On Wednesday the Senate Finance Committee will hear from Jack Lew, the President’s pick as Treasury Secretary, who will succeed the controversial Tim Geithner if confirmed. While Lew wouldn’t be taking office during a grave systemic crisis the way Geithner did, it remains a crisis-driven job as long as millions of Americans continue to experience their own personal economic emergencies.
The Treasury Department’s website says that the Treasury Secretary serves as the “President’s principal economic advisor.” The Secretary is also the chief American representative to the International Monetary Fund and other international banks, serves as Board Chair and Chief Trustee for the Medicare and Social Security Trust Funds, and has significant influence on Federal Reserve policy.
Republican Senators like Chuck Grassley may ask some excellent questions, but some of his colleagues are likely to be in attack mode. Here are eight lines of constructive Senators should pursue, along with some specific questions for each of them.
Advisors: Many people have criticized the outgoing Secretary and other policy leaders for depending too heavily on advisors with a limited range of views – specifically, people whose ideas were disproven by the 2008 crisis remain in control of economic policy. They include the outgoing Treasury Secretary himself, as well as former Treasury Secretaries such as Robert Rubin and Larry Summers.
Their ideas and experience may be useful in certain circumstances. But there is great concern that those who were proven to have more economic wisdom and understanding, like Paul Krugman and Joseph Stiglitz, have been minimized or excluded from advisory or policymaking roles.
What will you do to ensure that a broader range of viewpoints will be included in future policy decisions, especially from people who were right about deregulation and other economic issues?
Revolving Door: There is also grave concern that the “revolving door” between Washington economic jobs and high-paying Wall Street firms has compromised our government’s ability to rein in the big banks. How do you plan to address that problem? And while your own time on Wall Street was limited, do you feel your personal relationships there could limit your ability to be objective in your new role?
2. Too Big to Fail
Breaking up Citigroup: You spent only two years on Wall Street, but that time was spent working at Citigroup. Do you agree with former Citi CEO Sandy Weill that Citi and our other largest banks should be broken up?
Derivatives: The OCC reports that the four largest banks hold 93 percent of the derivatives market. This would appear to be an enormous concentration of risk. What would you do to address this concern? Do you support the derivatives measures proposed for the European Community?
Grave Threats: Section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act gives the government the ability to break up any banking institution which poses a “grave threat” economically. The watchdog group Public Citizen has identified Bank of America as one such group. Under what circumstances would you use this power?
3. Economic Policy
Unemployment: The big banks were rescued immediately. But four years after the crisis, unemployment remains extremely high. Current forecasts show that this is expected to continue for some time if something isn’t done. What do you see as the Treasury Secretary’s responsibility, if any, to address the unemployment crisis?
Underwater homes: Homeowners owe $1 trillion in mortgages for housing value that was lost when the bubble burst in 2008. Do you believe the banks should provide some reduction in the amount owed? If so, what role should the government play in making that happen?
HAMP: The HAMP program to assist distressed homeowners has been highly flawed and has been abused by bankers. What will you do to improve this program? In addition, The GAO reports that over $40 billion of the $45.6 billion allocated to help homeowners has yet to be spent, four years after the crisis began. Will you commit to spending this money – and to do so as quickly as possible?
4. Bank Oversight
Fed policy: The Federal Reserve has pursued policies which have given banks access to loans at very low cost. Yet much of that money has benefited the banks’ bottom line without being used for its intended purpose: increased lending to consumers, and to the smaller and medium-sized businesses that are the engines of job growth.
While this has improved slightly, it remains a serious problem. How do you propose to spur more lending to those who need it, and whose borrowing activity would contribute more to economic growth?
Volcker Rule: Five of your predecessors, both Democratic and Republican, endorsed the “Volcker rule” which would have forbidden banks from certain forms of investment which create systemic risk and cause other serious problems. This rule was seriously weakened during the Senate negotiations which led to the Dodd/Frank bill. What would you do, or recommend that the Senate does, to fully implement the Volcker rule or something like it?
Ratings agencies: New legal actions have shed additional light on the actions of the so-called “credit ratings agencies” such as Standard & Poor’s and Moody’s.
The current system creates a conflict of interest between the agencies’ financial incentives as for-profit companies who are paid by the institutions they review, and their mission as independent analysts. How would you propose to address these problems?
“Repo 105”: Are you confident that we now have a handle on accounting tricks like “Repo 105,” the sleight-of-hand which contributed to Lehman’s downfall? Overall, do you believe we’re sufficiently protected from systemic risk, or are additional laws needed?
Stress tests: Your predecessor instituted a series of “stress tests” for major banks which were criticized in some quarters for failing to identify genuine risks. Do you believe those stress tests were adequate? If not, how would you improve them?
5. Law Enforcement
Reasonable doubt: Your predecessor repeatedly pronounced bankers innocent of prosecutable crimes, citing “stupidity and greed and … recklessness” instea. But a considerable body of evidence has surfaced which suggests that crimes did in fact take place, and on a large scale. Do you agree with Mr. Geithner’s assessment or is that a matter for law enforcement?
Too big to jail? Do you believe that bankers should be prosecuted for criminal wrongdoing – or do you believe that prosecutions should be avoided, as outgoing Assistant Attorney General Lanny Breuer stated, if their institutions might suffer as a result?
FCIC Findings: Do you plan to follow up on the findings of the Financial Crisis Inquiry Commission?
More investigations: What additional investigations into bank lawbreaking would you like to see, and how would you collaborate with the Justice Department and other agencies in this matter? For example, the Justice Department has not provided very many staff to the Mortgage Task Force. Would you be prepared to assist them by making Treasury Department staff available to the Task Force as researchers and investigators?
6. Deficits, Spending, and Taxes
Deficit Panic: At the International Monetary Fund, where you will represent the United States if confirmed, the Chief Economist now says he was wrong to recommend sharp spending cuts in Europe because he underestimated the positive impact of government spending in tough economic times. Your predecessor insisted that failure to cut government spending would lead to higher borrowing costs for the US government. Instead the opposite has happened.
Do you agree that the concern about deficits has been overstated, and that spending cuts should be deferred until the economy is in better shape?
Stimulus spending: Economists are also increasingly concerned that a lack of further stimulus spending will lead to greater economic loss, and even to larger government debt further down the road. Do you agree? If so, what kind of stimulus spending would you consider ideal (political considerations aside)?
Taxation: Some people are insisting that tax rates be cut for America’s corporations, and they cite our relatively high statutory tax rates to support their position. The same people are proposing further tax breaks for the wealthiest Americans.
But actual corporate and high-earner tax levels are at record lows. What will you do or propose to increase tax revenues from corporations and very high-earning individuals?
Social Security: If confirmed, you will become the Chairman of the Board and Chief Trustee for Social Security’s Trust Fund. Do you agree that Social Security, as a self-funded program, does not contribute to the Federal deficit? If “yes,” do you therefore agree it should not be included in deficit reduction discussions?
There are two approaches to stabilizing Social Security for the next 75 years: to cut benefits, as with the so-called “chained CPI,” or to raise additional revenues. Which do you support?
Medicare: You will play the same role with the Medicare Trust Fund. Some are arguing that Medicare’s benefits must be cut by raising the eligibility age and/or by placing caps on the amount of money it can spend. Yet many people argue that Medicare’s projected costs, along with those of other government health programs, are driven largely by profit-making corporations in all aspects of the health economy.
How do you propose to address health care costs, specifically for Medicare?
8. Values and Goals
Moral Hazard: Your predecessor privately expressed the opinion that underwater homeowners should not be helped because “that would reward the undeserving.” Yet he had no such compunctions about rescuing Wall Street executives and asking nothing of them in return. What are your views on this issue?
Legacy: Lastly, you would be assuming the role of Treasury Secretary in dire economic times. How do you hope to be remembered when your time in office ends?