Obama's Toxic Advisers

Bernie Sanders, the senator from Vermont
who is independent in spirit as well as party label, has placed a hold
on President Obama's nomination of Gary Gensler to head the Commodity
Futures Trading Commission. Sounds like a minor issue to get worked up
about, but the senator is right. Like most Americans, I am eager for
Barack Obama to succeed, but I see this appointment as further evidence
that the president has entrusted his economic policy to the wrong
people.

Gensler helped create this financial crisis when he was in the Treasury
Department back in the Clinton era, when bipartisan cooperation with
Wall Street lobbyists was all the rage. Sanders gets right to the
point: "Mr. Gensler worked with Senator Phil Gramm and Alan Greenspan
to exempt credit default swaps from regulation, which led to the
collapse of A.I.G. and has resulted in the largest taxpayer bailout in
U.S. history."

Sanders' hold will not stop the Gensler
nomination, because Congress and the president, recognizing the
nation's mood, want to give Wall Street whatever it wants to make the
stock market go up. And Gensler is a reassuring figure to the moguls of
finance; he was a partner at Goldman Sachs before being brought by
Goldman honcho Robert Rubin to the Clinton Treasury Department.

After Rubin left to take a
$20-million-a-year job at Citigroup, which he helped run into the
ground, Lawrence Summers, his protege and replacement at Treasury,
elevated Gensler to be an undersecretary. Gensler then performed as
Summers' point man in advocating for deregulation legislation that
enabled the current debacle.

The explosion of toxic assets is a direct
result of the laws pushed through by Rubin and his followers, and in
the decade since, we have had a 20-fold increase, to more than $530
trillion, in the value of those newfangled financial instruments, which
Warren Buffett in February 2003 correctly termed "financial weapons of
mass destruction."

Yet when one member of the Clinton
administration, Brooksley Born, then head of the Commodity Futures
Trading Commission, attempted to sound a warning, she was treated by
the rest of Clinton's economic team as the enemy.

In response to Born's warning, they drove
her from government and pushed through the Commodity Futures
Modernization Act, which summarily exempted from regulation the
derivatives that now haunt us. The claim at the time by Summers, now
top economic adviser in the Obama White House, was that "[t]his
legislation promotes innovation and competition in the U.S. financial
markets and may help to reduce systemic risk." Of course now we know,
as Born predicted, that it did quite the opposite. What irony that
Gensler is being rewarded with Born's old job for getting it wrong.

In congressional testimony supporting the
radical deregulation of the financial derivatives market, Gensler had
insisted with great enthusiasm that "OTC derivatives directly and
indirectly support higher investment and growth in living standards in
the United States and around the world." As to the many trillions of
dollars in credit swaps that now afflict the world economy, Gensler
specifically called for freeing swaps of this kind from existing
government regulation in the Commodity Exchange Act, which regulated
other futures such as wheat sales. He said, "...[S]wap transactions
should not be regulated under the CEA. ..."

His key argument, and that of Summers as
well, was that even raising the prospect of regulating what have proved
to be toxic derivatives would deny these financial instruments the
"legal certainty" they needed to thrive. What a loss that would be,
warned Summers, who called the financial derivatives market "a powerful
symbol of the kind of innovation and technology that has made the
American financial system as strong as it is today."

So "they"-Summers, Gensler, Treasury
Secretary Timothy Geithner and their uber mentor, Rubin--were as wrong
as anyone could be. Perhaps such error is human, but aren't there folks
out there with a better prospect of getting it right that Obama can
rely on?

A great deal is at stake, and we are being
asked to support the president's plans as a matter of trust in a
hopeful new leader. But the latest administration plan, announced by
Geithner on Monday, seems to be more of the same. We taxpayers are
being asked to buy back from the banks the very toxic assets that the
members of Obama's economic team once celebrated as an unmitigated
blessing. Only this time, instead of trusting the banks, we will turn
over control, but little risk, to hedge funds that are totally
unregulated. Here we go again.