As Treasury Secretary Jack Lew responded to questions from the bloated House Financial Services Committee for nearly three hours, he provided more grist for analysis and more evidence of the uneven quality of the product coming out of the Treasury.
It looks like the more Lew applies himself, the better the result, but he tends to lapse into regurgitating industry talking points from the Geithner briefing and previous versions of the briefing book. It is unrealistic to expect any improvement, because in a second term, the staff tends to thin out, especially after the sixth year, as staff move to cash in while the president in still in office.
A few more Republicans, such as Scott Garrett, R-N.J., continued to raise Topic A, and the Democrats took the opportunity to help the witness, such as when Mel Watt, D-N.C., quipped that the IRS isn't represented on the Financial Stability Oversight Council (FSOC). Spencer Bachus, R-Ala., Randy Neugebauer, R-Texas, John Campbell, R-Calif., Steve Pearce, R-N.M., Bill Posey, R-Fla., and Blaine Luetkemeyer, R-Mo., also pursued this line of questioning without notable result except to give Lew another chance to say that the IRS should be independent of political influence.
A combination of cynicism and instinctive suspicion that Republicans might be getting ahead of themselves on this issue led me to imagine what the most bizarre turn this case could take, but there was every reason to refrain from making this suggestion based on cynicism and instinct alone, in part because my cynicism is almost always inadequate to anticipate the actual course of events.
So there could be no surprise when David Scott, D-Ga., pointed out, disguising any glee that he might have felt, that the holdover IRS Commissioner Douglas Shulman had told the Senate Finance Committee that he had information regarding targeting of conservatives but did not pass this on to his superiors. Schulman is reported to have contributed $500 to the Democratic National Committee prior to his appointment by President George W. Bush, and he had previously served as vice chairman of the Financial Industry Regulatory Authority, the self-regulatory organization for Wall Street.
Conservatives have almost gotten used to appointments like this, such as Eisenhower's appointment of Earl Warren as chief justice of the Supreme Court and George W.'s appointment of David Souter to the Court, not to suggest that this case rises to the same level. However, to expect good appointments and good administration from big-government Republicans would be extremely naive.
The following is a discussion of additional issues raised beyond Thursday's article
1. Housing industry.
One of the most prosaic questions a member can ask is, what are you going to do for the housing industry, and Nydia Velazquez, D-N.Y., is a good bet to ask it.
In fact, one of the few light moments occurred when Committee Chairman Jeb Hensarling, R-Texas, offered Lew 10 minutes if he wanted to talk about that subject, and Lew simply laughed.
Instead, he briefly waxed eloquent about how important housing is in providing employment to the construction industry, and he trotted out the cliche that the administration seeks to "strike the right balance."
Specifically, he warned that besides promoting employment, the authorities need to keep in mind the "prudential considerations that institutions and individuals not be overextended, creating the seeds of a future crisis." This is an indication that Lew realizes that the administration and the Federal Reserve may have already succeeded in creating another housing bubble.
Lew deserves credit for giving a more complete and nuanced answer than advocates for the Housing-Industrial Complex usually receive.
2. Small business.
Also, as usual, Velazquez, the senior Democrat on the Small Business Committee, put in a word for that special interest group. Lew responded that the tradeoff with respect to commercial lending is similar to housing. "That means taking some level of risk; banking does involve some level of risk. But we need to make sure that banks don't take risks that become taxpayer burdens afterward," he said.
Lew does not give small and medium-sized banks a pass just because they don't singly threaten to bring down the economy. Again, this is a better-than-usual answer to a cliche question. Not satisfied, Velazquez gave Lew a chance to elaborate, and at that point, Lew responded that he had spoken to regulators about the concerns small business has over the implementation of Basel III. This made Lew appear to have been enlisted in the role of industry lobbyist.
When he does this, Lew risks falling into the same trap as his regulators and presiding over the very boom-bust cycle he knows could be in prospect that could create the next episode before the reforms he advocates can take effect.
3. Libor scandal.
In further questioning, because she is so pre-occupied with the special interests of housing and small business, Velazquez asked about the Libor scandal in that context. Lew responded that the FSOC report makes clear "that we need to work on an international basis with other financial regulators, with market participants, to develop an alternative to Libor, because there needs to be a broadly accepted market reference rate to take the place of Libor, if there is a need to replace it."
What?! This is a troubling statement, because it suggests that years after the scandal broke, leading agencies like Treasury have not come to terms with the fact that the Libor standard was manipulated and affects millions of contracts but has no connection to reality.
In a hearing on this subject by a U.K. parliamentary committee, the observation was made that little lending takes place among banks to provide an objective basis for a benchmark. So, in effect, Libor is the rate at which the leading banks are not lending to each other.
Michael Capuano, D-Mass., sought to impress Lew with the significance of this issue when he warned that on top of the original Libor scandal affecting a $500 trillion market, he has read that another exposure may be building in interest-rate swaps, involving the same players, to the tune of $400 trillion, so that the total approaches one quadrillion dollars, a figure that has 15 zeroes in it, and he doubted that the word quadrillion had ever been used before in the committee.
4. Insurance industry.
On the list of special interest groups involved in the financial crisis, the insurance industry is sometimes mentioned, and the industry is represented on the FSOC. In the context of the possibility that one or more insurance companies may be designated as systemically important financial institutions and subjected to heightened regulation and supervision, Neugebauer questioned Lew to make sure U.S. insurance companies are not placed in an uncompetitive posture versus their international competitors.
Lew repeated the cliche about striking the right balance, but he also repeated his admonition that "Sometimes it means taking actions that other countries are not taking." So in effect, he left Neugebauer and other industry advocates empty handed, and this is to Lew's credit.
5. Volcker rule.
Carolyn Maloney, D-N.Y., who represents Wall Street and its zombie banks, expressed concern that they may be subjected to capital requirements of anywhere from 3.5 percent to the 15 percent being proposed by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., of the Senate Banking Committee, and she proclaimed, "I don't favor legislating capital."
Thus, the not very subliminal message is that the "too big to fail" megabanks don't like capital. The audience knows this, but it is rarely expressed so brazenly. She went on to ask about how the Volcker rule is being implemented, but not before asserting on behalf of the zombie banks that "the institutions I represent have already implemented (Volcker); they've moved [trading] to a different organization or stopped it completely."
I doubt that the banks are complying, and Lew may also doubt it, because he responded that the rules need to take account of the fact that "what looks like a different activity could be the same."
In conclusion, the overall impression is one of uneven quality. At his best, Lew has the potential to get a grip on the crisis that his predecessors totally failed to achieve, to the extent that he even tried. However, he is subject to the blandishments of industry lobbyists and politicians who seem to have forgotten, if they ever fully appreciated, that the crisis occurred and was caused by highly leveraged, poorly funded, zombie banks.
As the crisis continues to fester, Lew will be tested every day, and he knows it.
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