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Forex: Paulson Not Your Typical Treasury Secretary

Paulson Not Your Typical Treasury Secretary

After Paulson's wide reaching policy speech, with nearly all the pomp and circumstance of a State of the Union address, the press is full of new title's for the Treasury Secretary. Secretary of State for China, Secretary of the Exterior and Secretary of Trade to name a few.

And we are told that White House power brokers now come to the Treasury to talk economic policy. It was rare for Snow to be called to inner White House discussions on the economy...cabinet meetings yes but not policy making meetings.

Paulson set an ambitious agenda...get Doha round of world trade talks restarted (not previously a Treasury function...USTR). Bring US-China relations, granted an emphasis on economic relations, more closely aligned (normally a function of the State Department). Open markets to trade in goods and services and keep Congress from passing protectionist legislation (normally a function of Commerce and USTR).

Paulson clearly bargained hard with Josh Bolton and the President for real say. Like the WSJ said today, his aim is to restore the prestige and power of the Treasury Department to its former self, a situation not seen since Rubin and Summers walked the hallways of the third floor.

All of these are admirable causes and desirable outcomes regardless of where one sits on the political spectrum.

But whether he can deliver is another question all together. To begin with the Congress waited less than a day before Senators Schumer and Graham said they would go ahead with seeking a floor vote on the China sanctions bill (a vote promised by the leadership after winning a procedural vote 67-33). And when it comes to trade, free trade at that, it is not simply the yuan that Congress is ready to address. Doha requires the US agreeing to serious cuts in farm subsidies. Paulson is right to press for this but the push back will be substantial.

And achieving a real economic partnership with China and its future path of development can't be negotiated into place or politely argued into place when much larger political differences keep the two governments at odds...Taiwan, human rights, IPR, North Korea, hording of the world's natural resources, Kyoto Treaty, trade in high tech US goods and Iran. Paulson's time at Goldman traveling through the upper echelons of Chinese society was all about business and business deals. Politics get in the way of business deals. I am not sure cordial relations and personal friendships are enough to assure Paulson success as the new China envoy for economics.

Then there are the turf battles that likely lie ahead. Having the White House sign off on a broader policy portfolio helps but does not secure real say over things like state-to-state relations and highly evolved trade negotiations. Indeed the USTR's Schwab today announced that the US will join the EU and Canada in bringing a case against China before the WTO over China's surging auto parts manufactured exports.

It is also less than clear that Paulson has anywhere near the relationships with members of the US Congress that he has with members of the Central Committee of the Chinese Communist Party. At the end of the day it is the former rather than the latter that will determine much of his success as economic policy tsar...entitlements, tax reform and GSE overhaul. And if the Democrats take back the House if not the Senate too (latter less likely since Chaffee won the GoP primary in Rhode Island Tuesday), Paulson will have a Herculean task of getting anything through an obstructed legislative branch. One feather in his cap here is his apparent (and real) non-partisanship. And even if the Republicans hold majorities in both legislative houses, the executive is at risk of lame duck. Presidential political capital is running low if not on empty and without a major turn of fortune in Iraq, it is difficult to envision adequate legislative leverage in the next two years. Even House and Senate GoP leadership know the pitfalls of backing the wrong horse of a policy like privatizing Social Security.

I like many in the FX market were dumbfounded by the absence of any mention of IMF reform (a key focus of Treasury before Paulson's arrival), global imbalances, the dollar and the global economic outlook. I can't remember a Treasury Secretary (I go back to Jim Baker...employed watching markets that is) who gave a major international economic policy speech without any discussion of the global economic outlook, risks to this outlook and what needs to be done to get imbalances down.

Paulson has a full plate, and figuratively speaking may be forced to dine without any utensils while in a headstand. But he may be up to the challenge. His rise to the top of Goldman could not have been any less demanding.

David Gilmore
FXA
www.fxa.com