Sunday, April 19, 2015

Gary Gensler – Hillary Clinton’s Move to Placate Elizabeth Warren Democrats? What the Media Gets Wrong. Social Security is a Question Mark.

This past week, Bloomberg News reported that Hillary Clinton plans to hire former CFTC Chairman Gary Gensler as CFO of her presidential campaign. Gary Gensler has been praised for his tenure at the CFTC for being a tough regulator, and media comment generally interpreted Clinton’s move as a way to placate the Elizabeth Warren Democrats, who may view Clinton as too close to Wall Street. For example, Matthew Yglesias, writing for Vox, took this line in an article headlined “Elizabeth Warren Democrats should cheer Hillary Clinton's latest big hire.”

What most of the commentary gets wrong is that Gensler’s becoming a tough regulator was a dramatic evolution on his part. While many liberals were pleasantly surprised that Gary Gensler turned out to be a tough regulator, those of us who worked on financial regulatory issues for Gensler when he was an Assistant and then Under Secretary at the Treasury Department were not surprised. For example, I wrote in February 2009 two days after Gensler’s nomination hearing: “Gensler went to great lengths to reassure the Senators that he would be a tough regulator. I see no reason not to believe him. The OTC derivatives industry will also likely not be entirely comfortable with him at the CFTC, though it is not clear at this point what the extent of his authority and influence on OTC derivatives policy issues will be.” (If you read my post, you will find that I don’t agree with everything Gensler said at his nomination hearing, though I support strong supervision and regulation of financial institutions based on good analysis of actual and potential problems.)

While at Treasury, Gensler was actively involved in another issue, Social Security reform. I know less about his thoughts on this than I do about financial regulation, since this was not an issue I worked on. However, I would note that the Bill Clinton Administration flirted with private accounts, perhaps as some sort of add-on to Social Security, and with investing some of the Social Security trust funds in equities. A January 1999 Wall Street Journal article reports:

“Treasury Assistant Secretary Gary Gensler told Congress this week that the president's proposal envisions that the Social Security funds would be invested in a very broad market index, such as the Wilshire 5000, by private money managers who would be hired by a politically independent entity akin to the Federal Reserve Board. Treasury Secretary Robert Rubin, stumping for the Clinton plan Thursday on television’s ‘Good Morning America,’ said: ‘As long as the investment function and the portfolio are totally segregated from government function, then it seems to me that what you’ve done is you've completely ... insulated [investments] from the functions of government.’” 

One of the common explanations given that President Clinton’s Social Security proposals went nowhere is the Monica Lewinski affair. But President George W. Bush also tried, with no more success. The politics of Social Security are notoriously difficult by design. The New Dealers keep winning from the grave.

Now, the politics of Social Security have changed in the Democratic Party, with Senator Elizabeth Warren and other advocating expansion, not cutting, of the program. Republicans continue to want cuts.

Hillary Clinton’s current thoughts on Social Security have yet to be revealed. Political considerations argue that probably she at least will not favor cuts and may go for some expansion funded by an increase in Social Security taxes on high income taxpayers. Gary Gensler’s current thoughts and potential “evolution” on this subject are also not known, but he is likely to keep quiet about this during the campaign. Hillary Clinton will have to say something.

As is quite obvious, there are sometimes big gaps between what candidates say and what they do when they come into office. Social Security will be a difficult issue for a potential Clinton Administration, given the stark division between the Democrats and Republicans. Any effort to “triangulate” will be very difficult to accomplish if any part of a Hillary Clinton Administration proposal on Social Security is seen as cutting benefits, especially to those in the middle class. That would mean civil war in the Democratic Party.

Finally, one suspects Gary Gensler has ambitions beyond the campaign, perhaps Secretary of the Treasury should Clinton win. In this regard, the Matthew Yglesias Vox article contained a telling sentence: “Except the Obama-Gensler relationship was so bad, Obama can't point to Gensler as an example of anything.” Assuming this is correct – the author does not reveal his sources for this statement –  Gensler, if he assumes a major role in a Clinton Administration, would be well advised to work on having good relationships with his colleagues even when there are disagreements about issues such as Social Security. Interestingly, Yglesias reverses responsibility in his next sentence: “By rebuilding the relationship, Clinton now can.” Ultimately, though, Hillary Clinton will be boss should she win in November 2016.

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