Obama Emulates FDR’s Kennedy Pick With Rubin Clan in ‘Henhouse’
Nov. 26 (Bloomberg) — In turning to Clinton administration veterans for his economic team, President-elect Barack Obama is banking that people who had a role in the current financial crisis will be best able to fix it.
Timothy Geithner, Obama’s choice for Treasury secretary, was involved in the decision to let Lehman Brothers Holdings Inc. go bankrupt, which exacerbated a global credit-market freeze. Lawrence Summers, his pick for White House economic adviser, ran the Treasury when Congress repealed the Glass- Steagall Act, breaking down walls between commercial and investment banking.
Presidents have always sought experienced hands, even if those hands aren’t always clean. The most extreme example might be Franklin D. Roosevelt’s selection of stock speculator Joseph P. Kennedy as the first chairman of the Securities and Exchange Commission.
“Kennedy may have been the fox in the henhouse, but he knew where the holes in the henhouse were,” said John Steele Gordon, an economic historian. “You certainly need people with experience in a situation like this, people who know what the hell they are doing.”
“Peter doesn’t need a map to know where the bodies are buried,” he said. “We are going to hit the ground running.”
Obama didn’t have a lot of experienced hands to choose from, given that Clinton is the only Democratic president since 1981, said Gordon, the author of “Hamilton’s Blessing, the Extraordinary Times of Our National Debt.”
“Presidents generally reach back to past administrations,” he said. “Secretary of the Treasury is not exactly an entry-level job.”
Obama’s immediate goals will be far different from Clinton’s. Urged on by Robert Rubin, who became his Treasury secretary, Clinton came to office in 1993 determined to raise taxes and cut spending to reduce the federal deficit, then at a record $290.4 billion.
Obama, who inherits a recession that could be long and deep, will increase the deficit with an economic-stimulus package that may be as large as $700 billion, according to aides and lawmakers.
Jared Bernstein, a senior economist at the labor-oriented Economic Policy Institute in Washington, said the new economic team’s connection to Clinton, 62, may be a benefit in selling that plan.
“They’re associated with Rubinomics, balanced budgets,” Bernstein said. “That may give them added credibility” in making the case that more spending is needed.
The association works two ways. At the Treasury, Rubin fought proposals to regulate credit derivatives. That stymied Geithner, 47, when, as president of the New York Federal Reserve Bank, he tried in 2005 to reform the market for the exotic financial products that helped bring on today’s financial crisis.
Rubin also helped negotiate legislation to repeal Glass- Steagall, a Depression-era law that limited commercial banks to taking deposits and making loans. As Rubin’s deputy and then successor at the Treasury, Summers helped shepherd the repeal into law, leading to the creation of megabanks such as Citigroup Inc. that could create and trade securities.
After leaving the Treasury, Rubin, 70, became a senior adviser to the top executives at Citigroup, which on Nov. 23 became the latest financial institution to get a government bailout. U.S. regulators agreed to protect the bank from losses on $306 billion of troubled assets, including tens of billions related to its derivatives.
Critics say putting Rubin’s foxes back in charge of the henhouse violates Obama’s campaign promise to be an agent of change.
“Certainly you can’t get any farther away from a culture of change,” said Josh Rosner, a managing director at investment-research firm Graham Fisher & Co. in New York. “All of these folks are too tied to the roots of the problem.”
Geithner has been in the middle of the financial crisis since taking over as New York Fed president in 2003. He was the Fed’s chief liaison to the banking industry as subprime lending and securitization were taking off. Then last year, those securities began defaulting, threatening the stability of the banking system.
Since then, Geithner has helped negotiate the takeover of Bear Stearns Cos. by JPMorgan Chase & Co., the bailouts of insurer American International Group Inc. and Citigroup, and the Lehman bankruptcy. Money markets froze, credit spreads soared and stocks tumbled after Lehman filed to liquidate on Sept. 15.
Bernstein said the Obama team’s involvement in the crisis may actually push them to take a stronger line on market risk. “You can bet they’ll be implementing new regulations, or making sure we implement the old ones.”
That doesn’t mollify some progressives who were hoping Obama’s election would mean a break from the emphasis Clinton and Rubin put on free trade and unfettered markets.
“The number of Clinton folks involved is somewhat surprising,” said Gabe Gonzalez, campaign director at the Center for Community Change, a grassroots organizing group based in Washington.
“The assumption we’re making is you’ve got a real crisis moment,” he said. “Regardless of what their policies may have been in the past, they’re going to have to respond to that.”