The Importance of Impressions

Given the magnitude of the problems in the financial sector, the government programs initiated to ameliorate the situation ultimately depend on a good degree of public support or, at least, acquiescence. This poses a special challenge when it comes to the arcane issues of the banking system and financial markets.

It is somewhat surprising that in this regard the Federal Reserve has recently done a better job than the Treasury in explaining itself. Normally the Fed is secretive and strives to maintain an aura of omniscience. The attitude they often project is that lay persons need not bother with the details known only by the Fed’s high priests. There is a reason, after all, that William Greider chose the title Secrets of the Temple for his 1987 book on the Fed.

Earlier this month, though, Chairman Bernanke, in an unusual public relations move and a welcome change, granted 60 Minutes an extensive interview. (It can be viewed here.) Whether or not one agrees with all that the Fed has done in response to the crisis, my impression was that the interview served Bernanke and the Fed well. It humanized the Fed chairman, and he explained what he was trying to do. The Fed seems to realize that it is necessary to explain itself as best it can as it continues to take large and unprecedented actions.

It is worth noting that Michelle Smith, who worked at Treasury in Public Affairs and eventually headed it during the Clinton Administration, is one of the key people at the Fed directing its public relations strategy. Secretary Rubin, one of the Treasury Secretaries for whom Smith worked, had one of the best public images of any Secretary while he was in office. Some of the credit for that goes to Treasury's Office of Public Affairs.

The Treasury’s current public image needs improvement. The rollout of the strategy to address the problems of the financial sector was widely panned. The AIG bonus and retention payment fiasco is threatening to undermine that strategy, both because it has weakened public and Congressional support for new initiatives and because it has caused private entities with whom Treasury wants to have help it price and purchase “toxic assets” reevaluate whether they want to enter into a partnership with the government. The New York Times in an article today entitled “A.I.G. Uproar Is a Defining Moment for Geithner” called this week “perhaps the worst week in a string of bad weeks for the Treasury secretary.” Criticism is coming from across the ideological spectrum in Congress and elsewhere.

Secretary Geithner can probably surmount his current troubles if he can provide a credible plan to deal with the current financial problems and can get his political team in place. He also has to figure out how to sell his programs to the public and to Congress. He has some time, but it is finite.

What Treasury and the Administration need to avoid is prompting comments such as that Simon Johnson posted on the Baseline Scenario on March 11: “At last, our long wait to learn the Administration’s policy on banking is over. The policy is: wait.” Somewhat better was David Wessel’s article in today’s Wall Street Journal – “Believe It or Not, Treasury Has a Plan to Fix Banks.” The concluding sentence, though, reads: “The Geithner plan might not work. It does exist.”

Geithner needs to be both creative in his approach to the problems in the financial sector and in explaining his initiatives. We should all hope he succeeds.