September 23, 2008
Who'll Be the Next Treasury Secretary?
As the Congress was debating how much power and how many hundreds of billions to the US Treasury, I was pondering who would be in charge of all that come January 20th.
One could look at the photographs of the economic advisers on each side, but I thought I'd try to be slightly systematic and search the web (not a recommended research technique for my students!). Here is the WSJ:
Sen. Barack Obama hasn't officially accepted the nomination as the Democratic presidential nominee, but already there is chatter about who he may pick as the next secretary of the Treasury if elected.
Receiving the most buzz is Federal Reserve Bank of New York President Timothy Geithner, who has won plaudits from Washington policymakers for his handling of the credit crisis and the collapse of Bear Stearns Cos. earlier this year.
Multiple staff members from the House and Senate have said the chatter surrounding Geithner has become palpable as the election nears and Democrats consider the potential makeup of an Obama cabinet. Geithner's Wall Street connections and Washington experience -- he worked at the Treasury for 13 years beginning in 1988 and rose as high as undersecretary for international affairs from 1999 to 2001 -- are seen as working in his favor given that the next Treasury head is likely to still be faced with the ongoing credit crisis and continued housing-market disruption. A New York Fed spokesman declined to comment on the issue.
Also in the mix is Federal Deposit Insurance Corp. Chairman Sheila Bair, who has likewise impressed Democrats -- while annoying some of her fellow Republicans -- by her aggressive efforts to pressure banks to deal with the record numbers of foreclosures across the nation.
Senate Banking Chairman Christopher Dodd (D., Conn.) said he didn't want to list off potential Treasury nominees under an Obama presidency but was complimentary of Geithner and Bair. "Geithner's done a great job, and with the Bear Stearns stuff he was critical," Dodd said in an interview. "And Sheila has been great, and she's creative and tough and imaginative."
The two aren't alone on the potential list of Treasury nominees if the Democrats take the White House. J.P. Morgan Chase Chairman and Chief Executive James Dimon, who has been an economic adviser to the Obama campaign, is said to be in the mix, as is fellow Obama adviser New Jersey Gov. Jon Corzine, a former member of the U.S. Senate and former chairman and CEO of Goldman Sachs. – Michael R. Crittenden
Kuttner also centers his speculation on Geithner.
Regardless of whether you put much faith in such speculation (especially in the former case speculation from a month ago), I was struck by the lack of similar speculation regarding the choice should John McCain win.
One (old, from April) article cites Phil Gramm; from "Gramm Speaks! The Views of Our Next (Maybe) Treasury Secretary":
If John McCain is elected the 44th president of the United States, the 75th secretary of the treasury just might be Phil Gramm. The deficit hawk former U.S. senator from Texas is currently a vice chairman of UBS Investment Bank and a top economic adviser to McCain. I recently chatted with Gramm, who has done few interviews since leaving office in 2002. (In an earlier post, I questioned Gramm on whether his efforts to deregulate the financial industry contributed to the current subprime crisis.)
By the way, here is a section out of the previous interview:
On a related point, there has been harping of late on the repeal of Glass-Steagall in 1999. Was that a good idea in retrospect?
I see no evidence whatsoever that the subprime problem was in any way caused by making our financial structure more competitive by allowing banks and securities companies and insurance companies to compete against each other. I have seen no evidence whatsoever to substantiate that claim.
The subprime problem came from an extraordinary run-up in housing values beginning in 2000 as we were in a recession and the Federal Reserve cut interest rates; it was a very unusual recession in that investment had collapsed but home building and consumption were strong, so the monetary policy that was aimed at stimulating the economy [also] stimulated an industry that was in boom condition. Housing prices rose faster than at any time except right after World War II, when wage and price controls came off, and that created this speculative demand.
And secondly, America's policy to try to encourage home ownership by making down payments lower and lower and lower until they were practically zero in many cases gave the whole thing a hair trigger. None of that has anything to do with banks and securities companies and insurance companies competing with each, nor did it have anything to do with the syndication of mortgages, which were old hat by that point. So I think that what always happens in these cases is that it depends on what your agenda is, as to what you want the cause of the problem to be.
While currently out of sight, he's not out of contention, as far as I can tell. As an aside, I think Phil Gramm's biggest role in the current situation is not in Gramm-Leach-Bliley, but rather in this episode discussed by Justin Fox.
I can't find many other candidates mentioned for the Treasury post, from the Republican side (admittedly in this non-exhaustive survey). This Barron's article is one of the few exceptions; it identifies a few more candidates:
McCain's team includes Gerald Parsky of California's Aurora Capital, who has been a finalist for the job in the past; Stanford University professor John Taylor, a former Treasury undersecretary who is an expert in monetary policy and bank regulation; economist Kevin Hassett of the American Enterprise Institute; and former Massachusetts Governor Mitt Romney. I believe, however, that McCain would go for Peter Wallison, a former Treasury official now at the American Enterprise Institute. Wallison for many years had been a leading critic of mortgage giants Fannie Mae and Freddie Mac, predicting that they would eventually collapse, at great cost to the American taxpayer.
He gained prominence attacking Congress for the mortgage entities they had created. That earned him some enemies on the Hill and would likely result in a heated confirmation. But few people understand financial institutions better than Wallison, a banking lawyer by training who taught himself economics.
So from my perspective, when thinking about what should be built into this legislation, think also about who you think will be implementing that legislation, come January 20th.
Update 9/24 07:24am: Brad Setser (in comments below) notes this article, citing additionally, for Obama: Laura Tyson, Larry Summers; for McCain: Robert Zoellick, John Thain.
Posted by Menzie Chinn at September 23, 2008 10:55 PMdigg this | reddit
You didn't mention Franklin Raines or Jim Johnson in your Obama choices. Do we really want to give these guys control of $700 billion, or $740 billion, or $850 billion, or whatever the bailout bid of the day is.
I know you don't have very good connections to Republican circles so let me help. The primary choices of McCain appear to be John Taylor (they say he wrote the book on current FED policy) or Martin Feldstein. Phil Gramm is mentioned only in passing so your expose is probably about as good as one on Raines for Obama.
But you have hit on one of my primary reasons for opposing this bailout. Just who is going to run it? I would rather sell the assets off to successful proven corporations than have the government confiscate the assets and take their cut. The track record of the government over the past years doesn't give me much of a warmfuzzy.
Posted by: DickF at September 24, 2008 05:18 AM
menzie -- Dr. Tyson and Dr. Summers appeared in the New York Times short-list for Obama (along with Mr. Geithner); and for McCain they mentioned Zoellick and Thain.
Posted by: bsetser at September 24, 2008 05:54 AM
DickF: Thanks for the names. Must confess, I haven't seen anywhere those two names discussed as candidates for Treasury Secretary. Maybe you have better connections to Democratic circles than I do -- anyway, do you have a link to some articles that cite those individuals?
bsetser: Thanks, Brad. I knew I was missing a key, recent article -- added those names in the post.
Posted by: Menzie Chinn at September 24, 2008 07:37 AM
I didn't keep the link but it was on RealClearPolitic.com. I think they mentioned Roger Altman, Larry Summers, and Robert Rubin as potential choices for Obama.
Everybody is in the guessing game, but the most important issue is the one you brought up. Do we really want these guys with a trillion dollar blank check?
Posted by: DickF at September 24, 2008 07:47 AM
hasn't obabma said he might keep paulson for a while? thought i saw that scroll across the screen the other day
Posted by: oops at September 24, 2008 08:44 AM
Before I make a guess, I need to look over the list of Obamuh's 300 economic advisors. Anyone know where I can get it?
If McCain wins, Phil Gramm for sure.
Posted by: Rich Berger at September 24, 2008 10:44 AM
Its telling that the list includes Shiela Bair.
Cost estimates of the various bail outs always subtract some value for recoveries -- the value realized by selling foreclosed homes.
Bair's candidacy for Treasury Secretary reminds us that those recoveries may be low, for the simple reason that many do not want the government to be in the business of foreclosing on its citizens. A fine sentiment and public policy stance, but the impact on the dollar of such a policy could be severe.
After all, mortgages are supposed to be collateralized loans. Take away access to collateral, and they re just unsecured credits.
Posted by: David Pearson at September 24, 2008 11:06 AM
If Laura Tyson is going to be Treasury secretary, I'll add that to my list of reasons to donate more money to John McCain.
We don't need a 'General Secretary' of Communism as a Treasury secretary.
Posted by: GK at September 24, 2008 11:17 AM
How about Janet Yellen? As a bonus you get an Nobel winning spouse.
Posted by: Joseph at September 24, 2008 11:37 AM
I'm pretty sure he's not serious, but a possibility for Obama may be Paul Krugman:
I can think of worse people in whom to vest $700bn & dictatorial powers...
Posted by: psummers at September 24, 2008 11:51 AM
OT. Hey, does that fact that we've been counting $700 billion in wealth that apparently never existed mean we actually have been in a recession? When was that $700 supposedly produced and what happens when we subtract it out of GDP?
Posted by: aaron at September 24, 2008 01:12 PM
aaron: GDP is the flow of goods and services produced over a given time period. Wealth is a stock variable that exists (or is perceived to exist) at a given point in time. So there is no direct mechanical linkage. There is however a causal linkage to the extent that when assets "disappear", the consumption will decline relative to what it otherwise would have been, for instance.
Posted by: Menzie Chinn at September 24, 2008 01:27 PM
I think it would be educational to find out what Goldman Sachs balance sheet looked liked when Paulson left. Was it levered up 30 to 1? Did it have MBS's?
Posted by: anon at September 24, 2008 01:31 PM
Actually, what I was getting at is that the flow measured must have been wrong in the past for the current measured wealth to be off. I was trying to ask when the securities of popular debate were created.
Posted by: aaron at September 24, 2008 02:00 PM
anon: I think it would be educational to find out what Goldman Sachs balance sheet looked liked when Paulson left. Was it levered up 30 to 1? Did it have MBS's?
The Goldman Sachs mortgage unit was one of the biggest participants in packaging and selling CDOs.
However, in early 2007, shortly after Paulson left, the GS traders started shorting CDOs and made 100s of millions of dollars when the mortgage market tanked. The interesting thing is that their mortgage unit was still selling CDOs heavily to their own clients at the same time they were shorting CDOs. I guess that's why you never see the customers' yachts.
Posted by: Joseph at September 24, 2008 02:26 PM
Both McCain and Obama could do far worse than Paul Volcker, who probably has more credibility than any other person on these issues.
Note: Rubin would be dead in the water. Even worse than running Goldman, he was on Citi's exec cmte while the bank was "still dancing" its way into massive, idiotic losses. He let a lot of the big distortions in the economy metastasize under Clinton. His reputation is as tarnished as Greenspan's.
Note2: Anyone associated with the investment banking industry is an immediate non-starter, because of their foolish behavior. The era of idolizing I_bankers is over.
Posted by: Curmudgeon at September 24, 2008 05:47 PM
Rich Berger: I'm not sure I get your point. Are you criticizing Obama for having too many economic advisers? My observation would be that it's a good thing to have a diversity of advisers; and a bad thing to have a short bench in terms of economists.
GK: I am curious about your ad hominen attack on Dr. Tyson. Has she suggested nationalizing anything recently (I mean above and beyond anything that has already been by the Administration)?
Posted by: Menzie Chinn at September 24, 2008 06:31 PM
"Before I make a guess, I need to look over the list of Obamuh's 300 economic advisors. "
Come on Rick Berger. You should know that economists are like sheep, goats and camels in semi-arid mountainous region common pastures. You can never have enough of them (notwithstanding potential open-access wealth dissipation issues).
I don't know just how many economic advisors Obama has but I can see the political marketing appeal of having many in this race at this time in US history. Clever.
Posted by: GNP at September 24, 2008 11:44 PM
Although I think BO's having 300 economic advisors is a bit excessive (e.g., just consulting each for 1/2 hour would take almost a week), I was really more interested in knowing just who they are. I have seen listings measured in the dozens, but I wondered if there was a complete list somewhere.
Posted by: Rich Berger at September 25, 2008 05:34 AM
OK, the notion of Taylor looks pretty silly, given that he took a great reputation as a monetary theorist, ran it through a stint as a Treasury Undersecretary and came out with his reputation as an administrator looking pretty shabby. Taylor is apparently not a very effective bureaucrat.
Volcker could be a Bentsen. He may not have enough youthful vigor for the long haul, but he knows how to get things accomplished, so could serve a useful role for a while.
Why not Dodd for Obama's cabinet? If Summers isn't too abrasive, even Dodd may not be.
Posted by: kharris at September 25, 2008 09:59 AM
Given USA cultural schizophrenia and its strategically painting itself into a very nasty corner over the last 30 years (very clever response to fear, no one else will follow it there) may I respectfully suggest that we dig up, stuff and shellac Thorstein Veblen and put him in charge? At least we'd get entertainment value.
Posted by: Chicago School ideologist at September 25, 2008 11:52 AM
There are over 90 hedge funds that have been formed and capitalized over the past year to invest in distressed mortgage assets. Why is there any need for the government to do this? The problem is that banks DO NOT WANT TO SELL THESE ASSETS AT DISTRESSED PRICES since that would require a remarking of their entire portfolio under mark to market accounting. Re-marking their entire portfolio would then required capital injections or dividend cuts which banks don't want to do. How is the treasury going to coerce banks into participating in their auctions?
Posted by: Scott at September 25, 2008 06:07 PM
"GK: I am curious about your ad hominen attack on Dr. Tyson. Has she suggested nationalizing anything recently (I mean above and beyond anything that has already been by the Administration)?"
I am going off of 8 years of watching her on financial talk shows, and reading her BW columns. She is far too socialist for America.
Posted by: GK at September 26, 2008 12:31 PM
"Receiving the most buzz is Federal Reserve Bank of New York President Timothy Geithner, who has won plaudits from Washington policymakers for his handling of the credit crisis and the collapse of Bear Stearns Cos. earlier this year."
Isn't he kind of busy behind the scenes keeping markets propped up?
Posted by: Professor Bear at September 26, 2008 12:33 PM
How about Timothy Geithner? We can clone him for the behind the scenes work, while he's busy center stage.
Posted by: Zero X owner at November 21, 2008 01:04 PM