Treasury Secretary Timothy Geithner (epa/ZUMApress.com)

This weekend, Treasury Secretary Timothy Geithner appeared on two Sunday news programs to make the case for the expiry of the Bush tax cuts on the wealthiest earners and to argue for a strong recovery. The backdrop for the appearances is the looming fight over how to extend the 2001 and 2003 tax cuts. If Congress takes no action, taxes will rise for all income brackets.

[Economy1] The Obama administration hopes to extend the tax cuts for everyone making less than $125,000 a year, or $250,000 a year for couples. Some congressional Democrats want to keep lower taxes for all Americans until the recovery takes better hold. Most Republicans want to make the tax cuts entirely permanent. That sets the stage for a serious fight, during the run-up to the midterms, between the two parties and possibly among Democrats as well.

On This Week, Geithner called the Obama plan the “responsible thing to do, because we need to make sure we can show the world that [we are] willing as a country now to start to make some progress bringing down our long-term deficits.”  He also said that “letting those tax cuts that only go to 2 percent to 3 percent of Americans, the highest earning Americans in the country, expire” would not “have a negative effect on growth.”

That argument is designed to combat the Republican line that tax increases would cut GDP growth and jobs. In advance of November’s midterm elections, campaigning for which will begin in earnest after the August congressional recess, Republicans have prepared a talking-points campaign focusing on the “Democrat tax hike.”

Delivering the Republicans’ weekly radio address this weekend, Rep. Mike Pence (Ind.) argued, “The economic policies of this administration have failed. Last year, the Obama administration said that its trillion-dollar ‘stimulus’ plan would create jobs ‘immediately’ … [but] unemployment remains near a heartbreaking 10 percent.”

He continued, “[I]f they haven’t already done enough to wreck our recovery, Democrats in Washington are pushing more spending, more regulation, and right around the corner: more taxes. Democrats in Washington are now actually talking about embracing what would be the largest tax increase in American history.”

But Democrats are not embracing the tax increases wholesale, and several Democrats support extending them for at least another year or two. Kent Conrad (D-N.D.), a deficit hawk and the head of the Senate Budget Committee, is arguing for extending all cuts. “In a perfect world, I would not be cutting spending or raising taxes for the next 18 months to two years,” he told reporters. “This downturn is still very much with us unfortunately.”

But the Obama administration is also heralding the economic turnaround more loudly than congressional Democrats. In a separate appearance on Meet The Press this weekend, Geithner said that “the most likely thing is, you see an economy that gradually strengthens over the next year or two. You see job growth start to come back again.”

Other economic figures do not agree. Testifying before Congress last week, Ben Bernanke, chairman of the Federal Reserve, described a weaker economy and argued for retaining tax cuts as a form of stimulus. “In the short term I would believe that we ought to maintain a reasonable degree of fiscal support, stimulus for the economy,” he said. “In the longer term, I think we need to be taking steps to reassure the American people and the markets that our fiscal situation is going to be well controlled.”

The Republican congressional leadership has argued that tax cuts do not need to be offset, because they are stimulative, a point contended by conservative and liberal economists.

Frank said:

I need people to understand she’s not a zealous advocate but a very smart operator. Sometimes people think those are separate. That if you care a lot about an issue, you’re not going to be effective in putting it forward. I never had a better partner on a tough fight than I had in Elizabeth Warren. Her knowledge is great. Her compassion is great. She stands out as the person who ought to be running that agency.

He also noted:

I sympathize with President Obama. He’s been criticized by some of my liberal friends. We didn’t get a public option and other things we wanted. That wasn’t his fault. The economic recovery bill, the stimulus, it wasn’t as big as it should have been. That wasn’t his fault. He couldn’t get the votes. With regard to appointing Elizabeth Warren, that’s his decision. No one can stop him from making it. I hope he will appoint her.

And Treasury Secretary Timothy Geithner, without outright supporting Warren, had warm words for her this week as well:

She represents to a large part of the country — not just people caught up in the damage of the crisis, but people who view this system as being fundamentally broken — she represents, again, one of the most compelling advocates for reform.

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

Bloomberg, today:

House Financial Services Committee Chairman Barney Frank ruled out creating a single U.S. bank watchdog similar to the U.K.’s Financial Services Authority as part of an overhaul of regulations.

Failure to communicate? Not necessarily. Both the administration and Frank seem interested in combining the responsibilities of the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation into a single banking regulator, and both seem to favor a separate regulator, likely the Federal Reserve, to focus on systemic risk. The difficult question, as I see it, is whether this division makes sense.

On the one hand, two separate regulators overseeing the health of the banking system provides an opportunity for redundancy. Should the Federal Reserve fall into the hands of a laissez-faire ideologue (difficult to imagine, but play along) then a separate regulatory agency overseeing banks could take steps to shore up capital buffers and limit risky activities at systemically important institutions. The system might have functioned this way before the current crisis, were banks not in a position to shop among multiple regulators (OCC, OTS, FDIC), which created an incentive for the regulatory bodies to compete for banks.

On the other hand, having dual regulatory agencies creates the potential for a lot of buck-passing. Pulling away the punch-bowl is not popular. Bubbles make a lot of people very (though temporarily) rich, and those people will command a lot of political influence, which will be marshaled to fight any attempt to enforce sobriety. The systemic regulator could be tempted to declare problematic issues the purview of the banking regulator, and vice versa.

It’s important to have a place where the buck definitively stops, and a few carcasses which can be nailed to the wall in the event of a major regulatory failure. That’s currently difficult to do, because so many potential overseers fell down on the job. Deny the regulator any scapegoat, and the regulator is more likely to do his job effectively.

When Geithner didn’t immediately jump on the idea, Sherman jumped on him.

“You won’t commit to telling the American people how many folks at Goldman, Sachs or AIG are going to make a million dollars this year?” Sherman asks Geithner.

Geithner, slightly rattled, responded that he’ll “think carefully” about the suggestion.

Watch:

As a reality check, let’s review something that happened recently — a reminder of how we got into this crisis and who bears most of the responsibility for it. On Thursday, the Federal Deposit Insurance Corporation announced it had completed the sale of IndyMac, a once high-flying subprime lender that failed last summer. The total loss to the federal insurance fund? Some $10.7 billion, according to the FDIC.

IndyMac sustained huge losses selling Pay Option ARMs, which are loans that require little or no documentation. They allow the borrower to pay only the interest on the loan for several years, or to choose the amount of the monthly payment. These loans went south quickly, often because borrowers couldn’t afford the houses they bought or their loans reset to much higher payments as the loan balance grew.

Did any of this stop IndyMac from selling these loans, even at the end of its tenure, when it was clearly in trouble? No. Banking analyst Bert Ely told TWI that IndyMac used $10 billion in loans from the Federal Home Loan Bank of San Francisco to continue making Pay Option ARMs — even when investors figured out that the loans might not be such good bets and refused to buy them anymore.

IndyMac wasn’t alone. Other struggling banks also borrowed from the Federal Home Loan Bank system to keep themselves afloat, as TWI reported. The financial newsletter of the Institutional Risk Analyst wrote that Congress ought to be investigating the whole mess:

“Most of the failed banks resolved by the FDIC during 2008 have been excessive users of FHLB advances…Remember, it was the availability of the FHLB advances as funding source which allowed the management of IndyMac to grow the bank’s size beyond that supported by its natural deposit base… Like WaMu and Countrywide, but even to a larger degree, IndyMac leveraged government funding via the FHLBs with unsafe and unsound lending practices – and all with the full approval of federal regulators!

Obama and Geithner weren’t in charge when all that deregulation was going on, as I recall. It’s true the rescue effort hasn’t been perfect, and the populist anger against AIG often has gone too far. And it’s convenient for congressional Republicans — the biggest cheerleaders of the free market for financial services — to try to pin some of the resulting damage on the people in charge now.

But the huge cost of winding down IndyMac is an important reminder: Don’t forget how we got here — and who led the way.

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Subprime loans were bad. TWI’s Twitter feed is good. Please follow it here.

Roger Hedgecock, a California radio talk show host, on “Lou Dobbs Tonight” on CNN: “It came down to a situation where the American public realized the Democrats who always want to raise taxes on people didn’t want to particularly pay the taxes on people.”

Sean Hannity on his Fox News Channel talk show: “I guess the reason Democrats want to raise taxes, use class warfare, attack corporations is because they take everyone else’s money and redistribute it. But they themselves don’t pay taxes, so there’s no reason for them to worry about tax increases, right?” [...]

“The challenge for Democrats is that Obama did a good job during the general of convincing voters that his party wasn’t just about raising taxes and spending more money,” said Sara M. Taylor, who was White House political director under President George W. Bush. “Between the stimulus and now the Daschle-Geithner tax problem, all that ground is gone.”

First of all, Sara Taylor has all the credibility of a Nigerian businessman who really really needs your credit card number. Second, apart from the cigarette tax included in the SCHIP bill, Democrats aren’t raising anyone’s taxes, and probably won’t until the economy rebounds, as raising taxes in a recession is the one thing that both conservative and liberal economists realize is a huge blunder. If the point is that Republicans will base a future campaign against a Democratic tax increase by summoning the ghost of Tom Daschle … well, that would probably be weird and ineffective. According to a Rasmussen poll, the take-aways from this week were that most people think Obama’s cabinet is about as ethical/unethical as any previous cabinet, and that a sizable majority of Americans think both parties are full of tax cheats.

If in 2011, Republicans are seriously campaigning against a Democratic tax increase by whining about Tim Geithner, it will be the sign of a deeply unserious party.

This tax-evasion revelation comes on the heels of similar scandals that have embroiled Treasury Secretary Timothy Geithner and health czar-designee Tom Daschle. While Killefer’s post is not as high-profile as Geithner’s or Daschle’s, its central focus is fiscal responsibility. A lack of such discipline in Killefer’s personal life would reflect poorly on her integrity for the job.

If her case were an isolated one, she might be able to push through with an apology, as Geithner has and Daschle likely will. But now that a pattern has formed, she appears to be the proverbial straw that broke the camel’s back.

She is the second Obama nominee to withdraw her name. New Mexico Gov. Bill Richardson gave up his commerce secretary nomination amidst a federal investigation into his dealings with a California financial company contracting with the state government.

UPDATE: From the White House, here’s Killefer’s letter to Obama:

February 3, 2009

Dear Mr. President,

I recognize that your agenda and the duties facing your Chief Performance Officer are urgent. I have also come to realize in the current environment that my personal tax issue of D.C. Unemployment tax could be used to create exactly the kind of distraction and delay those duties must avoid. Because of this I must reluctantly ask you to withdraw my name from consideration.

I am deeply honored to have been selected by you and you have my deep appreciation for your confidence in me. You have my heartfelt support and best wishes for success in all your endeavors.

Respectfully yours,

Nancy Killefer

Despite some reservations from a small minority of Republicans, the Senate Finance Committee voted this morning to approve Tim Geithner to head the Treasury Department. The vote was 18 to 5, The Page reports. Geithner’s nomination now goes to the full Senate for a confirmation vote.

Seems that skipping thousands of dollars in tax payments is no impediment to higher office, even if you’ll oversee the IRS.

Ray LaHood, who represented Illinois in the House for seven terms, sponsored $60 million in earmarks last year, steering at least $9 million in federal money to campaign donors, a Washington Post analysis shows. An opponent of earmark reform efforts in Congress, LaHood ranks roughly among the top 10 percent in the House for sponsoring earmarks in 2008, according to a watchdog group.

LaHood’s record poses an important question as hearings begin today that will explore how he would administer part of a $775 billion stimulus package that will be directed to the Transportation Department. LaHood has defended his use of earmarks as a way to direct federal money to decaying communities in his district and insisted there is no connection between his earmarks and projects benefiting campaign donors.

Among the earmarks:

LaHood’s biggest campaign donor is Peoria’s largest corporation: Caterpillar. The company and its workers have donated more than $190,000 to LaHood since 1998, according to the Center for Responsive Politics. Last year, LaHood secured $7.8 million to help the company and its offshoots develop technologies for potential future military contracts.

Last year, he also pushed for $333,000 to construct the new Lakeview Museum in Peoria, part of a project that will include a Caterpillar-financed museum focused on the company’s history.

LaHood sponsored $1.49 million in earmarks directed to Springfield’s Memorial Medical Center to fund the purchase of computer-based simulation technology and other equipment. Memorial and its lobbyist Cassidy and Associates together have given $60,000 to LaHood.

Local road-building companies also have supported LaHood. United Contractors Midwest, led by president James Bruner, is often ranked as his second or third largest donor, and its officials have donated $24,925 to LaHood. Three leading members of the Illinois Asphalt Pavement Association have given more than $60,000 to LaHood.

President-elect Barack Obama has pledged that there will be no earmarks in the upcoming economic stimulus package (though, as my colleague Dave Weigel recently mused, “One man’s earmark is another man’s shovel-ready project”). Presumably, the new administration will be a bit more concerned with overseeing the disbursement of hundreds of billions of dollars in taxpayer money than the current White House occupants, especially in the wake of the TARP debacle.

But still, with revelations yesterday of Treasury Secretary-nominee Tim Geithner’s little tax problem (Wait, he’s supposed to do a better job than Hank Paulson in keeping track of how federal funds are being spent?), and now this, these are not the questions a new administration promising change wants to be answering during cabinet confirmation hearings.

Things are looking better for Geithner than Obama’s former pick for commerce secretary, Gov. Bill Richardson (D-N.M.), who withdrew his nomination after a months-old federal probe in the governor’s home state heated up. Incoming White House Press Secretary Robert Gibbs has already blasted out a statement supporting Geithner, saying the nominee shouldn’t be punished for “honest mistakes,” particularly since they have been corrected.

Full text of Gibbs’ statement after the jump:

“The President-elect chose Tim Geithner to be his Treasury Secretary because he’s the right person to help lead our economic recovery during these challenging times. He’s dedicated his career to our country and served with honor, intelligence and distinction. That service should not be tarnished by honest mistakes, which, upon learning of them, he quickly addressed. He made a common mistake on his taxes, and was unaware that his part-time housekeeper’s work authorization expired for the last three months of her employment. We hope that the Senate will confirm him with strong bipartisan support so that he can begin the important work of the country,” said incoming White House press secretary Robert Gibbs.

This situation kind of reminds me of the time I didn’t pay taxes for three years, then was audited, then grudgingly paid up — that was an honest mistake too! (Just kidding!)

Still, this is certainly not how the Obama team would have liked to begin the confirmation process for what will surely be one of its most high-profile cabinet positions.