The Hindu Business Line : Challenges before new US Treasury Secretary

In these days, when stock market operations are the subject of investigation in certain countries, the nomination of the Goldman Sachs Chief Executive, Mr Hank Paulson, as US Treasury Secretary must come as a pleasant surprise. Only recently, The Economist of London, which cannot be accused of any particular bias, had a special article entitled "On top of the world" detailing the triumphant march of the investment bank, Goldman Sachs, in the year gone by.

Among its record-busting yardsticks was a 40 per cent quarterly return on equity. The average pay packet of its 24,000 staff last year was $520,000, and that included a number of asset shares and securities. Goldman was, and is, an innovative bank that progressed at a furious pace. It moved from plain vanilla securities trading to more profitable portfolios of derivatives and private equity investments. The gross value of Goldman's derivative exposure is more than $1 trillion.

Mr Hank Paulson comes with a heady reputation as a tough cookie, learned in the ways of the market as well as the intricacies of the political economy. He has had prior exposure to working in President Nixon's office briefly as also a short stint at the Pentagon.

His record is primarily that of an investment banker, and an exceptional one at that. President George Bush has followed his predecessor, Mr Bill Clinton, in picking a former CEO of Goldman Sachs. Mr Clinton had Robert Rubin, who was also head of Goldman Sachs. Perhaps, President Bush feels that with the recent polls showing a weakening confidence in his economic management — although the American economy is growing and inflation is low — it is better to beef up his economic team with a `heavyweight'.

John Snow, for all the compliments his colleagues have given him, was a relatively slow starter and did not cover himself with glory in the way he managed the American economy, although he had considerable help from the former Fed chief, Mr Alan Greenspan.

It is a fact that America has had a tradition of engaging successful corporate executives in political top slots. Apart from Mr Rubin, there was the case of Nick Brady, another Wall Street executive in the Treasury. The way the American polity accepts such choices is an object lesson to our politicos, who shudder at the thought of a corporate honcho entering politics.

Head honchos in politics

It is reported that Prime Minister Nehru had himself chosen industrialist C.H. Bhabha for a Cabinet ministerial position in the mistaken belief that he was the renowned scientist H.J. Bhabha. T.T. Krishnamachari was among those who had close access to business experience in the long roster of India's Finance Ministers, although John Mathai also qualified by virtue of his experience as a professional in the house of Tatas.

There is undoubtedly great merit in inducting into the Cabinet top business executives of proven corporate track record. But, given the suspicious atmosphere and allegations of likely conflict of interest, it is doubtful whether any efficient CEO of a corporate enterprise would dare enter the muddy waters of top government positions in India.

What does Paulson have to offer America and the rest of the world? Apart from his experience in the management of American investment banking, I believe his great strength is his exposure to the rest of the world, particularly China, where he has been a frequent visitor and participant. Goldman Sachs has entered into collaboration with one of China's premier financial institutions.

I hope he will bring a broader perspective than did Snow to handling America's problems with China, particularly on China's exchange rate and current account surplus. His relationship with the top executives of China's enterprises, particularly in the financial sector, must give him a special advantage in his attempts to solve some of the problems that plague the US' interactions with China.

Tough decisions

Mr Paulson's role will be particularly challenging as Mr Bush has just about two more years to go. In a lame-duck term, it is difficult to implement tough policy decisions, of which Hank Paulson will have no dearth. Equally daunting will be curbing America's fiscal deficit, which remains high. In a pre-election period, it must be difficult to persuade President Bush to support policies to curb spending.

Hopefully, Mr Paulson would have got assurances to this effect from President Bush. Otherwise, the former will be running the risk of having little to show for the period he serves as Treasury Secretary unless he continues in the job, which may be possible if the Republican Party returns to power in 2008.

One of the perceptive reviews of the role played by Mr Rubin, Mr Paulson's predecessor at two removes, showed that much depended on President Clinton's uncanny knack of taking hard decisions on serious economic issues.

Secretary Rubin was at an advantage in that he was able to persuade Mr Clinton to put checks on fiscal expansion so successfully that the US Treasury soon ran into a surplus, leading to the anticipation that long-term Treasury Securities (30-year bonds) may be scarce.

Those days are gone, thanks to President Bush's extravagant tax cuts and Defence outlays. Hank Paulson will have his task cut out to deal with the problems posed by a President who is not known for keeping his fiscal ambitions in check, even as he extends the American empire abroad.

Danger signals

The challenges before Mr Paulson include, importantly, the ticklish question of reducing America's current account deficit, which is running at above 6 per cent of GDP. This is a danger signal, and what sustains the deficit is the inward investment by Asian and OPEC countries into US Treasury securities.

This will continue only so long as there is confidence in the greenback. Once that is shattered, investors will turn to euro and yen-denominated securities — a shift that will further weaken the dollar.

In solving this problem, Mr Paulson will have to take on board not only the EU but also emerging economies like China and India, apart from OPEC economies, which are today investing their savings in the US. The setting right of global economic imbalances cannot happen unless America controls its fiscal spending as also its consumers' appetite for goods and commodities. There is no use simply banking upon the protectionist mantra of flexible exchange rates and revaluing the Chinese yuan.

Whether there should be another Plaza Round to get the major participants to convene and solve this problem is not clear. The situation is different from that at the earlier Plaza Round. The US' current account deficit is running significantly higher and China's surpluses seem to be climbing. How Paulson will manage a soft landing for America and the world is a trillion-dollar question!

Here's hoping Mr Paulson will have good luck and, importantly, have learnt sufficient lessons from the earlier bitter episode. He also needs a lot of pluck. Here is wishing him both in good measure.

More Stories on : Banking | Insight | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The 100 million club

Oil price: States should take the initiative

The importance of nurturing talent

Old timers' quandary

Challenges before new US Treasury Secretary

Lessons from the Enron verdict

Being competitive yet human?

Tax on judges