Now that former Treasury Secretary Geithner is holed up writing his book, President Obama is working on getting his replacement confirmed by the Senate. Jack Lew will appear this week before the Senate Finance Committee, which will likely focus most of its attention on budget issues. The senators should save some of their time for questions about how Mr. Lew would handle Mr. Geithner's regulatory legacy.
Mr. Geithner's legacy is, of course, tightly intertwined with the financial crisis and the resulting Dodd-Frank Act. As president of the Federal Reserve Bank of New York and as Treasury secretary, Mr. Geithner played a central role in the government's response to the crisis. He advocated then, and continues to stand by, a no-holds-barred government-dominated approach to dealing with financial calamities.
In an interview last month, Mr. Geithner told the Wall Street Journal that when another major financial crisis comes, "our successors are going to have to do exceptional things again if they want to protect the economy from a failing financial system." He further explained that "in a severe crisis, you're going to have to do very substantial and very creative monetary policy. You're going to have to do very substantial fiscal stimulus. And alongside that, you're going to have to do what you need to do to try to reduce the risk of damage and contagion on the financial system." The senators would do well to ask Mr. Lew if he shares Mr. Geithner's belief that the government has to "do whatever it takes" during a crisis, and whether, in doing so, Mr. Lew would be bound by the strictures of law.
Mr. Geithner helped to draft and implement Dodd-Frank and has been one of its principal defenders. Dodd-Frank embodies a regulator-centric philosophy that attempts to safeguard the financial system by placing existing financial institutions within the protective orbs of regulators, armed with tremendous discretion and endless reams of information. The Finance Committee ought to ask Mr. Lew whether he thinks regulators are really able to gather, process, and employ information more adeptly than properly incentivized markets. If he does not believe this, would he advocate alternative financial regulatory reforms that would incentivize market participants to identify, punish, and-if necessary-purge weak firms?
Private market monitoring incentives have been debilitated by the bailouts that Mr. Geithner helped to arrange and the too-big-to-fail labeling system built into Dodd-Frank. Would Mr. Lew, as Richmond Federal Reserve Bank President Jeffrey Lacker suggested last week, take a whack at too-big-to-fail by letting the next big failed financial firm go through bankruptcy without taxpayer funding?
Mr. Geithner has admitted that "you won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock," an admission that suggests that the Dodd-Frank infrastructure for ferreting out systemic risk is not going to be effective anyway. Does Mr. Lew agree? If so, would he recommend changes to Dodd-Frank to better reflect reality?
Dodd-Frank rulemaking is less than half done. Although Treasury is not a major Dodd-Frank rule writer, it has an important coordinating role to play in the process both domestically and internationally. Mr. Geithner, in his capacity as chairman of the Financial Stability Oversight Council, did not actively work to coordinate rulemaking, but allowed inter-regulatory conflicts to fester. International tensions over regulatory reform have also mounted. What steps would Mr. Lew take to foster effective inter-agency rulemaking and to smooth international regulatory relations?
The new Treasury secretary will need to be a master of more than just budget matters. He should have a clear plan of how he would improve the Dodd-Frank implementation process, address the issues that Dodd-Frank either did not address or handled badly, and respond to another financial crisis if it comes on his watch. Accordingly, the Senate would do well to ask some meaningful questions about the regulatory philosophy of any would-be Treasury secretary.