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November 7, 2010
David Warsh, Proprietor


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Next?

Nancy Pelosi, seeking to remain the leader of House Democrats, is betting that the election results had more to do with the state of the economy than with the intrinsic appeal of the Republican program. What about the White House?

Surely some part of the sharp reversal is a verdict on the administration’s economic crisis management. How to differentiate the new team from the old?

Here’s one possibility. President Obama could appoint Credit Suisse First Boston chief US economist Neal Soss, 61, or someone like him, as director of the National Economic Council and instruct him to devise a plan to restructure and re-regulate the banking industry, one that goes far beyond the very modest changes wrought by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Obama doesn’t have a close friend on Wall Street to whom he can turn, as George H. W. Bush turned to Nicholas Brady, of Dillon Read & Co., in 1987 and 1988. But Obama has worked well with the ensemble of Lawrence Summers, Timothy Geithner, Christina Romer, and, at a distance, Ben Bernanke.  That suggests he would be comfortable with a reform-minded banker in the office upstairs.

While Soss hasn’t been mentioned in articles about the soon-to-be vacant White House Economic Council job, I am not entirely picking a name out of the air. A Princeton-trained economist (and Williams College graduate), Soss worked as a state banking regulator in New York (he was adviser to Gov. Hugh Carey for a time) and in the Office of the Comptroller of the Currency in Washington, before joining the Federal Reserve Bank of New York.

On leave, he served as assistant to Fed chairman Paul Volcker for two years before joining Credit Suisse in 1984. He left the bank in 1994 to start a hedge fund with a colleague, Robert Cotton, then rejoined CSFB two years later while continuing for a time to operate Soss & Cotton.

That is to say his career resembles that of his former boss. Volcker, too, served as a regulator, then spent much of his career at Chase Manhattan bank in New York before returning to Washington as Fed chairman.  Volcker’s familiarity and comfort with the banking industry served him well in Washington, but his formative years in government were the key to success in his campaign against a global inflation.

Obama badly needs an adviser who knows something about Wall Street, who understands  the vast changes that have overtaken the banking business, who is well disposed towards the industry, but who recognizes that the problem with the financial intermediation today is similar to the problem with money and banking in the 1970s – the complex is out of control and leaderless.

Then the banks had captured the monetary authorities. The Fed therefore was the appropriate place to stem what was, in effect, a slow-motion stampede. The problem today is that the bankers have captured the Congress. Probably only a determined presidential initiative can restore a sense of appropriate architecture and responsibility to an industry that has been coping pell-mell with unprecedented waves of innovation and globalization for fifty years.

Much remains to be done before confidence in the banking industry, internal and external, is restored.  Various possibilities have been proposed, of which the most interesting is the notion of creating a new class of utility-like banks, closely regulated by the Fed, to deal with the issuance of the torrent of securitized debt instruments that, for the moment, has slowed to a trickle.

In somewhat similar circumstances, Congress created charters for “national” banks during the Civil War and solved a host of problems thereby. Bankers themselves took the initiative then and, again, after the Panic of 1907 they drew up blueprints for a Federal Reserve System in a meeting in 1910 that was, with suitable modifications, enacted into law three years later. With disinterested leadership from another quarter today, they could go a long way towards healing themselves again.

But that is likely to happen only if the White House again follows Nancy Pelosi’s lead and steps up to the challenge of putting its ideas to the test — in 2012 and beyond. There is, of course, no chance that the 112th Congress would pass such a measure. Indeed, it seems unlikely that the Republicans in the Senate will consent to the appointment of anyone that the White House would care to name to a six-year term as director of the new office of Financial Research.

But it is widely recognized in banking circles that that the Dodd-Frank Act did nothing to restore confidence in securitization, the great flywheel of commercial lending that now acts more like a brake. If Obama were willing to meet the industry half-way, the 113th Congress could be a very different story.

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