White House Chief of Staff Jack Lew in the East Room of the White House in Washington
To no one’s great surprise, President Obama has appointed his chief of staff, Jack Lew, to succeed Tim Geithner as Treasury Secretary. Mainly, the choice signals that there will be no change either in the Obama-Geithner approach to reforming Wall Street (not very much), or on fiscal politics, where deficit reduction is a paramount goal despite a faltering recovery.
The positives of Lew are these. He’s not a hard-core deficit hawk like Erskine Bowles (low bar). He’s not a bully like Larry Summers or Rahm Emanuel (even lower bar.) He’s a highly competent, detail-oriented numbers guy, and a skilled negotiator.
That combination seems to drive some Republicans nuts, because in the infighting over the budget deal of 2011, Lew’s knowledge of the details enabled him to win some tactical victories in what was otherwise a rout for the administration (this was the deal that created the fiscal cliff). In budget negotiations, Lew resists cuts in programs for the poor.
Admirers of Lew also point out that he was something of a liberal in his youth, having been a student of the late Paul Wellstone at Carleton College, as well as an assistant to the legendary House Speaker Tip O’Neill. As O’Neill’s aide, he directed the important, and at the time progressive, Democratic Steering and Policy Committee, and later was the DNC’s issues director in 1988. So Lew is not just a numbers cruncher, but a political veteran.
But then the story gets troubling. After five years in private legal practice, Lew went to work for the Clinton administration, rising to the director of the Office of Management and Budget (OMB) in its last two years. He was chief of OMB when Clinton signed two pieces of key financial deregulation legislation, the repeal of Glass-Steagall in 1999 and the Commodity Futures Modernization Act of 2000, which put financial derivatives off limits to regulators.
A close ally of Robert Rubin, Lew followed Rubin to Citigroup in 2000, where he was made chief operating officer of Citi’s Alternative Investments Group—its hedge funds. He was not involved in trading or financial strategy. It was mainly a chance for a skilled public manager to make himself some money until the Democrats returned to power. Lew received a bonus of $950,000 when he rejoined government in 2009—cynics would say it was Citi’s investment in getting its phone calls returned.
When President Obama nominated Lew in 2010 to take his old job as OMB head, there was a revealing exchange at his confirmation hearing before the Senate Budget Committee. Sen. Bernie Sanders asked Lew whether he thought the deregulation pushed by Fed Chairman Alan Greenspan and Lew’s former boss Bob Rubin was implicated in the financial collapse.
Lew responded that he didn’t consider himself an expert in these issues, “my experience has been on the management side, not as an investment adviser.” He added that “problems in the financial industry preceded deregulation,” due to an emphasis on “highly abstract, leveraged derivative products” but that “I don’t believe that deregulation was a the proximate cause” of the collapse. He said that he would “defer to others who are more expert.”
Sanders had used up his time, but the Committee Chair, Kent Conrad, no progressive, was flabbergasted and associated himself with Sanders’ remarks.
“Deregulation,” he admonished Lew, “has a central responsibility in the collapse.”
It’s hard to know which is worse, the fact that Lew dismissed the direct link between deregulation and the creation of “highly abstract, leveraged derivative products,” or his confession that he is no expert on these issues.
As treasury secretary, he will need to be expert. Two issues of huge importance to the economy fall directly under his purview—the financial industry and the federal budget.
The intricate details of the still-to-be-implemented Dodd-Frank Act are mainly the responsibility of the Treasury secretary, who chairs the interagency Financial Stability Oversight Committee created by Dodd Frank and that deals with too-big-to-fail banks and other key regulatory questions. Will he be tough or soft on derivatives? Will he sign off on deals like the weak settlement of the mortgage mess announced Monday, which was negotiated by a Treasury official, the Comptroller of the Currency?
His only direct experience on these issues was as a somewhat overcompensated, revolving-door hire of Bob Rubin’s Citigroup, where highly abstract leveraged products that he didn’t understand underwrote his paycheck.
On the budget side of his responsibilities, Lew is both well informed and shrewd. But on behalf of what policies?
As OMB Director and then as Obama’s chief of staff, Lew has been a core member of the team that believes deficit reduction is the necessary path to growth. Within those constraints, he may fight to defend programs for the poor, but these are relative crumbs within a shrinking pie. And to get confirmed, against the backdrop of on going Fiscal Cliff II negotiations, Lew will need to reassure Republicans that he favors deep budget cuts.
Was Lew the best we could do? While there were even more knowledgeable people who are more progressive than Lew, President Obama got just whom he wanted.
He is an entirely competent and skilled member of a team that has been pursuing policies that have failed to reform Wall Street’s business model on the regulatory side, and that could condemn the economy to a decade of slow growth on the fiscal side. In this respect, Lew both reflects and reinforces the instincts of his boss, the president. And he represents, yet another continuation of the deep reach of Bob Rubin, deficit hawk and de-regualtor par excellence, into the second consecutive Democratic administration.
With Republicans in disarray, Obama could govern as more of a progressive in his second term. His nomination of Chuck Hagel to be defense secretary suggests that he is willing to take some risks to do so on military policy. Would that he did the same on economic policy.