Sheila Bair, Not Jamie Dimon, Should Succede Janet Yellen As Treasury Secretary
Rumors are flying that President Biden is considering Jamie Dimon as Janet Yellen's successor at Treasury. Normally one might think the present - with the ship of finance foundering - an inopportune moment for talk about changing helmsmen midstream. But in fact it's a fine moment - a reassuring moment - for such talk if we talk of a far better candidate for the present crisis: former FDIC Chair Sheila Bair.
The crisis we face at the present is the product of three decades' concentration and financialization of banking on Wall Street. Since the 1990s, we have seen the number of banks nationwide shrink precipitously, the size of remaining banks balloon perilously, and the focus of lending move from production to speculation calamitously. This has, anything but accidentally, coincided with the destructive globalization, financialization, and deindustrialization of the national economy.
In related work I narrate the details of these developments, and the role played by critical legal changes wrought over the 1990s in enabling it. Here, however, I want briefly to note the significance of current developments in the banking sector - and why these, along with the historical trajectory whose culmination they represent, argue for Ms. Bair over Mr. Dimon as our next Treasury Secretary.
The collapse of the Silicon Valley Bank last week, and the continuation of bank failures and bank stock gyrations this week, all stem from a tragic pass that our banking system has now reached. And it is a pass that is still all but ignored in the present familiar - if not by now tiresome - discussion of Dodd-Frank and partial 'rollbacks' thereof back in 2018.
What SVB's failure shows us is how hard it is now to be a sector-specific, production-focused, non-Big-5 regional bank rather than a generic, one-size-fits-all, TBTF Wall Street bank. Federal Deposit Insurance (FDI), modernized in 2005 to levy quantitatively sensitive, risk-priced premiums upon all insured banks, continues notwithstanding that modernization to place a $250 cap upon FDI coverage.
It is insufficiently widely appreciated just how precariously this regime places non-Wall-Street megabanks.
That is, sector-specific, production-focused, locally responsive regional banks like SVB.
The production-focused industrial banks of the SVB type service clients with large payrolls and daily operating costs that dwarf the $250K transaction accounts to which FDI coverage is now limited. This of course means that producing firms face a tragically unnecessary tradeoff. They can reap the benefits of sector-specificity, productive-focus, and regional sensitivity offered by an SVB, but only at the cost of forgoing deposit insurance.
The alternative for these firms, of course, is the safety of large Wall Street TBTF banks, which are inherently more diversified and which nobody doubts would be rescued in the event of crisis. But that of course comes at a cost of its own - namely, banking with an institution more interested in global financial markets and financial speculation than in industrial production, not to mention insensitive to specific sectors, regions, and localities.
This situation is inimical to our nation's now urgent project of reindustrializing and definancializing, as I have been arguing incessantly since SVB's failure. For this very reason I've also drafted legislation now under consideration in Congress, to lift all FDI caps upon bank deposits while continuing to risk-price premiums, progressively, as required by law since 2005.
But these same considerations also scream out for a successor to Secretary Yellen who is herself regionally and production focused, not to mentioned a celebrated former Chair of the FDIC. I refer, of course, to Ms. Bair. There could be no better time to name her to Treasury than at the present, when a boost to the role of the FDIC in comparison to the Fed is all but inevitable and when someone more attentive to actual banks a la Bair as distinguished from financial conglomerates a la Dimon is imperative.
Sheila Bair was renowned in the lead-up to and the aftermath of the 2008 crash as the sole regulator apart from the CFTC's Brooksley Born to have 'seen it coming' and warned us accordingly. A Republican from Kansas, she was markedly more prescient and serious than the Democrat Tim Geithner, who then presided over the New York Fed, in warning of and trying to forestall the crisis that gathered, then broke.
So renowned was Ms. Bair in this time that President-Elect Obama shortlisted her along with Geithner while deciding upon his first Treasury Secretary. Tragically, Mr. Obama chose Geithner over Bair - not to mention Larry Summers over Joe Stiglitz as his chief economic advisor - in a fateful blunder with whose consequences we are still living.
President Biden is widely said to be determined to do better than did his former boss President Obama, and to avoid the mistakes he saw made during his Vice Presidency. I submit there could be no better way right now to undo the mistakes, and to recapture the then-squandered opportunities, of the Obama Administration than to offer Ms. Bair the Treasury Secretaryship when Ms. Yellen retires.
As Trustee of the Federal Deposit Insurance Fund, the FDIC has always been a more serious regulator than the Fed, which was never intended to be a regulaor and which has too many other important jobs to expect to be good at the regulatory task. This is why FDIC, not the Fed, wields the most potent of our bank-regulatory tools - capital regulation - and why it has broader regulatory jurisdiction than the Fed too - all insured banks, not just Fed member-banks.
Ms. Bair, the most serious modern Chair of this most serious of bank regulators, is accordingly a Treasury leader whose time has come - again. As a Republican, moreover, she'll earn the President bipartisan 'brownie points,' while also retaining the gender diversity at Treasury that Biden laudably gave us when he named Ms. Yellen to the post a bit over two years ago.
So there you have it, Mr. President. I, a New York Democrat who has worked at the New York Fed and the International Monetary Fund, urge you to choose Kansan Republican former FDIC Chair Sheila Bair, not New York Democrat megabanker Jamie Dimon, to be your next Treasury Secretary. You - and the nation's small bankers and real producers - will be very glad that you did.
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