As Treasury Secretary Jack Lew prepares to leave the office he’s held for nearly four years, he spoke with David Brancaccio about his economic legacy. Lew shared his thoughts about the Great Recession of ’07-‘08, and the steps he and his colleagues took to institute regulations on the financial industry – a framework he hopes will stay in place as a safeguard against future economic crises. As the nation prepares for the transfer of power between President Obama and President-Elect Trump, Lew addressed the concerns of Americans across the country who have felt dislocated by the economy, and what he believes should be done to support the working class moving forward.
This interview has been edited for length and clarity.
David Brancaccio: After financial markets nearly froze up in 2008 and 2009, triggering the Great Recession, new rules were put into place to keep Wall Street from ever again taking the sort of risks that would require a government bailout. With the new administration in the wings the pendulum could swing back. A top agenda item for the new team is deregulating Wall Street. Is there room now for some deregulation of financial services and financial markets?
Jack Lew: I think you have to start by remembering how far we’ve come. In 2007, 2008 our financial system was in terrible shape. We were surprised by a financial crisis that led to the worst recession since the Great Depression and it led to the most expansive overhaul of our financial regulatory system since the Great Depression. Today we have financial institutions that have deeper capital and I think they’re the best capitalized financial institutions in the world. We have transparency where we used to have opacity so that complicated financial products will in the future not be some mysterious box of potential exploding problems. If a financial institution hit a speed bump in ’07, ’08, the uncertainty of what was inside those institutions was an accelerant to the financial crisis. We have procedures in place to resolve failing institutions so the taxpayers should never again have to step in and become the equity holders of financial institutions. So I think before one asks what could change we have to remember how far we’ve come, and with a bit of humility recognize that until tested in a financial crisis, we don’t know whether what we’ve done is as effective as we think it is. The fact there hasn’t been a financial crisis is not a reason to unwind what we’ve done. We built the system to withstand a shock that hasn’t come, and happily has not come on my watch but will come because there are cycles, and shocks come.
I think that if you look at the questions that people raise often about where reform might be debated one issue is small banks. And I think there’s very broad openness to thinking about treating the smallest banks differently from large ones.
Brancaccio: Some of them feel that the added regulation is onerous.
Lew: We have a lot of flexibility, and that flexibility has been used to not have a one size fits all approach. But the problem is when people advocate for small bank special rules, they sometimes jump exponentially to a size of institution that meets no definition of small. So for example, under the Dodd-Frank law, there is a threshold of $50 billion for the size of an institution that you pay a certain level of scrutiny to. If there were a debate about raising that from 50 to 100, I think reasonable people would probably find a way to agree that there are small institutions that should get some special consideration. But the last major proposal put forth to reform Dodd-Frank didn’t go from 50 to 100. It went from 50 to 500, and at $500 billion you’re talking about some of the largest financial institutions in the country, so reform has to be incremental and sensible. It can’t be painted with such a broad brush that we undo some of the basic protections we have.
I actually am pretty confident that, because it would take 60 votes in the United States Senate to do major changes to our financial rules, that there will be kind of careful consideration and caution except in the area potentially of budgetary changes where a simple majority could suffice. The last remaining tool that future Treasury secretary will have if there is a financial crisis is something called the “orderly liquidation authority,” because under our budget rules there is an assumption that at some point in 10 years there will be a crisis. You can theoretically save money by repealing that authority. What would happen if it got repealed it would mean that there would be no way to help a failing financial institution to work itself through a crisis. And the way the provision works is it’s a quasi-bankruptcy kind of proceeding where the kind of financing can be put in place to keep an institution for failing. I would approach that with extreme concern if there were proposals to repeal that.
The other two things that come up with some regularity are proposals to say look at the Financial Stability Oversight Council; some people want to roll it back. Before the financial crisis, there was no place where all of the regulators sat down together and looked across the whole financial system to ask, “Where are the financial stability risks?” There are some authorities that give the Treasury secretary, as chair of that body, the ability to pull the regulators together to pull information together so that you can see what’s coming. I think to take down the radar so that the next crisis would not be visible would be a very big mistake.
The third thing that you hear on a number of occasions is that the Consumer Financial Protection Bureau should be modified. I think if you go back to the financial crisis, at the root of the crisis in ’07, ‘08 was consumer abuse. That manifested itself in millions of people losing their homes or going under water. It obviously manifested itself across the economy in a financial crisis that is second only to the Great Depression as an economic downturn. I think will be a grave mistake to roll back the protections we have in that area, both because I think consumers warrant that protection but also because financial stability demands it.
Brancaccio: The U.S. economy, as you point out, improved on your watch. Seventy-five consecutive months of job growth. But we know many people are being left behind. In cities, rural places, places that used to have more factory jobs. It’s persistent. People are upset about this. I don’t know is this an economic question or a philosophical question, but is this something that you ultimately have been left feeling is resistant to policy — the economic dislocation that people feel?
Lew: I think that there’s multiple things going on at the same time and there are contradictions that are hard to explain. If you look at the simple economic facts, having created 13 and a half million private sector jobs, having gone from an economy that was losing 800,000 jobs a month to gaining almost 200,000 jobs a month — that’s a swing of a million jobs, almost. That means that there are 13 and a half million people working who wouldn’t have been working if the economy hadn’t improved. It should leave people feeling a little better than they feel. Wages have been going up. We saw in the last jobs report year on year the best wage growth in a very long time. We saw in the current population survey that poverty has gone down faster than in any other measured period. So at a macro level you look at the statistics and you can feel pretty good about where we were eight years ago and how far we’ve come from there to now. On the other hand, there’s clearly a great deal of anxiety and I would say anger not just in the United States but in much of the developed world, and you have to ask why is that. I think that it’s complicated. Some of it has to do with globalization that makes people fear that their jobs are going somewhere else. But that same globalization has also led to economic growth. The biggest reduction in poverty and to more affordable prices for people in a lot of the countries that are feeling that anxiety and anger.
I think there’s some other things going on, two other things in particular, that are not just a question of the business cycle. One is the role of technology. You look at at the rate of change — it’s given us the ability to get more done. It’s given us the ability to have more things in our lives that provide value. You could say that we’ve reached a golden age of people having tools you know that are available democratically to everyone. The question is, “What does it mean about the structure of the economy and what does it mean about the workplace?” And there I think you can break it down into pieces. If you’re a manufacturing worker who’s worked for 20, 30 years on a production line, it’s not that likely that you’re going to go out and become a computer programmer. But it doesn’t mean that person can’t do any other work. One of the reasons we talk about the need for infrastructure investment is the kind of work that is goes into building things is not that different than the kind of work that goes into factory work.
If we put the investment into building up our infrastructure to meet the challenges of the 21st century, we would create more jobs for some of those people who are feeling dislocated by the technological change. For future, the question is, what skills do we give to our children and our grandchildren so that the next generation has the skills to take the advantages of technology and take it to a higher level with more value-added work that they can do, and the wages and the security and life that go with that?
But there’s another component. As you see technology come into the workplace, you’re also seeing a shift that the benefits of economic activity are more going to those who own the capital and less to those who provide the labor. The input of capital and labor are shifting in terms of what the composition of the economy is. And the question you have to ask as we make tax policy is, are we rewarding capital over labor? Should we be doing things to make it easier to have a middle-class lifestyle on a working wage, and perhaps tax the earnings on capital in a way that is more reflective of the benefit that goes with having the high earnings that go there? I obviously think we should. We’ve made proposals along this line for a number of years. It’s not as if we haven’t seen this coming, but that politically is hard to do. You have to be willing to take on interests like the fact that you can have you know very economically advantageous investments, whether it’s in high technology or real estate, and pass on the gains from generation to generation with virtually no tax. And at the same time you go to work at minimum wage, and your first paycheck you’re paying Social Security and Medicare at dollar one. And when you ask why do people say it’s not on the level? I think what I just described is what they, at some level, intuitively know.
You can make decisions on policy to tax cut taxes and to create a future fiscal path that puts more and more pressure on the things that are vital to middle-class Americans, things like Medicare and Medicaid and education benefits and nutrition benefits. As Congress makes policy over the next year, is tax policy going to help or hurt in terms of rewarding working families versus those who already are quite well off? Is it going to create a fiscal hole that puts pressure on the things that are so important to working families? And if you can’t answer those questions, a yellow light ought to start blinking, because what we learned in 1980 and what we learned in 2001 is you make the decisions quickly and they have a long tail. It takes a decade to go back and repair the things.
Additional production by Paulina Velasco.