Jack Lew appointment sets tone for Obama economic policy

The appointment of Jack Lew as Secretary of the Treasury is a crucial event in the evolution of the ongoing financial collapse, and this would be the case no matter who the president selected. From the time the short list became public knowledge last summer, this writer has believed that ultimately Lew would get the job.

Shrewd political move

Lew’s appointment has been almost inevitable since Obama cashiered Bill Daley and installed Lew as White House Chief of Staff. It was a truly amazing move on Obama’s part and one that goes very much against the teachings of Chicago politics. One of the most prominent political figures in Chicago, former commerce secretary, brother of the mayor, banking colleague of JP Morgan’s Jamie Dimon was sent home.

Evidently Obama had decided that in order to prepare for the election, the time had come to bring in the first team. The results of the election showed that competence won out, because Obama was able to keep the Republicans from ever getting a firm footing in the race. As Obama builds his team for the second term, putting a steady technocrat in charge of Treasury makes as much sense as appointing the mercurial Chuck Hagel as Secretary of Defense raises questions as to what Obama was thinking.

Wall Street ties and support for megabanks

Commentators are already questioning whether Lew has enough ties to Wall Street to take charge if there is another crisis episode during the next four years, but a better question would be whether he is too cozy with Wall Street to exercise the role the Dodd-Frank Act envisions as the ultimate arbiter of any bailout scenario.  Lew was COO of Citigroup hedge fund, so he is presumably wired into the same network that has enabled serial bailouts over the last several decades.

Critics are questioning the appropriateness of a $900,000 bonus Lew received from Citigroup in the wake of the TARP bailout, as well as the propriety of his unit at Citi taking a short position on housing as the crisis was unfolding. The bonus issue goes back to the role Senate Banking Committee Chairman Chris Dodd (D-CT) played in jiggering the TARP legislation so that bonuses could be paid to the very executives who caused the crisis. Dodd paid for this action and for other indiscretions, such as getting a VIP loan from Countrywide, with his Senate seat.

As for shorting housing, maybe the country would have been better off if someone with that sensibility had been around. Instead, it seems that the only people who didn’t know what was coming were the so-called financial regulators at the Treasury, Fed, and lesser agencies. The administration seems fully committed to backing another boom in financial stocks and housing, and these never end well.

Finally, critics who charge that Lew’s appointment means that financial reform is going to continue to languish are right, and they would have been right if Obama had appointed someone else. Under Timothy Geithner, with Federal Reserve Chairman Ben Bernanke walking two steps behind, this administration has expanded its support of the very same TBTF institutions that it also fingers as the source of systemic risk that could bring down the global financial system. The administration’s plan calls for the TBTF banks to continue to grow by picking up share from weakened banks in the UK and EU.

Fed chairmanship appointment looms

Another key appointment will come to the fore over the next year as the administration deals with the expiration of Bernanke’s term as Fed chairman. Meanwhile, Jack Lew will establish himself as an able leader of the Treasury whose mandate does not include the power to change the flawed policy of continuing to support massive investment and commercial banks that are thinly capitalized and encouraged to take risks in the pursuit of global market share, knowing that they have the full backing of the United States government.

In the afternoon following the announcement, CNBC interviewed Jim Grant, who took the opportunity to clarify that Lew should really be called the Secretary of the Debt, because his main job is going to be to manage the huge debt that continues to grow without restraint.

Asked when this policy would be recognized by the market in the form of higher interest rates, Grant quipped, five years ago. He argued that the issue of monetary policy is even more crucial than that of the debt, because the extremely and protracted accommodation is unsustainable.  He expressed hope that there will be a vigorous debate over these issues during the confirmation process.  Asked if the confirmation process would be a contentious one, Grant replied that he hopes so.

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