The Right Choice at Treasury
With all the talk of a new "Great Depression," Herbert Hoover has enjoyed an ignominious revival. On the day when Lehman Brothers winked out of existence and the simmering financial crisis boiled over, John McCain infamously pronounced that the "fundamentals of the economy are strong," a phrase that uncomfortably echoed Hoover's 1929 pronouncement that "the fundamental business of the country...is on a sound and prosperous basis."
Hoover's inaction in the face of the mounting crisis has made him an enduring symbol of economic mismanagement, but as bad he was, his neglect was nowhere near that of his secretary of the treasury, Andrew Mellon. Faced with a financial crisis even greater in scale than our current troubles, the multi-billionaire robber baron said, more or less, "Bring it on": "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate!" Mellon railed, "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"
In welcoming the widespread immiseration of the populace, Mellon was simply giving voice to his (very) narrow class interest: depression brought with it a sharp deflation that would increase the wealth of the holders of great stores of capital like himself, and provide ample opportunities to purchase assets at steeply discounted prices. Though he was putatively the treasury secretary of the entire country, his views reflected the narrow interests of his fellow Wall Street tycoons.
Mellon's failure is a startling reminder of just how important the secretary of the treasury can be. Certainly that has never been the case more than it is now: The next treasury secretary will oversee hundreds of billions of dollars of bailout money, and will have statutory authority to spend it pretty much any way he or she sees fit. So far, the best we can say about Hank Paulson is that he's not quite as bad as Andrew Mellon. Like Mellon, Paulson cut his teeth on Wall Street, overseeing Goldman Sachs while the speculative bubble of credit inflated. When the bubble burst, Paulson's initial bailout proposal included a provision explicitly barring oversight. And throughout the crisis, Paulson has failed to put in obvious safeguards, like banning banks from issuing dividends or disclosing what deals Treasury has struck (and with whom) to administer the handout.
Starting with the very first secretary of the treasury, Alexander Hamilton, the office has, traditionally been held by a denizen of Wall Street. But at this moment, whatever the benefits of hands-on experience with finance brings, it comes at high cost: a tendency to believe that what's best for Wall Street is necessarily best for the country as a whole.
But the inescapable fact is that the interests of taxpayers and Wall Street firms will often be in direct conflict, and we need someone at Treasury whom we can trust to represent the former over the latter.
So there are two simple criteria for president-elect Obama's treasury secretary: First, no Wall Streeters; second, no one who helped to create the current financial crisis.
Over the course of his campaign, Obama (rightly) railed about the flawed economic philosophy of aggressive deregulation that brought on the current crisis. But Obama failed to mention that this agenda was pursued every step of the way with bipartisan fervor. Indeed, some of the strongest supporters of deregulation were President Clinton's old economic brain trust, led by Robert Rubin and current treasury secretary front-runner Lawrence Summers. Like much of the Clinton team, Summers and Rubin were outspoken and unrelenting enthusiasts for the laissez-faire mania of the late 1990s. Summers, who once wrote that Africa was, from a market perspective "under- polluted," also supported the abolition of capital flow restrictions in developing countries, a catastrophic policy that triggered the Asian financial crisis and nearly led to a global meltdown. When the late Enron CEO Kenneth Lay wrote Summers in 1999 to congratulate him on his appointment as Treasury Secretary, Summers wrote back, adding a hand-written PS: "I'll keep my eye on power deregulation and energy market infrastructure issues." We all know how that worked out.
So if not a Wall Street baron and not Summers, who's left? Nobel laureate Joseph Stiglitz served in the Clinton White House but distinguished himself then and now for his thoughtful criticisms of the deregulatory orthodoxy of that time. Economist and former Federal Reserve Chairman Paul Volcker meets both established criteria: he's not a creature of Wall Street, and he warned of the unsustainable excesses of the last dozen years of the bubble economy. But perhaps the best choice available is also one of the least known: FDIC head Sheila Bair.
As a one-time small-town Kansas banker, registered Republican and former staffer to Bob Dole, Bair would also make history as the first woman to head Treasury in the nation's history. Most importantly, Bair is one of the few officials to distinguish herself during the crisis: managing the failure of IndyMac in an efficient, orderly manner and openly pushing for a bottom-up solution to the housing crisis that directly aids stressed borrowers. What recommends Bair the most is the fact that she's first and foremost a regulator, someone whose world view is shaped by a mandate to oversee the excesses of private actors rather than enable them. Wall Street might not be thrilled to have someone like Bair at the helm at Treasury, but they've had their views well represented for a very long time--and look where it's gotten us.