Obama’s Cabinet: Treasury

In the first part of a series, Reason Foundation’s Shikha Dalmia looks at the best and works picks President-elect Obama could make for Secretary of the Treasury:

This is likely the most important job, next to the president’s, given that the country is in the midst of the worst financial crisis since 1929 and slipping into a recession. The $700 billion bailout that Secretary Henry Paulson jammed through Congress is both economically flawed and politically dangerous. It gives extraordinary powers to the secretary to potentially nationalize banking and other segments of the economy with little oversight. It has triggered a feeding frenzy beyond just among distressed banks holding bad assets – the original targets of the bailout. Auto, credit card and other companies facing any competitive threat are all demanding a piece of the pie. This puts federal taxpayers on the hook for bad corporate decisions at a time when they are already facing massive debts from just two government programs: Medicare and Social Security. Government spending on these programs alone is projected to soon consume 10 percent of the GDP. The government should not be taking ownership stakes in or otherwise bailing out any private institutions. With that horse now well out of the barn, the first order of business for the new secretary would be to clean up the present bailout mess and establish sensible and strict guidelines for who would qualify for government assistance. At the very minimum, the new secretary ought not to ask for additional bailout money to address any further weakness in the financial markets. And instead of trying to pre-empt a system-wide collapse by handing big financial institutions advance assistance, the treasury should show great restraint and intervene narrowly only in cases – if any – where the failure of an institution could truly lead to a collapse of the economy. He or she should feel no shame if no entities qualify. The secretary should also be a strong voice for fiscal discipline and against the government adding to its already massive burden. He/she ought to also counsel the president against tax hikes, especially during a recession when businesses, big and small, need every incentive to expand and create jobs. If anything, the secretary should counsel the president to stimulate the economy, not through additional government spending, but by lowering America’s corporate income tax rates – the second highest in the industrialized world – and keeping a lid on capital gains tax rates. The treasury secretary is also in a strong position to influence trade policy and he/she should counsel the president against insisting on “fair trade” – code for protectionism – to prevent the recession from deepening into a full blown depression, as happened after the 1929 market crash. There are no perfect or even excellent candidates with the right experience and resume who combine a commitment to fiscal discipline with an appreciation for free trade and low taxes. Nearly every major figure in government or the banking industry expressed support for the bailout. That said, among the top picks for the job might be JP Morgan Chief Executive Jamie Dimon. Although a Wall Street insider and a political neophyte, Dimon’s big plus is that he was ahead of the industry curve in recognizing the threat posed by bad mortgage assets and began doing damage control much before anyone else. Hence his bank was in much better shape to weather the subsequent sub-prime debacle and even agreed to acquire the faltering Bear Stearns and Washington Mutual’s banking operation – albeit after the government assured him that all of their bad debt would be covered. He probably understands the complicated financial instruments such as credit default swaps and derivatives whose breakdown is being blamed for the debacle, something that will be invaluable in helping shape a sensible government response going forward. He is a deficit hawk who believes, however, that some modest cuts in taxes now would be a better stimulus than presumably government spending. “The policy should be, reduce taxes a little bit now, provide stimulus now, but have a serious, and I mean very serious plan to attack deficit spending going forward,” he noted in a summer interview on the Charlie Rose Show. Unsurprisingly, however, he is not a fan of the over-regulation of Wall Street – and will bring a useful perspective in the current political climate. Close seconds might be Laura D’ Andrea Tyson, chair of President Clinton’s Council of Economic Advisors and Larry Summers, who briefly served as Clinton’s Treasury Secretary and was also in the Reagan administration. They both harbor strong interventionist streaks and were among the early and vocal supporters of the Wall Street bailout. However, Tyson was a sensible moderate in the Clinton administration; an open critic of HillaryCare; and a strong defender of free trade. Summers is known to be a worry-wart concerning federal liabilities and debt – something that the Obama administration could certainly use. Another strong pick – even stronger than Summers – would be Robert Rubin, also Treasury Secretary under President Clinton. He was the architect of the Clinton administration’s balanced-budget policy. He is a strong opponent of too many regulations, especially on Wall Street, because of a keen appreciation of the difficulty of crafting good ones that avoid awful unintended side effects. He is reluctant to use taxpayer dollars for bailouts – foreign and domestic. In Rubin’s view, as Summers puts it, “there is something worse than Country X going down, which is Country X going down and taking our credibility and $10 billion of our money with it.” Rubin’s Achilles Heel is that, as head of Citigroup, he unsuccessfully tried to use his influence in the Treasury Department to prevent rating agencies from downgrading Enron’s debt. But among the worst picks for the job would be billionaire investor and philanthropist Warren Buffet. He is reputed to be dismissive about federal spending and unfunded liabilities and worries instead about the effect that the trade deficit might have in devaluing the U.S. dollar – a position that could easily morph into protectionism. He also favors an inheritance tax. Equally bad would be Timothy Geithner, president of the New York Federal Reserve Bank, a perennial bail-outer who has been involved in the bailouts of Mexico, Indonesia, Korea, Brazil, and Thailand. No surprise then that he was an aggressive proponent of the current bailout – recommending that the Treasury inject direct liquidity into banks by buying preferred stock even before Paulson eventually did this, thus opening the door to all kinds of government meddling. The New York Times reports that Geithner, and his mentor Summers, are fond of quoting Mexican president Ernesto Zedillo, saying since markets overreact, policy makers must overreact too. Also, Obama should banish any thought to keeping Henry Paulson. His constant vacillating on how to use the massive amount of bailout money that he arm-twisted out of Congress demonstrates that he understands neither the underlying causes of the financial crisis – nor what to do about them.