Tuesday, June 06, 2006
On Bush's Rubin
My analysisin the Business Times of Bush's decision to nominate Wall Street Big Shot Hank Paulson as his new Treasury Secretary (online access to the BT website is restricted. So I'm pasting the entire piece here):
Business Times - 06 Jun 2006
Would Paulson be Bush's Rubin, or another Powell?
The credibility of the new Treasury Secretary in financial markets is his major political asset
By LEON HADAR
IF ONE had to point to the most powerful member of former US president Bill Clinton's Cabinet, the consensus among most Washington observers and historians would be that the dominant figure was not anyone responsible for managing US national security or foreign policy but its leading economic player, Treasury Secretary Robert Rubin.
Indeed, during the boom years of the 1990s, it was Mr Rubin, a former Goldman Sachs CEO, who helped Mr Clinton manage the dangerous global financial crisis that threatened to unravel the global economy. Mr Rubin organised the largest financial bailouts in history, first to prevent the meltdown of the Mexican economy in 1994 and then to contain the Asian contagion that spread through Thailand, Malaysia, Indonesia, Singapore and South Korea, and threat-ened to reach Wall Street in 1998 with the collapse of Long Term Capital Management. In a way, the global financial crises of the 1990s could be described as Mr Clinton's 'Economic 9/11', and in it was Mr Rubin, working together with his undersecretary Lawrence Summers and Federal Reserve chairman Alan Greenspan, who assisted the then White House occupant in resolving one of the most dangerous economic crises of the past century.
And it was Mr Rubin who helped Mr Clinton mobilise support at home and abroad for an ambitious global trade liberalisation programme that created the conditions for the economic boom of that era.
When Texas governor George W Bush succeeded Mr Clinton in the White House, he did not select a leading Wall Street executive like Mr Rubin as his Treasury Secretary but chose instead to that position a former head of an aluminum company, Paul O'Neill, who was later replaced by railroad executive John Snow. These choices helped send a message to the financial markets - that have been associated during the Clinton years with the Democratic Party's political bastions in New York, New Jersey and Connecticut - that the new Republican administration would not place their concerns on the top of its economic agenda.
The White House's perspective would be more influenced by the interests of the manufacturing industries and the commodities markets, and in particular, the energy sector (represented in two powerful oil executives, Mr Bush and Vice-President Dick Cheney).
That meant, for example, that maintaining a balanced budget would be less of an important goal under Mr Bush than protecting the steel industry. Moreover, the Bushies also hinted that they would be less inclined than the Clintonites to bail out collapsing emerging economies (although they ended up doing just that when they helped bail out Brazil, Argentina and Uruguay in 2002, citing the danger of contagion).
Even before the terrorist attacks on New York and Washington, President Bush had made it clear that when it came to the global agenda, he was placing national security and not economic security on the top of his concerns, by selecting forceful public figures such as members of the so-called Vulcans group in the Pentagon (Defence Secretary Donald Rumsfeld) and State Department (former Deputy Secretary of State Richard Armitage).
These national security Vulcans were supposed to become the most powerful Cabinet members in his administration, his Robert Rubins, and that was sending another worrying message to the financial markets: with an assertive chief heading the Pentagon, expect a huge rise in defence spending even if that would produce new budget deficits.
In a way, 9/11 and its aftermath only helped to accelerate the momentum that President Bush and his aides set in motion when they came to office and it brought about the increase in the power of the national security establishment, the military industrial complex and the energy industry, and the erosion in the influence of Wall Street and the more productive and globalised sectors of the economy, including those associated with the Silicon Valley.
A new 'Vulcan'
At the same time, while the Bush administration has taken giant steps to protect the agricultural and steel industry from foreign protection in the form of tariffs and subsidies, its efforts to liberalise the global trade system were mediocre at best as the energetic moves by Mr Clinton to promote regional and multilateral trade arrangements were replaced with a cautious strategy of reaching bilateral trade accords.
Indeed, Republican economist Bruce Bartlett has described Mr Bush as 'the most protectionist president' since Herbert Hoover. Hence when one asks 'Qui Bono?' (Who benefited?) from Mr Bush's policies, the main industries (in relative terms) include energy, agriculture, steel and real estate, all of which benefited from enormous government spending.
The result was that Mr Bush, who inherited a budget surplus from Mr Clinton, quickly turned it into a large deficit, while the US current account deficit with the rest of the world ended up exceeding US$800 billion, or about 6.5 per cent of GDP.
According to the latest figures, America's borrowing from abroad has accelerated dramatically in the past four years, all of which has created major concerns in the financial markets while strengthening protectionist pressures in Washington just as President Bush is about to lose 'fast-track' trade authority and the Doha Round shows signs of being stalled.
It is not surprising therefore that there is a growing sense among investors on Wall Street and executives in the Silicon Valley that President Bush and his aides, who are preoccupied with the never-ending crises in the Middle East, have failed to devise a coherent strategy to deal with potential economic crises, especially as the pressures to correct the global financial imbalances are building up and leading in the process to a weaker US dollar which in turn could force interest rates to rise and endanger the easy-credit and cheap housing that has allowed the American consumer to go on a major shopping spree as though there was no tomorrow.
Add to the picture the rising energy prices and one considers the possibility that American middle class way of life could be under threat.
Indeed, it looks like the economic chickens are coming home to roost as declines in the US dollar and in major stock markets reflect the uneasiness in the financial markets that do not seem to have much confidence in the new Fed chairman.
It is in response to this sense of rising volatility in the markets that President Bush had no choice but to tap one of America's leading financiers, Henry M. Paulson - who like Mr Rubin has been a Goldman Sachs CEO - as his new Treasury Secretary.
To put it differently, Mr Bush has decided that he now needs a 'Vulcan' in the Treasury, his own Robert Rubin, that would be able to reassure the financial markets and help the White House prepare for potential economic uncertainties and perhaps even global economic crises, like those that confronted the Clinton administration.
As news reports indicate, Mr Paulson initially resisted the overtures from Mr Bush and agreed to accept the job only after assurances from the White House that he would become a major player in devising and implementing the adminis tration's policies, especially as he tries to restore the deteriorating US fiscal position. But he will be facing major obstacles as he tries to achieve these and other goals.
It would certainly be difficult to move towards re-balancing the US budget at a time when the White House needs to increase defence spending in order to maintain American military intervention in Iraq and elsewhere and is continuing to maintain its policies of tax-cuts.
The credibility that Mr Paulson enjoys in the financial markets is probably his major political asset since Mr Bush and his advisers are aware that a decision by the new Treasury chief to leave his job would be devastating to the administration.
Mr Paulson could also become a very effective promoter of energetic trade liberalisation efforts. As someone who has visited China more than 70 (!) times, he recognises the rising economic influence of China and the emerging economies too, and could deal more effectively with the protectionist forces in Washington.
But in order to succeed in his job, Mr Paulson will need to win the complete support of President Bush. But as former Secretary of State Colin Powell discovered, despite his enormous popularity at home and abroad he could not persuade his boss to adopt a diplomatic-multilateralist approach to deal with Iraq and was forced to leave the Cabinet.
Indeed, as President Bush stressed recently, he and no one else is the final 'decider'.
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