanke, may struggle to win sufficient support.
The statement, which includes an assessment of the economy, was a patchwork quilt of discouraging language. The labor market is deteriorating, construction is weak, housing depressed, recovery slow.
“Economic growth so far this year has been considerably slower than the committee had expected,” it said. “The committee now expects a somewhat slower pace of recovery over coming quarters.”
Twenty-five million Americans cannot find full-time work, a number the Fed said would decline “only gradually.”
The Fed is charged by Congress with minimizing unemployment, and increasingly vocal critics have questioned why the central bank is standing still even as the economy shows clear signs of faltering. The modest step announced Tuesday did not satisfy many of those critics.
“The Fed took the least action possible given the circumstances,” Sherry Cooper, chief economist at the BMO Financial Group, said in a note to clients. “Bottom Line: Holy Cow!”
In part, the Fed’s answer is that it is already engaged in an immense program of economic aid.
The central bank has held its benchmark short-term interest rate near zero for more than two years, flooding the financial system with the nearest thing to free money. It already had promised, most recently in June, that it would keep rates near zero “for an extended period” — at least several months, Mr. Bernanke said earlier this year.
The Fed also has amassed a portfolio of more than $2.5 trillion in Treasury securities and mortgage-backed securities, putting downward pressure on long-term interest rates. The purchases have pushed investors into the stock market and other riskier investments, and reduced the value of the dollar, helping American exporters.
The decision announced Tuesday is intended to put additional pressure on long-term interest rates, although not with the same direct force as buying $600 billion in securities, a program it completed in June. The rates on long-term securities reflect a combination of expectations about short-term rates and a risk premium for holding a long-term note. Buying bonds reduces that risk premium; by promising to keep rates low, the Fed aims to reduce expectations about future short-term rates.
The Fed’s statement stopped short of an absolute commitment to provide two years of near-zero rates, preserving some room for movement if economic conditions change drastically. But Vincent R. Reinhart, who headed the Fed’s monetary affairs division until 2007, said the meaning was clear.
“It’s as close to an unconditional commitment as you can get out of a central banker,” said Mr. Reinhart, now a scholar at the American Enterprise Institute. “It means that you’ve handcuffed yourself. You can’t change it. You’ve given up unless there’s an overwhelming case to offset inflation risk.”
A second reason for the Fed’s restraint, it is increasingly clear, is the opposition of a group of Fed officials who are concerned that the central bank is overly discounting the risk of inflation.
The three members who dissented from the majority Tuesday were Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia.
By law the Fed is responsible for keeping prices steady and unemployment as low as possible. But Mr. Bernanke, like his predecessors, places greater emphasis on prices, in part because the Fed has concluded that slow, steady inflation — about 2 percent a year — is the best atmosphere for enduring job growth.
The Fed projected in June that inflation could reach 2.5 percent this year, a crucial reason for its announcement then that it would pause before considering new measures.
There are now signs that inflation is abating, as a temporary spike in commodity prices earlier this year works through the economy, and as growth weakens. Mr. Bernanke and his allies on the committee have predicted as much all year, and the announcement on Tuesday reflects confidence in that judgment.
But conservative members of the policy-making board see evidence in past recoveries that inflation can accelerate quickly, with little warning. Their dissents echo the last time the committee was as deeply divided, in November 1992, when three members pressed to begin raising the short-term interest rate, which then stood at 3 percent.
The Fed’s statement, indicating that it will continue to consider additional options despite those internal divisions, sets the stage for Mr. Bernanke’s speech later this month at a conference in Jackson Hole, Wyo. Last year, he used the opportunity to indicate that the Fed would undertake a new round of asset purchases. “The markets,” Mr. Lear said, “will be actively interested to hear what he says.”
It has been three decades since the United States suffered a recession that followed on the heels of the previous one. But it could be happening again. The unrelenting negative economic news of the past two weeks has painted a picture of a US economy that fell further and recovered less than we had thought.
When what may eventually be known as Great Recession I hit the country, there was general political agreement that it was incumbent on the government to fight back by stimulating the economy. It did, and the recession ended.
The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday in an unprecedented reversal of fortune for the world's largest economy.
S&P cut the long-term US credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.
The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.
On Aug. 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.
The White House maintained silence in the immediate aftermath of S&P downgrade.
The political gridlock in Washington and the failure to seriously address U.S. long-term fiscal problems came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.
The S&P 500 stock index fell 10.8 per cent in the past 10 trading days on concerns that the US economy may head into another recession and because the European debt crisis has been growing worse as it spreads to Italy.
US Treasury bonds, once undisputedly seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.
'DAUNTING' IMPLICATIONS
As the focus for investors shifted from the debate in Washington to the outlook for the global economy, even with the prospect of a downgrade, 30-year long bonds had their best week since December 2008 during the depth of the financial crisis.
That's the $14.3 trillion question as each day ticks closer to next week's debt ceiling deadline and Congress shows no sign of brokering a deal.
If lawmakers fail to raise the ceiling by Tuesday, the Treasury Department has said it will no longer be able to guarantee that it can pay all the country's bills in full and on time.
That's because Treasury will not be taking in enough revenue to cover all the bills coming due in August. And without a debt ceiling increase, it will be prohibited from borrowing new money in the bond market to make up the difference.
So, something will have to give.
The consensus thinking has been that Treasury will prioritize who to pay first and who to put off. And at the top of the list of who gets paid will be investors owed interest on U.S. debt. If the investors aren't paid, that would constitute a default, which would have a host of negative consequences for the country.
Of course, it's possible Treasury may decide it doesn't actually have the authority to prioritize and will instead pay interest owed to bond investors but pay other bills as they come due -- first come, first served, said former Treasury official Jay Powell, who coauthored a Bipartisan Policy Center report on the consequences of not raising the debt ceiling.
Assuming, however, that Treasury believes it has the authority to prioritize, it's not clear yet who will be paid first alongside investors. The Treasury has said it will provide more information as Tuesday approaches, and Republican Sen. Orrin Hatch has requested that the department turn over its plan by 5 p.m. on Thursday.
The plan, however, isn't likely to make anyone feel better.
Will I get my Social Security check?
That's because everyone to whom money is owed besides bond investors have either qualified for federal benefits, provided goods or services to the government, are serving in the military or otherwise work for Uncle Sam. Money will also be due to agencies to which Congress has legally appropriated money to run federal programs.
On deck to be paid every month: retirees, veterans, business owners, federal workers, active-duty soldiers, Medicare physicians and government agencies that need money to keep the lights on, to name just a few.
"While at midnight on August 2nd we don't all turn into pumpkins," White House spokesman Jay Carney said in a press briefing, he described the process of picking who to pay and who to put off as a "Sophie's choice."
How the math might work: The Bipartisan Policy Center estimates that Treasury will be short by about $134 billion for the month of August.
That cash deficit will build steadily throughout the month.
So, on Aug. 3, for instance, the center estimates that Treasury will take in $12 billion in revenue and have to pay out $32 billion, creating a $20 billion cash deficit. Among the biggest bills due that day: $23 billion for Social Security payments, $2.2 billion for Medicare and Medicaid payments, and $1.8 billion due to defense vendors.
On Aug. 4, the group estimates that the cash deficit will increase to $26 billion, with only $4 billion in revenue coming in, compared to $10 billion in bills, the largest of which would be for Medicaid and Medicare.
Come Aug. 5, the cash deficit grows another $5 billion to $31 billion.
By Aug. 15, the Bipartisan Policy Center estimates that the running cash deficit will hit $74
billion. That day the Treasury will take in an estimated $22 billion in revenue and have to pay out roughly $41 billion. The biggest bill that day is a $30 billion interest payment.
Cash on hand: What's not yet clear is how much cash Treasury might have on hand going into August.
The Bipartisan Policy Center estimates it might have enough, in theory, to pay bills in full until Aug. 10.
Even if that's right, however, Treasury may still decide to withhold some payments sooner to preserve cash to ensure it can make interest payments after Aug. 10.
It may also keep some cash on hand to ensure it can make principal payments on bonds coming due after Aug. 10.
Treasury will be able to hold bond auctions to roll over existing debt as it matures -- more than $450 billion is expected to come due in August.
However, if there isn't enough demand for Treasuries because of the uncertainty the political crisis in Washington has caused, those auctions may fail to raise all that Treasury needs to pay the principal due.
So Uncle Sam would have to pony up using the revenue coming in. That would mean even less money available to pay seniors, vets, small business owners and others who are part of the lifeblood of the U.S. economy.
The nation is just days away from the debt ceiling deadline, and no one knows exactly what will happen when the borrowing limit is reached. But even in the worst case scenarios, many experts think investors will flock to U.S. Treasuries.
That possibility would mean lower borrowing costs for the government, not the spike in interest rates that many were expecting.
"Intuitively, this might not make sense because you would think there would be selling of Treasuries, but instead the Treasury market is well-supported," said Richard Bryant, head of Treasury trading at MF Global.
The experts admit they're not sure how markets will react if there is no solution by the Aug. 2 deadline. But many believe that stocks will suffer more in the uncertainty caused by a debt ceiling crisis.
"We'll have a liquidation of risky assets and a flight into quality," said Kim Rupert, Managing director of Fixed Income for Action Economics. "There really isn't an alternative [to Treasuries]."
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U.S. Treasuries are such a massive market -- about $9.8 trillion -- that they dwarf the markets of other so-called "safe havens" such as gold, top-rated corporate debt or the bonds of other countries with AAA ratings.
And the expectation that the U.S. Treasury will continue to pay the principal and interest payments owed on existing debt, even in the case of a prolonged deadlock, will give investors a sense of confidence, even if there is a downgrade.
"I don't think a rating change will fundamentally change anyone's view about the likelihood of being paid back on Treasuries," said Josh Fienman, chief economist DB Advisors. "They will continue to think that Treasuries are 'money- good.'"
Fienman said that the U.S. debt ceiling crisis is widely viewed as less serious than the lingering worries about European sovereign debt. He said the U.S. needs to address its long-term government deficits, but that is a problem that needs to be solved in the coming decades, not coming days.
"This is a self-inflicted crisis. No one in the market is unwilling to lend to the U.S., " he said. "Some people find it galling, but no matter what the U.S. does, it's able to borrow at extraordinarily low interest rates."
Some worry about whether foreign investors will sour on U.S. Treasuries if there is a crisis. But countries with huge holdings of U.S. debt, such as China, have an interest in making sure that bonds stay strong during a debt ceiling crisis so as not to hurt the value of their existing holdings.
"We suspect that China would quickly pledge to continue purchases of Treasury securities, just as it has done for debt issued by governments in the eurozone, given the even greater risks to its own wealth from a financial meltdown in the U.S.," said Julian Jessop Chief International Economist for Capital Economics in a note Thursday. "China's own rating is currently AA-, so it would be odd for Beijing to make a big deal of a downgrade that would almost certainly still leave the U.S. rating higher.
A prolonged debt ceiling deadlock could quickly cause the government to stop making other payments , cutting paychecks to federal workers, contractors and citizens depending on payments such as Social Security.
Analysis by the Bipartisan Policy Center estimates that cut in spending could come to $134 billion in August alone, roughly the equivalent of cutting annual spending by $1.6 trillion. And that slashing in spending has many economists worried that the crisis could spark a new recession.
But a recession, while terrible for stocks and a country as a whole, can be good for bond prices, which move in the opposite direction of bond yields. Lower inflation expectations that typically accompany a recession lowers the returns that investors demand on a nation's debt.
The record low yield for the 10-year Treasury of just above 2% came in December 2008, when the country teetered on the edge of a new depression. Rupert said yields could approach those lows, nearly a full percentage point below current levels, if another recession starts.
One other factor that could lift bond prices is that Treasury could be forced to stop selling new bonds, which would limit the supply available for investors. Limiting supply typically helps to lift prices.
Thursday's auction of 7-year Treasuries came in with a yield of 2.25%, the lowest rate Treasury has had to pay for notes of that term since last November.
The debt ceiling talks, for weeks now, have been going on behind closed doors. The negotiations have been conducted by a tiny group of legislative leaders and President Obama's top aides.
All the while, the countdown to Aug. 2, when the government will no longer be able to pay all its bills, has marched closer.
Any proposal will still have to be put into legislative language, scored by the Congressional Budget Office and vetted by rank-and-file lawmakers whose votes will decide its fate.
Even after the principal negotiators announce a deal, the rest of Congress will have to be convinced to go along. The closer to D-Day Washington gets, the messier it will be.
Witness what happened on Sept. 29, 2008, when the House at first rejected the $700 billion bank bailout bill.
Weeks earlier, Fannie Mae and Freddie Mac had been placed into conservatorship by the Treasury Department. Lehman Brothers had filed for bankruptcy. AIG Corp, the world's biggest insurer, had been bailed out by the Federal Reserve.
After all that, the Senate passed the bill. And then, as markets watched, the measure was voted down in the House -- a defeat that shocked investors and congressional leaders on both sides of the aisle.
Debt ceiling: What happens if Congress doesn't raise it?
Following the vote, the Dow slumped 778 points, in the biggest single-day point loss ever.
A few days later, the House reversed course and passed a modified version of the bill. Some 58 members switched their votes.
Why was the process so hard? A principal reason is that it was rushed.
Lawmakers who voted against the bill warned that "being stampeded" into a decision would be a serious mistake.
"Wall Street is so hungry for the $700 billion they can taste it. To get it they need to ... create panic, block alternatives and herd the cattle. We ask Congress not to rush," California Democrat
Rep. Brad Sherman said before the vote.
"I am voting against this today because it's not the best bill. It's the quickest bill," Rep. Marilyn Musgrave, Republican of Colorado, told the New York Times. "Taxpayers for generations will pay for our haste and there is no guarantee that they will ever see the benefits."
Norman Ornstein, a resident scholar at the American Enterprise Institute, said lawmakers now face a similar situation, but this time around, "It's worse."
Lawmakers aren't going to have a lot of time to consider their options. And all the negotiations are happening behind closed doors, limiting the involvement of rank-and-file members.
"With TARP, it wasn't clear that another day or two wouldn't make a big difference," Ornstein said. "If you take two to three days messing around with this, you end up with what could be a profound and very long lasting impact."
The White House has already warned that time is running short, saying that a deal needs to be completed in the next couple days in order to give Congress time to pass a bill.
Alabama Republican Sen. Jeff Sessions has voiced concern about the timeline, saying there is a "very real risk that no text will be available until the last minute" and that a bare minimum of seven days is needed to review legislation.
How Washington screwed up the budget
"The real endgame here is not August 2," Ornstein said. "It takes time to put any agreement into legislative language and get it scored. It sure as hell doesn't look to me like we are urgently moving to make sure that happens."
And like 2008, not everyone is dealing with the same set of facts. At that time, every high-ranking government official from then-President Bush on down was warning of dire consequences if TARP faltered in the House.
That moved a few members into the "yes" column, but not all.
"We're on the cusp of a complete catastrophic credit meltdown. There is no liquidity in the market," Rep. Sue Myrick, a North Carolina Republican, said in a statement before the vote. "We are out of time. Either you believe that fact, or you don't. I do."
Right now, despite warnings from Treasury Secretary Tim Geithner, President Obama, Federal Reserve Chairman Ben Bernanke and even House Speaker John Boehner, a number of Republicans remain so-called debt ceiling deniers.
"You've got enough people out there, way too many people, who aren't going to be convinced until Armageddon actually happens," Ornstein said.
How much clearer can Ben Bernanke be?
The Federal Reserve Chairman has issued a stern warning to Congress repeatedly this year: if it fails to raise the U.S. debt ceiling by Aug. 2, the economic fallout could be "catastrophic," "self defeating" and "dire."
And yet, here we are in mid-July, with the country only three weeks away from a possible default, and Bernanke is repeating his warning again -- this time in his semi-annual monetary policy report to Congress.
"Clearly, if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world," Bernanke said, indicating such an event would raise interest rates and send shockwaves rippling through the entire global system.
And contrary to what some Republicans have proposed, just paying interest on the debt to bondholders may not preserve the nation's pristine credit rating, Bernanke said.
"It's possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since it makes the deficit worse," he said.
Debt ceiling: Chaos if Congress blows it
If Congress does not pass the debt ceiling by Aug. 2, the Treasury Department will not be able to pay at least 40% of its bills -- possibly including payments to Social Security recipients and military pay.
Bernanke also indicated the U.S. economy is at a crossroads, and the central bank is prepared to either provide further stimulus or pull back from intervening.
"On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," he said in prepared testimony, indicating the Fed stands ready to provide additional stimulus if the recovery falters.
While those remarks immediately gave U.S. stocks a boost, the Fed chairman was quick to follow up that statement with a completely opposite idea -- showing it's not really clear which direction the economic recovery is heading right now.
"On the other hand, the economy could evolve in a way that would warrant a move toward less-accommodative policy," he said.
From November until June, the Fed bought $600 billion in U.S. Treasuries as a way to boost the economic recovery.
Amid disappointing jobs reports in May and June, and other weak readings on the economy, critics have questioned whether that controversial policy -- known as the second round of quantitative easing, or QE2 for short -- has actually worked.
Debt ceiling: What you need to know
Bernanke cited statistics that private businesses have averaged 160,000 jobs created each month in 2011, and part of that could be due to QE2.
That said, the Fed is maintaining its weak forecasts for the year overall, expecting the economy to grow by only 2.7% to 2.9% in 2011.
Meanwhile, inflation remains a concern, Bernanke said. He had previously argued that higher consumer prices are merely "transitory", but he changed his tune slightly Wednesday and seemed more vigilant of inflationary pressures.
"Given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate," he said.
The public pressure on lawmakers to raise the debt ceiling was ratcheted up Wednesday when a major rating agency said it would put the sterling bond rating of the United States on review for possible downgrade.
Moody's Investors Services said it had initiated the review because of "the rising possibility" that Congress will fail to raise the debt ceiling by Aug. 2 -- something that could lead to a U.S. default on its debt.
If the debt ceiling isn't raised by then, the Treasury Department says it will no longer be able to pay all the country's bills in full and on time without being allowed to borrow new money. (Read: Debt ceiling FAQ)
"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis," Moody's said in a statement.
The United States enjoys its AAA rating in part for having always stood behind its debt and paid its bills on time. As a result, U.S. Treasury bonds are considered the world's safe-haven investment.
The Treasury Department issued an immediate response Wednesday.
"Moody's assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country's obligations and agree upon a substantial deficit reduction package," Treasury official Jeffrey A. Goldstein said in a statement.
Debt ceiling: Chaos if Congress blows it
In the still unlikely event the United States would default on any of its interest payments to bondholders, Moody's said it expected the default to be short-lived and the loss to bondholders "minimal or non-existent."
But, the agency added, a default "would fundamentally alter Moody's assessment of the timeliness of future payments." Translation: The United States would be downgraded to AA status.
Beyond the debt ceiling: Even if lawmakers raise the debt ceiling in time, Moody's also made clear that it is expecting progress on the long-term debt.
The agency said it would likely change its outlook on the AAA rating to "negative" from "stable" absent a "substantial and credible" debt-reduction deal.
Moody's had alerted investors in early June that it was considering putting the U.S. rating under review unless it saw forward movement in the debt talks by mid-July. It cited as a concern the "heightened polarization" in the debate.
Since then, negotiations led by Vice President Biden to find a compromise broke down and the prospects for a "grand bargain" have been called into question.
Market reaction: Just how the bond market -- i.e., the investors around the world who lend to the federal government -- will respond to Moody's action is not clear yet.
Bond traders may take note but not blink since the agency already signaled its intention -- "so no surprise factor," said Steve Van Order, a fixed income strategist at Calvert Investments.
And Moody's isn't the ultimate arbiter.
"The bond market will follow its own judgment of how Washington is approaching deficit reduction, not the decisions of the rating agencies," said Jim Vogel, head of interest rate strategies at of FTN Financial.
But, Vogel noted, "Moody's action will focus the market's attention on the debt ceiling more than it has been in recent days. Rating agency actions also may provide a rationale for policy makers to alter their voting stance as deadlines loom."
Bernanke: Default would cause 'major crisis'
Moody's isn't the first ratings agency to announce a negative action.
In April, Standard & Poor's revised its outlook on the country's AAA rating to negative from stable.
S&P's reason: Relative to its peers, the United States has "very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us."
Fitch Ratings, meanwhile, said in early June that if lawmakers fail to raise the debt ceiling by Aug. 2, it would put the country on "ratings watch negative," meaning there is a "heightened probability" of a rating change.
Timothy Geithner said Thursday that he plans to stay on as Treasury Secretary for the foreseeable future. But that hasn't stopped speculation about who might take his place later this year.
Sources told CNN and other news outlets Thursday that Geithner is considering leaving the Obama administration later this year, once negotiations on raising the government's debt ceiling and cutting the budget deficit are complete.
Geithner's family is moving back to the New York suburbs where they lived before he took office so his son can finish high school there. And as the head of Treasury through the worst financial crisis in a generation, and the last key member of President Obama's original economic team still on the job, a desire to leave wouldn't be a shock.
Geithner tried to tamp down the reports of his imminent departure when speaking in Chicago Thursday by saying he wasn't planning on leaving anytime soon.
Still, economists and Washington experts were already talking about who might take over the high-profile job.
Near the top of the list is current White House Chief of Staff Bill Daley, a close Obama confidant and someone who was brought in at least partly because of his good relationship with the business community.
Before taking the job in the administration earlier this year, Daley had been an executive at JPMorgan Chase (JPM, Fortune 500). He also served as Secretary of Commerce in the second term of the Clinton Administration.
Also at the top of many lists is Erskine Bowles, the Democratic co-chairman of the president's bipartisan commission on cutting the budget deficit. Bowles, who had served as White House Chief of Staff in the Clinton administration, would be an relatively easy pick to get confirmed given the budget cutting emphasis in Congress today, according some experts.
But when contacted Friday, Bowles, 65, appeared to take himself out of running for the job, saying that he is not interested in any full-time job at this point in his career.
"I am looking forward to being useful in part-time endeavors," he said.
Investment banker Roger Altman is another name that has been mentioned, but his name has surfaced for previous openings on the Obama economic team without ever getting tapped for a position.
And White House Budget Director Jacob Lew, who has been central to negotiations on the debt ceiling and deficit reduction, is another name suggested by experts.
Jamie Dimon, chairman and CEO of JPMorgan Chase, who is often described as "Obama's favorite banker" is another prominent name mentioned. A spokesman for the nation's second largest bank holding company had no comment on whether his boss would be interested in the job.
Greg Valliere, chief political strategist, Potomac Research Group, said he doesn't think it'll be a good idea for Obama to pick someone from Wall Street, given the government help banking giants like JPMorgan -- along with rivals likeCitigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) -- received during the crisis three years ago.
"I just think that Wall Street is not the way they would go. It could be an albatross for this administration," said Valliere. "And having him berating [Federal Reserve Chairman Ben] Bernanke in public three weeks ago certainly didn't help his case."
Valliere said that he thinks Obama should try to go with a high-profile Treasury Secretary outside of banking and Washington -- someone like Berkshire Hathaway (BRKA, Fortune 500) Chairman Warren Buffett, an earlier supporter of Obama four years ago, or New York Mayor Michael Bloomberg.
"I think he should do something bold and swing for the fences. I think Mike Bloomberg would be an electrifying pick," he said. "The only problem is that he could stray from the reservation on the message. But he's an entrepreneur who knows about creating jobs."
Bloomberg has denied interest in an administration post in the past, and has said he intends to complete his term as mayor which runs through 2013. A spokesman in the mayor's press office declined to comment Friday.
But the political reality is that it might be impossible to get any replacement for Geithner confirmed by the Senate in the year before a presidential election, said Jaret Seiberg, a research analyst at MF Global Inc.'s Washington Research Group.
Seiberg pointed out that 44 Republican senators have vowed not to confirm any nominee to head the new Consumer Financial Protection Bureau because they want the new agency's powers substantially trimmed. The same political battle could lead that group to block a Treasury nominee as well, he said. Even Alexander Hamilton would have trouble getting confirmed today, he said.
"The problem is there is no ideal candidate out there," said Seiberg. "I think it's a Herculean task to get anyone through the Senate right now. That's why at the end of the day, we're likely to have Geithner stay in place."
Valliere said if confirmation becomes the major hurdle to a new Treasury chief, he could see Secretary of State Hillary Clinton moving over to Treasury, with Sen. John Kerry taking her spot at State. Past and current senators have an easier time winning confirmation than do outsiders, he said. And he said that the Treasury job has become a diplomatic job as much as a finance job in the current interconnected global economy
Greece's recently approved austerity plan might not resolve deeper questions over how the country will repay its debts beyond this summer, but it appears one of the world's biggest investors still has faith in the country and and the greater eurozone. After all, it would be too risky not to.
Earlier this week, just days before the Greek Parliament approved austerity measures amid talks of a possible default, China said it would keep investing in Europe's sovereign debt. Premier Wen Jiabao told reporters that the country actually increased the purchase of government bonds of some European countries and hadn't scaled back its euro holdings.
These acts "show our confidence in the economies of Europe and the eurozone," he said.
China's backing isn't all that surprising. It was only earlier this year when the Asian giant supported debt-ridden Spain by signing $7.3 billion in deals that included investments in everything from energy to banking to oil. And it was around this time last year that China pledged to make more than a dozen major commercial contracts for business in Greece.
The value of these purchases may very well be in flux amid debt problems that have put many investors on alert, but that's beside the point of China's voracious appetite. China has more to gain than lose by investing in Europe's future. Even as misery and uncertainty mounts in the region, the eurozone is still China's largest export market (accounting for roughly 20% of total shipments) and it's in its own interest to contain the crisis.
"They're not really concerned about short-term volatility," says Domenico Lombardi, senior fellow specializing in international monetary relations and global currencies at Brookings Institution.
Besides, as China expert Barry Naughton of the University of California in San Diego, pointed out earlier this year: The risks are relatively low since the European Union and the European Central Bank will likely swoop into the rescue if things get really bad.
Wednesday's $41 billion worth of budget cuts and asset purchases was part of a large-scale bailout launched last year to help debt-troubled Greece pay its loans. The European Union and the International Monetary Fund had required Greek lawmakers to pass the plan before releasing its next round of rescue payments.
China's foreign-exchange reserve, worth more than $3 trillion, is by far the biggest in the world and is viewed by politicians and corporate executives as a key source of capital. It's unclear just how much China has boosted its holdings of European bonds, as leaders keep the breakdown of its holdings secret. But just by saying it will invest in Europe, China indirectly calms markets and helps stabilize the euro, and in a way, sends a message to the world at large that it's a good global neighbor willing to help in times of crisis.
Longer-term, the Chinese have been looking to diversify its massive reserves away from the volatile U.S. dollar. To be sure, the euro has also seen its share of peaks and valleys throughout the crisis but the currency is still the most practical alternative to the greenback, says Lombardi, whose research has focused on the ongoing European crisis.
This surely isn't the last time we'll hear the Chinese back the eurozone. If and likely when financial instability rumbles in other parts of Europe in the coming months, we'll probably hear from the Chinese again.
The European Union approved the disbursement of it's last $17 billion tranche of bailout funding Saturday, putting Greece's debt crisis at bay -- for now.
With the last part of the $156 billion bailout package in place, the struggling nation will be able to keep functioning for a little while longer. The disbursement, which will be made by July 15, follows the Greek Parliament's approval of new austerity measures.
This latest piece is the fifth tranche of a bailout that was approved by members of the European Union last year.
"The Greek authorities provided a strong commitment to adhere to the agreed fiscal adjustment path, and to the growth-enhancing structural reform agenda, which are essential components of our strategy to restore fiscal sustainability and safeguard financial stability," ministers said in a statement Saturday.
European officials will now work on a second proposed bailout.
The bailout is a highly contentious subject in Greece. As the Greek Parliament voted in favor of the funding on June 28, thousands of protesters descended on Athens and clashed with riot police. Tear gas choked the streets as protesters and police pounded each other with clubs and firebombs.
Greece: Back from the brink - for now
However, the bailout won't take care of the nation's long-term budget problems, according to Mark Blyth, an economics professor at Brown University in Providence, R.I.
"This is simply giving them more breathing space, while they're kicking the can down the road," Blyth said, referring to the bailout. "They need to have enough money to cover the primary fiscal debt, and for keeping the lights on at the hospitals and military bases. Once they've got that, they're able to default without shutting down the country."
Blyth believes that a Greek default is inevitable. "Ultimately, there's no way the Greeks can pay back what they've borrowed," he said.
The debt-ridden nation has "heavy near-term financing requirements," according to S&P, with about $135 billion in government debt maturing between now and the end of 2013. An additional $82 billion is set to mature in 2014.
Still, the rest of Europe does not want Greece to default, because it would rupture the bond market and undermine the European banking system so severely that the repercussions could be felt on Wall Street.
Greek austerity: Cure or poison?
The French banking association and the German Finance Ministry, as well as German banks, have offered proposals to keep the Greeks from defaulting on $152 billion worth in bonds.
These proposals offer different variations on the same theme: rolling over Greek debt. As explained by Barclays (BCS), one of the options is to roll the debt into a 30-year bond, with at least 70% backed by private sector investors.
For the Greeks, there is one part of their future that is crystal clear: more austerity. In order to qualify for the final tranche of the bailout, the Greek Parliament had to agree to a new raft of austerity measures, in addition to the ones that were imposed on the Greek people last year. This is why people were rioting in the streets of Athens.
Since 2010, the Greeks have faced a myriad of austerity measures including pension cuts, a boost to the sales tax, excise taxes on fuel, cigarettes, alcohol and luxury goods, more stringent eligibility for disability benefits, and a hike in the retirement age to 65 from as low as 61.
On June 29 and 30, the Greek Parliament approved a new raft of austerity measures that included reducing the pay of public workers, increasing the attrition of public jobs and ramping up taxpayer compliance.
Tax dodging, in particular, is one of the most chronic fiscal problems in Greece. Many of the protesters in Athens blame rich tax evaders for their nation's troubles. The protesters -- particularly the young and unemployed -- believe they're being forced to shoulder an unfair burden to get their country out of hock.
The pain of Greece's crisis
Marko Mrsnik, the lead analyst in the recent Standard & Poor's downgrade of Greece, blames the austerity measures for exacerbating the shoddy job market. The unemployment rate has soared to 16.2%, compared to 11.6% in March 2010, he said.
The contradiction of the austerity measures is that they're harming the economy even as they're keeping it afloat, according to Jurgen Odenius, a strategist for Prudential Fixed Income.
Here's what Americans can look forward to if lawmakers fail to raise the debt ceiling in time: Treasury would not be able to pay between 40% and 45% of the 80 million payments it needs to make every month.
That's the estimate from a new analysis by the Bipartisan Policy Center, a think tank in Washington founded by four former Democratic and Republican Senate majority leaders.
A delay in raising the debt ceiling could affect Social Security checks, food stamps, federal worker and military paychecks, government contractor bills and payments to Medicare and Medicaid providers.
"Handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, active duty pay) will quickly become impossible," the report's authors noted.
Treasury Secretary Tim Geithner has said that by Aug. 2 he will no longer have enough money on hand every day to pay all the government's bills in full and on time. The government reached the legal borrowing limit on May 16 and has been taking "extraordinary measures" since to keep the country out of default.
To ensure it has enough cash on hand to make a $29 billion interest payment to investors on Aug. 15 -- among other payments -- the government would have to defer 44% of federal spending, and that would affect the broader economy, according to the BPC study.
Treasury is expected to update its estimate of the so-called "drop dead date" at the start of July, but no one expects the date to change much.
It's impossible for anyone to know exactly how much the government will take in and have to pay out on any given day in August. The BPC based its estimates on the revenue and outlays reported by Treasury from August 2009 and August 2010.
Bond experts to Congress: Don't mess it up
It's also impossible to say yet just how the government would prioritize payments. It's fair to assume, however, that picking who gets paid and who gets put off will be a mess technically and socially because it's never been done before.
"The reality would be chaotic," the report states.
The going assumption is that Geithner will do everything he canto pay bond investors, so the country doesn't go into a formal default.
"The Treasury Secretary will squirrel away money like -- well, a squirrel. He may have to delay some payments starting days or weeks early to prepare for big important payments later," said Joe Minarik, who served as the chief economist of the White House Budget Office in the Clinton administration.
And as the BPC study noted, the whole event could cause a public uproar and market unrest, the outcomes of which is anyone's gues.
