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Obama's Next Fed Fight

Why Michael Barr will be just as unacceptable to progressives as Larry Summers

Andrew Harrer/Bloomberg via Getty Images

The progressive coalition that stopped Larry Summers from heading the Federal Reserve last year may soon have a new battle to fight. The Obama Administration is considering Michael Barr, a former Treasury Department official now teaching at the University of Michigan, for one of two vacant Federal Reserve Board of Governor slots, according to multiple sources. This is unwelcome news to financial reformers, who see Barr as a leading architect of previous administration policies that were too lenient on the banking sector.

Federal Reserve board members vote on monetary policy measures, like the federal funds rate and whether to continue with or curtail quantitative easing. But they also will have a say on a host of lingering financial reform questions, with Chair Janet Yellen committed to involving top-level principals more in those decisions. One of the two vacant seats is earmarked for a community banker (assuming the administration’s nominees to two additional seats are confirmed), though the Administration’s preferred choice, Diana Preston, is actually a former lobbyist for the American Bankers Association. The other seat effectively replaces Sarah Bloom Raskin, who left to take the number-two spot at the Treasury Department.

Reformers viewed Raskin, the former chief banking regulator of Maryland, as having a keen understanding of the relationship between financial markets and ordinary people. They want her replacement to be just as tough on financial institutions, a protector of the public interest. They have floated some possible candidates, including the former chief economist to Joe Biden, Jared Bernstein, and chief counsel on the Senate Permanent Subcommittee on Investigations, Elise Bean. Senators Jeff Merkley and Elizabeth Warren sent a letter to the White House last week, urging that any nominees for the final two seats possess “a strong commitment to financial reform.” A similar letter, from outside groups in the Americans for Financial Reform coalition, is being readied. But the White House has not bitten at the reform community’s suggestions, and instead interviewed Barr for the job last week.

Barr served as the Treasury Department’s Assistant Secretary for Financial Institutions for two years, and prior to that conducted a wealth of research into the financial lives of low-income Americans and their inclusion in the financial system. He has a reputation as a strong voice for consumer protection, and advocated for the Consumer Financial Protection Bureau during the Dodd-Frank debate. Barr also holds fellowships with the Brookings Institution and the Center for American Progress, influential think tanks in Washington.

While these are admirable credentials, many reform advocates see Barr as a product of a Treasury Department that, under Timothy Geithner, ultimately defended the financial industry against proposals for progressive reform. And they see little reason to expect he’d behave differently in his new role. “I think he’s basically a team player, and can’t really be trusted to go after the industry,” said economist Dean Baker.

During Dodd-Frank, Barr wrote the initial Treasury blueprint for financial reform and served as a key liaison between the White House and Congress. Reformers argue that Barr backed up his boss Timothy Geithner at every turn, persistently seeking to weaken the bill. He publicly opposed tougher derivatives regulations, like forcing banks to spin off their trading desks. And former FDIC Chairwoman Sheila Bair writes in her book Bull By the Horns about Barr trying to water down provisions like the Volcker rule, and add loopholes that would allow for future bailouts of financial institutions.

This has soured Barr’s relationship with Democrats on Capitol Hill, whose support he’ll need for confirmation. “There are a lot of folks across the spectrum in the Democratic caucus who were highly dissatisfied with Barr’s approach to working with the Hill,” said one Senate Democratic aide. “Some offices thought he was not straightforward with them.”

Some Democrats accuse Barr and his Treasury colleagues of rubbing their noses in their failure to break up the biggest banks. Treasury’s opposition played a major role in sinking the Brown-Kaufman amendment, which would have instituted caps on bank size and restrictions on their activities. A New York magazine piece quoted a senior Treasury official who said, “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.” Senate Democrats saw that as an end-zone dance by the Treasury Department, and believe Barr shared that attitude. “That’s a source of continuing, lingering dissatisfaction with Barr,” said the Senate Democratic aide.

Barr was also an architect of HAMP, the government’s much-maligned foreclosure mitigation program, which has not met its goals, and which banks used as a kind of predatory lending program to trap borrowers and force foreclosures. Banks successfully fended off broader attempts to force them to write down mortgage balances and aid underwater homeowners, and Barr has acknowledged that “there wasn’t enough political capital, time or energy” to thwart that. He also led initial efforts to investigate foreclosure fraud, the illegal activities of mortgage services that led to improper evictions. In late 2010, Barr said, “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.” Of course, basically nothing has changed; after a large cash settlement and no criminal prosecutions, banks have continued the same practices.

Perhaps worst of all for progressives, Barr has repeatedly defended the White House’s actions on housing and financial reform issues since leaving Treasury in 2010. The release of Geithner’s memoir, Stress Test, has touched off a debate inside Washington about whether Treasury policies protected the banks at the expense of ordinary people. Barr has had several opportunities to break with the past, but he has not taken the opportunity, remaining steadfast to colleagues like Geithner and Robert Rubin, for whom he previously served as a special assistant.

This came to a head last week, at a panel discussion at the Washington Center for Equitable Growth. Atif Mian and Amir Sufi, co-authors of the new book House of Debt and major critics of the administration’s housing policies, criticized the failure to aid homeowners and pursue debt relief, and Barr basically took Geithner’s side, arguing that Treasury did everything it could. “I think that more was done than the authors have acknowledged,” Barr said, which Mian and Sufi discounted.

Reformers don’t see this as a debate about the past, but one about the future. The next Democratic administration could return to the same pro-Wall Street braintrust that designed the current economic policies, or it could seek a new direction. While it’s unlikely we’ll see Geithner or Rubin return to public life, the question is whether their viewpoint of protecting the banks at all costs will creep back into the next White House economic team. And Barr sits at the fulcrum of that, with reformers wanting to prevent the Geithner-Rubin influence from spilling into financial reform debates at the Fed.

It speaks to a certain dissonance that the White House would put up Barr for Senate confirmation, after he so damaged relationships with the very offices and senators who would have to confirm him. “Folks still remember him up here, and don’t remember him fondly,” said one Senate Democratic aide. Almost by definition, an Obama appointment will take some heat from Republicans, especially one associated with the Consumer Financial Protection Bureau (he was once floated to be its first director). But Barr’s toxic relationship with Democrats means that he won’t get any backup when Republicans start in with criticisms. He may not have the ability to even make it out of the Senate Banking Committee, let alone the full Senate.

This is a sensitive time for financial reform. The Office of the Comptroller of the Currency recently agreed to remove bank examiners and stand down regulatory oversight. The Commodity Futures Trading Commission is working to undo the rulemaking of the previous chairman. The Securities and Exchange Commission wants to fight a bureaucratic turf war and emasculate a key Dodd-Frank provision. Now the administration, with a chance to remake the Fed and make an imprint on the government’s most powerful financial regulator, may opt for someone in its own club of advisers, who hasn’t earned the trust of the reform community. There’s still time for a change of course, but a Barr nomination would trigger another brawl between the White House and progressives.