Wall Street is used to getting its way in Washington, but for once it has been dealt a rebuff. The question now is whether President Barack Obama has gotten the message as he seeks a new chairman for the Federal Reserve.
Just a month ago, the president was stumping the heartland as champion of the middle class. But lately, he seems to have lost his way. His plan to nominate former Treasury Secretary Larry Summers as Fed chairman would have hurt the middle class and rewarded the financial elite by renewing Wall Street’s domination of U.S. financial policies.
The president was saved by Senate Democrats. Some, like Jeff Merkley of Oregon, objected vociferously to Summers, now a multimillionaire Wall Street consultant. “I have serious doubts that Mr. Summers, who as a committed deregulator drove policies that set the stage for the Great Recession, is the right person for a key regulator position,” Merkley warned the White House.
When Obama’s lieutenants took further soundings, they ran into stiff resistance from five Democrats on the Senate Banking Committee who had vivid memories of how Summers had favored bank deregulation prior to the financial blowup of 2008. Summers, fearing an acrimonious fight, took his name out of contention.
That throws the problem back to President Obama.
So far, he has strangely shied away from picking Janet Yellen, former head of the San Francisco Federal Reserve Bank and now vice chairwoman of the Fed, to replace Ben Bernanke when he retires soon.
To many, Yellen seems a natural choice – well qualified as a former UC Berkeley economics professor, presidential economics adviser and policy ally of Bernanke. Like Bernanke, Yellen has defied the big banks, favoring new regulations, brushing aside Wall Street’s fears of inflation and trying to generate jobs and stimulate the economy.
Another putative Obama choice is Donald Kohn, a retired veteran Fed official, who advised both Bernanke and former Fed Chairman Alan Greenspan.
By now, the president should understand that if he is going to protect the country from the power and risky trading of the mega-banks, he has to break Wall Street’s grip on government.
But that’s tough to do.
For two decades, Wall Street has so completely captured political Washington that former IMF economist Simon Johnson called it “the silent coup.” So many bankers flooded into high policy posts in the George W. Bush administration during the financial crisis, with former Goldman Sachs CEO Henry Paulson as treasury secretary, that The New York Times headlined one story “Government Sachs.”
History should be telling Obama that he cannot afford to put another Wall Street favorite in charge of the Fed. The last Wall Streeter to chair the Fed was Greenspan, who made his reputation as a Wall Street economic consultant and member of the board of J.P. Morgan, where he was known as a libertarian advocate of laissez-faire economics.
In Washington, Greenspan became the voice of Wall Street. Soon after taking over as Fed chairman in 1987, he began punching holes in the protective wall between commercial and investment banking established by the Glass-Steagall Act of 1933 that for six decades had protected consumers and kept American banking stable.
Greenspan blessed the mega-merger of Citibank, Travelers Insurance and Salomon Smith Barney, which brazenly defied Glass-Steagall. That set the stage for Congress to repeal Glass-Steagall, prodded by Greenspan, then-Treasury Secretary Robert Rubin, another former Goldman Sachs banker, and Summers, the deputy treasury secretary.
Greenspan’s bank-friendly policies helped fuel the subprime crisis because of his refusal to impose regulation. In 1998 Greenspan also spurned the sage advice of Brooksley Born, head of the Commodity Futures Trading Commission, who urged that the government rein in Wall Street’s skyrocketing multitrillion-dollar trading in derivatives. Born warned that this high-stakes financial gambling posed an ominous threat to U.S. financial markets, but the Greenspan-Rubin-Summers axis rejected her warning and got Congress to block Born from regulating derivatives.
After the financial collapse of 2008, Greenspan had to admit that he had gotten things wrong. In a congressional hearing, Greenspan confessed that, as he gingerly put it, he was shocked to find “a flaw” in his economic concepts, which “cast doubts” on his deregulatory policies.
That Greenspan confession should be uppermost in the president’s mind as he seeks a new Fed chairman. Picking someone from the Wall Street-Washington symbiosis will get him more Greenspan policies, more maxims that free markets work on automatic pilot, regulations are unnecessary and America’s biggest banks can be trusted to take care of themselves – and the rest of us.
The track record of five administrations, Democratic as well as Republican, clearly points to the danger of putting Wall Street’s friends in command of the nation’s financial policies. The history lesson is that the president needs to look outside the Wall Street-Washington power grid for the next person to head the Fed.
This column was changed Sept. 21 to correct the spelling of Janet Yellen’s name.
Hedrick Smith is former Washington Bureau chief of The New York Times and author of the current book “Who Stole the American Dream?”