A Question For Secretary Lew

I’ve met two U.S. Treasury Secretaries in my lifetime.  Technically, when the Stanford Committee On Political Education dined with G. William Miller, he was a former Secretary.  He was relatively disgraced at the time, so the campus speaker bureau paid a lower fee than we would have paid for Paul Volcker, his successor.  Volcker later became a national hero for having the courage to raise interest rates until the inflation beast was tamed.  Often times, doing the right thing requires a thorough understanding of what ails us, in order to do the unpopular, but ultimately necessary, thing.

Last week, I had my 45 seconds of fame with Jack Lew, the current Secretary of the Treasury Department during the Colorado Capital Conference. 

I would have enjoyed having more time - enough time to have an extended discussion, but that wasn’t in the cards.  I decided, instead, to ask a question that sends a message, just in case the administration official with the most direct influence on my financial well being was in a mood to listen.

After noting that in 2009, bank examiners came into our neck of the woods and forced local banks to cut back their real estate loan books, forcing them to call in loans (even ones that were current) at the worst possible time – and making things worse than they needed to be – and then after noting that even now the mortgage markets remain much tighter than necessary, with even millionaire clients having difficulty getting loans that ought to be a lay-up, I told Secretary Lew that I did not blame him.  After all, he was just newly appointed to the position.

Prior to that, he’d been doing a bang-up job for the administration on debt reduction, as he is the author of sequestration.  Before that, he was a Chief Financial Officer at Citigroup, joining the firm just as the real estate bubble was getting going, shepherding that failed organization into the financial crisis and collecting multiple million-dollar bonuses funded by taxpayers as it unfolded, before finally jumping back to the mother ship to re-join the newly elected Democratic administration. 

Now this man who helped sink the ship at Citigroup is in charge of defending Americans against a Federal Reserve hell bent on impoverishing the elderly with 0 percent Certificate of Deposit rates in order to bail out a banking sector so flush with cash that it can’t think of anything to do with the money, other than return to the days of multi-million dollar bonuses for its hard working executive staff.  Is he up to the job?  Is he even trying to fix the problems in the banking sector?  Is he even vaguely aware that the problems exist?

Which is why I asked him if he was aware of the fact that the Treasury Department, itself, is part of the problem.  If he’s not aware of this, then he probably isn’t working too hard to find a solution, was my thinking.

Others heard his response, which was long-winded and in which he noted that we don’t want to return to the days of “no-income check and low-doc loans.”  I would agree with him on this point, which was (alas) irrelevant to the question that I asked.  He also pointed out that evidence of problems in 2009 is not important to today, however the mortgage loan example that I gave him happened only a month ago.

I didn’t want to be one of those people who demand 120 seconds of fame by asking a 3-minute question, so I left out a few other examples of why I believe that the Treasury Department, itself, is part of the problem.

For example, I’ve been told that banks which used to specialize in farm and ranch lending are now no longer allowed to have an above-average concentration in…farm and ranch loans.  Every institution must conform to the average, which is itself constantly declining because there is no longer any incentive to be particularly good at a certain type of lending.

These days, clerks at Fannie Mae and computers programmed to reflect the new bank Examiner requirements are making lending decisions, easily automating tough decisions that once required experienced credit analysts to decide.

Nor did I question the current regulatory imperative to consolidate the banking industry, forcing small community banks to merge into the fold of growing regional giants.  This, they think, will ease the burden on regulators.  However, it wasn’t the community banks that were the root cause of the sub-prime crisis.  Ground zero for those problems were the financial industry giants who packaged up toxic loans in order to sell them through their investment banking subsidiaries.  You know;  companies like, well, Citigroup.

The Treasury should be pushing back against the Federal Reserve.  The Fed’s charter is to protect the banking system.  The bankers in the system are doing quite well, frankly.  Wells Fargo’s CEO, on the backs of government subsidies and benefitting from Dodd-Frank regulations that have left it with nearly 100 percent market share of the local mortgage business, was paid $19.8 million in 2012.  Now, I happen to believe that Wells Fargo is one of the most profitable and rational of the big money center banks, but if they’re paying Stumpf $20 million bucks a year, I maintain that they are not in need of their free money subsidy.  Savers, most of whom are retirees and many of whom are low income elderly, are the folks in need of an advocate.

Logically, that advocate should be the Treasury Department, rather than the Fed.  The Treasury Secretary is the President’s key advisor on the people’s financial plight.  He’s supposed to be on our side, right?

But, to fix a problem requires a certain amount of insight.  Enough, for example, to realize that a problem exists.

I asked Lew a “yes” or “no” question.  Is there an awareness at Treasury that they are part of the problem?  The Treasury Secretary’s long-winded statement should probably be interpreted as a “no” answer.  I sure didn’t hear a “yes” hiding in there anywhere.  Really, is it that hard in Washington to admit that the government is not perfect?  In any case, I was discouraged by his response.  I see no signs that the leadership at Treasury is going to do anything to fix the problems that he refuses to acknowledge.

Volcker had the knowledge to understand what it would take to whip inflation, the courage to take unpopular measures in the interest of restoring long-term health, and the integrity to do what was best for the people of America, even when they didn’t like him (or the Administration) for doing it.  Jack Lew, I’m afraid, is a political hack who neither understands the problem nor has the integrity to acknowledge there even is a problem.  His crowning achievement up until now, sequestration, is both foolish and cowardly, and designed to fail by relying on formulas instead of accepting responsibility for making responsible budget cuts.

He is unlikely to understand what ails us or take the unpopular but necessary actions required to make things better. 

Fortunately, worldwide, the resilience of America’s economy is still the envy of the world.  But someone in Treasury needs to start working on these problems.  As someone once said, what good does it do if we’re still nothing more than the best looking horse in the glue factory?

Douglas B. May is President of May-Investments, LLC and author of Investment Heresies.