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[The Anti-Economist]

Does America Need Jack Lew?


The incoming treasury secretary's positions on regulation and the deficit offer cause for concern

Jack Lew, President Obama’s nominee for secretary of the treasury, professed during the 2010 Senate hearing for his confirmation as head of the Office of Management and Budget not to be sure whether deregulation was a principal cause of the 2008 financial crisis. If not deregulation, one wondered, then what? Was he part of the Alan Greenspan gang — those who claimed the crisis was just one of those things that happen from time to time, and that speculative excess is simply a natural development in a free market that makes many other contributions to the economy? Did he subscribe to the bad-apple theory, as President George W. Bush did when assessing the corruption scandals of the early 2000s?

Lew didn’t say. But he was a key member of the Clinton Administration at the time it passed the Commodity Futures Modernization Act of 2000, which prevents the federal government from seriously regulating derivatives, and which had a direct bearing on the crisis to come. He probably also believes, along with President Obama and his early advisers, that the Clinton Administration’s support for the repeal of key provisions of the Glass–Steagall Act had nothing to do with the crisis — that having investment banking and commercial banking under one roof was not a problem, as it had been before the law was passed in the 1920s. Prior to the administration’s decision, Glass–Steagall had already been watered down plenty by Federal Reserve chairman Alan Greenspan: banks had been underwriting securities for years, and Greenspan apparently never thought to challenge this speculation. Citigroup and JP Morgan Chase made huge loans to underwriting clients like Enron and WorldCom, for example, even as they analyzed and sold stock in those companies on behalf of their investor clients.

Clinton’s decision to end the enforced separation of investment and commercial banking allowed Sandy Weill’s Travelers Group, which included huge broker subsidiaries, to merge with Citicorp and create Citigroup. That enormous complex in turn took on much more risk than it would otherwise have, as did its competitors. The Bush Administration’s increase in the debt limitations on loan underwriters added further to the risk carried by the banks.

Was Lew unaware of these issues when he spoke at his confirmation hearing? My guess is that he was confused about Glass–Steagall, not fully understanding that the final destruction of barriers to mergers opened the door to giant institutions and their increased burdens of risk. Yet even Clinton admitted in his recent book, Back To Work, that his administration’s failure to regulate derivatives was an error; Lew should surely have agreed with that.

For me, however, a more worrisome and less often addressed problem than Lew’s attitude toward regulation is that he appears to be a deficit hawk, one of a camp that is comfortable comparing government finances with family finances. To me this is the great litmus test: Should a Democratic treasury secretary say “Like every family we have to tighten our belts,” as Lew did in presenting Obama’s 2012 budget?

When a family tightens its belt, it’s unlikely that its income — wages, salaries, and so on — will shrink, or that an upcoming raise will be cancelled. When a nation tightens its belt, by contrast, its income, the GDP, is likely to grow less rapidly or to fall. So why resort to this petty and misleading cliché? Lew may well believe in it — his boss has previously drawn the comparison, too.

We can’t spend indefinitely, to be sure, but the rest of Lew’s budget talk would have made any Republican treasury official proud. He failed to talk about the crucial role of growth in controlling future deficits. He drew no serious distinction between near-term deficits and long-term ones. And though he did talk about how we had to spend — presumably on public investment — it’s worth noting that the Clinton Administration did not use the surpluses of the economic boom to significantly raise public investment. To the contrary, Clinton and his advisers Robert Rubin and Larry Summers prioritized debt repayment, and Greenspan loved the administration’s approach. Lew, as a Rubin underling and protégé, was no doubt solidly in their camp.

So this is the treasury secretary we’re going to get. Obama bravely backed a significant, if ultimately inadequate, stimulus early in his administration. From then until late 2011, he was consumed by the federal deficit, rarely mentioning how effective the stimulus was, never mind coming back for more. Washington commentators say the politics were stacked against him, but his attitude spoke to his actions on other issues: naming two deficit hawks as the head of his budget-balancing commission, barely mentioning the nation’s jobs emergency, buying into the austerity-economics argument.

Reports from Washington suggest that Lew is a strong advocate of the nation’s social-spending programs, which is heartening, but I worry that his instincts on the deficit will lead to a debt-ceiling deal borne mostly by the middle class and the poor. The nomination is a step backward — one that suggests Obama wants loyalists, not idea people, on economic policy. Were it otherwise, he might have chosen former Goldman Sachs co-head of finance Gary Gensler, now an indefatigable regulator as head of the Commodity Futures Trading Commission; or Gensler’s predecessor, Brooksely Born, who wanted to regulate derivatives but was chased from town by Clinton and his men; or former FDIC head Sheila Bair, who created too much friction with Geithner (often for good reason) to be a likely choice. Such people might have plotted a new and better course — but Obama wants a private at the treasury department, not a general.

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February 2014

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