In his first post-election press conference, President Barack Obama said voters had awarded him only one mandate: to help middle class families and those striving to reach the middle class. In line with fulfilling this charge, the administration’s top priority would be creating manufacturing jobs and rebuilding the nation’s schools and infrastructure. An early bellwether of the president’s commitment to this will be his selection of a replacement for Timothy Geithner, who is expected to step down as Treasury secretary early next year. The nomination presents an opportunity for a White House course correction, finally putting Main Street ahead of Wall Street.
With Geithner’s appointment four years ago, Obama chose someone acceptable to the banking sector. Geithner had previously served as head of the New York Federal Reserve, where he patched together major bailouts of some of the nation’s largest financial institutions, such as the AIG bailout and the Bear Stearns’ shotgun wedding to J.P. Morgan. Under his watch, the New York Fed embarked on its first so-called quantitative-easing program, QE1, by which it purchased more than a trillion dollars of mortgage-backed securities from big banks and hedge funds. As Treasury secretary, Geithner has continued to carry water for Wall Street—it was he who stood in the way of reform efforts to make the big banks more accountable and give taxpayers and the middle class a better deal in the wake of the financial crisis. He has largely evaded scrutiny for his actions.
Most of the names mentioned as potential new Treasury secretaries are people with Wall Street backgrounds like BlackRock CEO Larry Fink, or deficit hawks from within the administration such as White House Budget Director Jacob Lew. After three decades of a Wall Street Treasury, that’s the last thing the country needs or voters want. What’s now needed is a secretary who can answer Obama’s convention-speech call for “bold, persistent experimentation”—language recycled from President Franklin Delano Roosevelt, whose administration was genuinely bold, experimental, and largely successful in confronting another protracted economic crisis.
Who should make the short list? First, Obama should consider nominating the first female Treasury secretary. Brooksley Born, chairperson of the Commodity Futures Trading Commission in the ’90s, sounded the alarm about the growing risks in the unregulated financial-derivatives market. Unfortunately, her warnings were beaten down by Alan Greenspan, Larry Summers, and Robert Rubin—Geithner’s old mentors. Sheila Bair, a Republican who, unlike the present Federal Reserve Chairman Ben Bernanke, would have swept out the failing bankers and broken up some big banks when Wall Street was on government life support. Sarah Bloom Raskin, a very effective former Maryland state banking commissioner and now the most progressive governor on the Federal Reserve Board, well understands the importance of repairing the debt overhang in the housing and consumer sectors by helping the middle class.
There is no shortage of talented people with broad experience in finance, economics, and law who could be trusted to look out for Main Street: Joseph Stiglitz, a Nobel laureate and former chief economist of the World Bank and head of the Council of Economic Advisors; Damon Silvers, who has represented the AFL-CIO on a number of important public boards charged with oversight of accounting and corporate-governance standards; Martin Gruenberg, the present chair of the Federal Deposit Insurance Corporation (FDIC); and Daniel Tarullo, another Federal Reserve governor with strong credentials in financial regulation.
Whomever Obama chooses to replace Geithner will need to reverse direction on a wide range of fronts, from regulation of the largest Wall Street banks to mortgage modification and relief for homeowners, consumers, and student debtors. Not least of the challenges will be finding sufficient resources to steer middle-class growth during a time of severe budget constraint. One option for funding a continued recovery comes from a bill proposed in the House in 1999. Introduced by a congressman from Illinois, the State and Local Government Economic Empowerment Act (H.R. 1452) would have authorized the Treasury to make $360 billion ($72 billion a year for five years) in interest-free loans to state and local governments for capital investments in infrastructure projects. The need for public-sector investment was clear to many in 1999, and the need is more apparent now after round upon round of state and local spending cuts that have laid off more than 600,000 public-sector workers in the past four years.
What made this legislative proposal even more attractive was that the Treasury would have created credits in United States Notes (instead of borrowing funds from the bond markets)—an approach that would not add a penny to the deficit. Abraham Lincoln used this model for his “greenback,” which financed much of the Civil War, the land-grant college system, and the construction of the transcontinental railroad that Obama spoke so approvingly about in the final presidential debate. Likewise, in the depths of the Great Depression, Congress authorized several billion dollars of U.S. Notes in the Thomas Amendment to the 1933 Agricultural Adjustment Act. An updated greenback program could be the one tried-and-true way around the fiscal cliff and out of the fiscal trap of the past four years. Economic growth and job creation is needed on a mass scale to restore the tax base and increase tax revenues, and credits in newly-created U.S. Notes for infrastructure investment would achieve those objectives without adding to government borrowing requirements.
Of course, Wall Street bankers and mainstream economists will argue that greenbacks and other such proposals would be inflationary, depreciate the dollar, tank the bond market, and bring an end to Western civilization. Yet, we’ve seen four years of the Federal Reserve—now on its third quantitative-easing program—experimenting with its own type of greenback program, creating new money out of thin air in the form of credits in Federal Reserve Notes to purchase trillions of dollars of bonds from big banks and hedge funds. While the value of the dollar has not collapsed and the bond market remains strong, neither have those newly created trillions trickled down to Main Street and the struggling middle classes. The most significant effect of the Fed’s programs has been to prop up banks, bond prices, and the stock market, with hardly any benefit to Main Street.
Is it too much to hope, after decades of Wall Street rule at Treasury, for a new Treasury Secretary who would welcome such bold experimentation as H.R. 1452 to put people back to work while actually restoring the tax base and reducing deficits? Lest anyone think that 1999 effort was championed by liberals, the bill was actually drafted and introduced by Republican Ray LaHood, now serving as Obama’s Transportation secretary. Although it was bottled up in the House Banking Committee without a hearing, LaHood’s bill gathered nearly two-dozen co-sponsors, from conservative Republicans to liberal Democrats. During LaHood’s term as Transportation secretary, more than half a million public-sector workers have lost their jobs—teachers, police officers, firefighters—while the nation’s schools have declined and its forests have burned. LaHood’s greenback bill made sense in 1999; it makes even more sense today.
Obama may be tempted to play it safe by selecting another Wall Street Treasury Secretary. That would be a mistake. How much bolder for Obama to nominate someone with a Main Street orientation, a Brooksley Born or Shiela Bair or Sarah Bloom Raskin, or even his own Transportation secretary to head a Treasury committed to putting people back to work rebuilding our schools and infrastructure.