We can safely assume that Senator Obama is well along in picking his cabinet. This may be tempting fate, since the election is still more than two weeks away; but all candidates engage in transition planning in October, and Senator McCain is doubtless doing likewise.
As I observed in the October print issue of the Prospect ("Meet the Next Treasury Secretary"), no positions will be more important than his senior economic team. In that piece, I argued that the two best Treasury picks would be either Tim Geithner, president of the New York Federal Reserve Bank, or FDIC Chair Sheila Bair.
Since then, my admiration for Bair has only grown. She has long waged a battle within the administration for direct assistance to homeowners, rather than having stressed mortgage holders be the incidental beneficiaries of bailouts to bondholders and banks. Last week, she went public with her dissenting views, giving an interview to the Wall Street Journal. "[W]e're attacking it at the [financial] institution level as opposed to the borrower level, and it's the borrowers defaulting. That is what's causing the distress at the institution level," she said. "So why not tackle the borrower problem?"
The FDIC, not the Treasury, is the one agency with the institutional competence to run a direct mortgage refinancing program. When an insured bank fails, the FDIC often takes it over for a time. It doesn't subcontract the job to Wall Street investment houses, as Treasury Secretary Hank Paulson is doing. FDIC uses competent public servants who look to the public interest first.
Nor does the FDIC just pump in capital and keep the inept executives who drove the bank into the ground, as Paulson is hoping to do. It gets rid of toxic management along with toxic assets. This is the exercise, writ large, that the federal government will need to perform in the next administration, as it partly nationalizes banks.
Bair has used FDIC's temporary ownership of a large failed bank, Indy Mac, to demonstrate how a mortgage refinancing program can be done right. The FDIC has contacted all of Indy Mac's mortgage holders who are in financial straits, and is working out easier mortgage terms. In some cases, bondholders are made to eat part of the loss. This is the right approach to repairing the entire subprime mess. So Bair has both the background and the commitment to do the recapitalizing and regulating of American banks correctly.
Bair, 54, also has special appeal because even though she is by far the toughest and most public-minded regulator now on the scene, she happens to be a Republican. It would be an elegant touch for Obama to appoint a Treasury Secretary who is both Republican and female.
Bair began her career as a small town Kansas banker. Along the way, she acquired a small-town banker's well-placed wariness of Wall Street. She came to Washington to join the staff of then Kansas Senator Bob Dole on the Senate Finance Committee.
Subsequently, she held a number of regulatory posts, including the important position of acting chair of the Commodity Futures Trading Commission. This is another crucial credential, since most of the financially-engineered derivative products, such as bonds back by subprime mortgages and credit default swaps should have been subject to CFTC regulation, and probably will be under reform legislation. Her close understanding of derivatives is essential to remaking our banking and credit system.
CFTC chairs, such as Brooksley Born, who served under Clinton, and James Stone, who served under Carter, have long argued that all derivatives should be subject to CFTC regulation and be traded in publicly supervised exchanges. Under current law, these exotic bonds are private contracts that are not publicly traded, so nobody knows what they are worth until somebody tries to sell them (and then they sometimes turn out to be worthless.)
When Born proposed regulations to bring derivatives, now totaling $500 trillion and dwarfing the rest of the economy, under the regulatory umbrella, all of the other senior economic officials of the Clinton administration isolated her, vilified her, and forced her to back down.
For good measure, then-Senator Phil Gramm (R-TX) subsequently slipped a provision into a Senate bill explicitly prohibiting regulation of most derivatives.
Others mentioned as leading contenders for treasury secretary include Larry Summers, who held the job for two years towards the end of the Clinton administration; Roger Altman who served as undersecretary; New Jersey governor Jon Corzine, another of the Goldman Sachs alums; New York billionaire Mayor Michael Bloomberg, who may or may not get New York city's term limit rules changed so that he can serve a third term; and Tim Geithner of the New York Fed. All have the technical qualifications to do the job. But, compared to the others, the Bair appointment makes the most sense.
The next Treasury Secretary should meet two criteria beyond having the necessary financial expertise. First, he or she should have a background in public service and not on Wall Street. Private financiers have dominated the setting of public regulatory policy for far too long, and Paulson is only the most extreme. His predecessor, both at Goldman and at Clinton's Treasury, Robert Rubin, was just as much an enabler of regulatory dismantling to serve purely private purposes.
It's time to end the tradition of bankers colonizing the U.S. Treasury. That test should exclude both Bloomberg and Corzine. As good and progressive a governor as Corzine is, it would be a travesty to continue the Goldman dynasty at Treasury. And though Bloomberg, another nominal Republican, has been a public-minded mayor of New York, we don't need more billionaire ex-Wall Streeters running the nation's finances.
Second, the next Treasury Secretary should not be a senior veteran of the Clinton administration. As details of the financial meltdown and its origins have been come out, it is increasingly clear that while the ideology was purely Republican, the Clinton administration was complicit in much of the deregulation.
Larry Summers, for one, joined in the stampede to repeal the Glass-Steagall Act and in the knee-capping of Brooksley Born, testifying to Congress that her proposal would risk "casting a shadow of regulatory uncertainty over an otherwise thriving market." In running hard for a second term as Treasury Secretary, Summers has published several op-eds lately suggesting that he is a born-again regulator. It is possible that he has truly changed his views -- or not. The "Larry has changed" mantra will be familiar to those who followed Robert Rubin's successful effort to install Summers as president of Harvard, an appointment that ended badly. Beyond his ambiguous views on finance, his missteps at Harvard raise continuing questions about Summers' temperament as well.
Tim Geithner also served briefly as a sub-cabinet official under Rubin and Summers, but is best known as head of the New York Fed. There, he has worked closely with Paulson and Fed Chair Ben Bernanke on the several financial rescues. He is widely respected as a competent financial civil servant, and has taken a somewhat tougher regulatory line than Paulson, but not nearly as tough as that taken by Bair.
One of the most interesting of Barack Obama's remarks at the third presidential debate was his volunteering of a short list of people to whom he looks for economic advice. This was obviously rehearsed, and he named only two -- former Fed chairman Paul Volcker and super-investor Warren Buffett -- both widely admired senior figures who have been critics of financial speculation and deregulation. Neither of these is a candidate for treasury secretary, but what is more interesting is who Obama didn't mention. He did not cite any of the Clinton administration veterans who have intermittently advised his campaign, notably Rubin and Summers.
By contrast, when Obama paraded economic experts before the cameras after a hastily called summit meeting on the economic emergency September 19, several were senior Clinton veterans. The campaign's thinking back then was that the Clinton era was fondly remembered as a time of competent economic stewardship, in contrast to the mess that George W. Bush made. Now, increasingly, Clinton's presidency is accurately characterized as part of the incubator of an economy based on speculative bubbles, financial crashes, and government bailouts. Obama is right to distance himself from that legacy. Bring on Bair.