Treasury Needs a Tough No. 2

Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The Obama administration is actively seeking a new deputy secretary for the Treasury Department. Its leading candidate, Ruth Porat of Morgan Stanley, just withdrew, and a new short list is now being floated. But one name is conspicuously absent: Gary Gensler.

Mr. Gensler is chairman of the Commodity Futures Trading Commission, the regulatory body responsible for overseeing the business of commodity trading, as well as the critically important area of derivatives. In this capacity, Mr. Gensler has worked hard to make markets more transparent and to push market participants away from activities that can be destabilizing to the macroeconomy.

In fact, the only imaginable reason Mr. Gensler is not on the Treasury short list is that he has been so effective getting financial reform in place that he has made powerful enemies on Wall Street.

Mr. Gensler worked in the Rubin-Summers Treasury Department in the late 1990s, when extreme deregulation was in fashion. Almost alone among prominent public figures from that period, Mr. Gensler not only learned the right lessons but is now willing to stick his neck out on re-regulation. (Former President Bill Clinton has also expressed regret for not regulating derivatives, but it’s not clear what he might do about his concerns.)

If you look across the current set of officials, few are really willing to take on the industry lobby in a sustained way. Mr. Gensler stands out in this category. The most visible actions of the C.F.T.C. may have been its pursuit of the Libor scandal – the illegal fixing of benchmark interest rates by employees of Barclays and other major global financial companies. (For more background on the issues at stake, see this commentary by Mr. Gensler.)

Mr. Gensler was also a constructive voice during the Dodd-Frank financial reform legislation, and he has been in the subsequent thick of rule-writing in the process of putting the law into effect. This is not glamorous work, but it is absolutely essential if the financial system is to function in a more stable manner (for details, see this speech by Mr. Gensler). Of course, industry people complain that the rules have not been written fast enough, but that is largely because of their diligent delaying tactics.

Independent observers, such as Dennis Kelleher of Better Markets, give Mr. Gensler high marks for his efforts – and for his accomplishments. “Chairman Gensler has done an exceptional job and has been a tireless advocate for implementing the critically important financial reform law designed to protect the American people from Wall Street and another devastating financial collapse and economic crisis,” Mr. Kelleher said recently.

Perhaps this success is a result of the fact that Mr. Gensler is unusual in another way – he is a former senior partner at Goldman Sachs who thinks that Wall Street firms should not be allowed to take and mismanage risk as they have in the past.

As important as his work at the Commodity Futures Trading Commission has been, the deputy Treasury job is bigger — with a broad purview and the ability to jump into all kinds of issues. Under the Dodd-Frank act, the Treasury has become more central to financial issues, and there are a lot of Dodd-Frank reforms still to be carried out.

No one is going to intimidate Mr. Gensler with supposed street smarts or complicated algorithms. And as a nation, the United States is desperately short on financial executives who are determined to become really effective regulators.

The revolving door between Washington and Wall Street is of course an important concern. In the latest development under that heading, Mary L. Schapiro, former head of the Securities and Exchange Commission, has joined the Promontory Group, a prominent force that works on behalf of the industry. (Ms. Schapiro feels she has established sufficient safeguards against anything inappropriate; read the details and decide. You should also review the case of Lanny Breuer, formerly of the Department of Justice, and now at a prominent law firm.)

Jeff Connaughton, a leading critic of the revolving door (see his book “The Payoff: Why Wall Street Always Wins”), thinks Mr. Gensler is an exception to the usual rule that industry insiders make ineffective regulators. In Mr. Connaughton’s assessment, “It would be difficult to find someone better suited than Gensler — who now has consistently shown determination and exceptional capability — to be a more effective regulator of complex banking and derivatives issues.”

Mr. Gensler is not working in government with an eye to his future prospects in the private sector; he burned those bridges a long time ago.

In contrast, Mr. Gensler has good relationships on Capitol Hill, having previously served as an adviser to Senator Paul Sarbanes, Democrat of Maryland (and having a hand in the Sarbanes-Oxley Act, which seeks to strengthen corporate governance).

Not all Republicans like Mr. Gensler. They should get over this. As the Republican Party modernizes, it has to do more than pay lip service to transparency. Jon Huntsman put it well during his campaign for the Republican presidential nomination: the United States needs markets to function properly, and this is possible only when the rule of law is in effect for everyone, without exceptions for the big and powerful.

The Obama administration has apparently asked Mr. Gensler to stay at the C.F.T.C., and one downside of his departure would be that his most obvious potential successors are not likely to push so hard for reform, and some might even allow a rollback of gains already achieved. But given that only a limited number of experienced and proven reformers can get jobs with this administration, we should want them in places where they can have the most impact.

Brooksley Born, whose credentials as a reformer are second to none, hopes that Mr. Gensler will stay at the C.F.T.C. for another term. I agree that would be a good outcome. But with regard to financial reform issues during the second Obama administration, the position of deputy Treasury secretary looks set to be highly influential – and able to engage across the board on financial sector issues.

Mr. Gensler should get the job.