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Obama's New Treasury Secretary Has to Work for the Public, Not Wall Street Hustlers

We desperately need to downsize our financial system, but Citigroup alumnus Jack Lew is not the man for the job.
 
 
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As Tim Geithner packs his bags, America will be treated to a new Treasury Secretary. It seems that Citigroup alumnus Jack Lew is President Obama's pick. What can we expect? What sort of Secretary do we need? And what are we likely to get?

Straight from the horse’s mouth, this is how the U.S. Department of the Treasury describes its mission: 

Maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth and stability at home and abroad, strengthen national security by combating threats and protecting the integrity of the financial system, and manage the U.S. Government’s finances and resources effectively.

Note what the mission statement does not say; that Treasury exists only to preserve the vestiges of a crony capitalist system. Or that it’s only about saving financial players rather than enforcing the law. Or that it’s supposed to be incompetent in bailout negotiations. Yet somehow since the days of the Clinton administration, the Treasury Secretary has morphed into the custodian of Wall Street interests, paying little or no heed to the concerns of Main Street on matters of economic growth or employment. This new-fangled Secretary tends to ignore the mandate to establish a genuinely stable financial system. It’s all about papering over cracks and simply setting us up for a bigger financial crisis down the road.

If one is to judge from the discussions of the likely new Treasury Secretary, it appears that nothing will change. It is sadly ironic that the last person to occupy this office who cared at all about US interests outside of finance was James Baker.  Even under the presidency of George W. Bush, Enron executives were jailed, yet over the past few years we have read much of widespread criminality and a total disregard for ethics and values. Led by Treasury, however, the authorities have seen fit to go soft on the banks and will prosecute only a few rogue traders when it seems many were involved. The point is that we are not talking about the isolated act of a rogue trader or two. Criminality and greed is embedded in the culture of the financial sector and only major reform will get rid of it. Unfortunately, the Obama administration, largely through the actions (or non-actions) of Tim Geithner, has been a major impediment to adopting the kinds of reforms that would allow the Treasury to genuinely fulfil its mission statement.

We have a financial system today in which the volume of financial transactions in the global economy is 73.5 times higher than the entire world economic output (GDP). The overall increase in financial trading is exclusively due to the spectacular boom of the derivatives markets. Most of the financial flows comprise wealth-shuffling speculation, transactions that have nothing to do with the facilitation of trade in real goods and services across national boundaries, as economist Bill Mitchell has noted.

In fact, we’ve really done nothing but tread water economically since the onset of the Great Recession of 2008. In the United States, financial institutions are still failing and as of May 2012, a whopping 441 FDIC-insured banks had failed. The employment-population ratio has dropped sharply. Nine million jobs were lost from the peak of January 2008, and at the current pace of sluggish job creation, it will take at least seven and half years to regain them; only in the Great Depression did it take longer for employment to recover in the U.S. Worldwide, as of May 2012, 50 million jobs are still missing compared to the pre-2008 crisis. According to the International Labor Organization, they are not expected to be regained until late 2016.

After his re-election last November, almost immediately President Barack Obama again stressed (as he did in 2008) that he would continue to work non-stop to help middle-class families and those striving to reach the middle class. Given the recent negotiations with Congress, it appears that the new Obama is much like the old Obama. Anyway you measure his resolution of the so-called fiscal cliff, and it is clear that we’ve got a fairly big fiscal restriction coming up. And that’s not even factoring in what is to come. And for all of the talk of making the wealthy pay its fair share, it’s particularly worth noting that the payroll tax hike is the biggest component of the deal, saving $124 billion in 2013. By contrast, the higher tax rate on the wealthy is $60 billion. 

If the president were serious about genuinely changing course, then the new Treasury Secretary would be the polar opposite of Timothy Geithner. The nomination presents an opportunity for a White House course correction, finally putting Main Street ahead of Wall Street. But it doesn't look like that's going to happen.

We need a Treasury Secretary who recognizes that simply saving big financial institutions does not save the economy. The financialization of the economy of successive treasury secretaries since Rubin has led to a financial sector that is at least three orders of magnitude too big. If anything, all the efforts directed toward saving Wall Street have only made the economy more fragile. Another financial crash is inevitable because the financial system is still too large to be supported by the economy -- even if the economy could recover. We need a Treasury Secretary who recognizes that the best course of action is to downsize the financial system. Jacob Lew  is not that guy.

And we need a Treasury team that understands government finance. The current team is hopelessly confused, and still operates under the baleful influence of the Rubinites, all of whom continue to believe that the Clinton boom was due to federal budget surpluses, not recognizing that it was actually due to an unsustainable boom of household borrowing. The new team must have no connection to Rubin (or billionaire Pete Peterson) and his anti-deficit hysteria. The Great Depression of the 1930s only ended with the massive spending of WWII, when the budget deficit reached 25 precent of GDP. Our current situation is not yet that severe, and it is likely that a sustained recovery can be obtained long before the budget deficit reaches such a level. However, the more we continue to get Rubin clones in charge of Treasury, the greater the probability that this could still turn into another Great Depression.

Marshall Auerback is a market analyst and commentator.