> On Jun 2, 2006, at 9:45 AM, Paul wrote:
>
>> Doug H. writes:
>>> And he's [Treasury Secretary designee Paulson] not likely to pursue the
>>> same policies as Rubin - he's to the right of old Bob on fiscal and
>>> social issues.
>>
>> I can see the significant differences on social issues, etc. But do you
>> think there would be significant differences on *Treasury* policy?
>> [serious not rhetorical question]
>
> Well Rubin was the only member of BC'c cabinet who opposed welfare
> "reform." Paulson, if anything, is suspected of being a weak dollar guy,
> the opposite of Rubin. I suspect that Paulson is to the right of Rubin on
> tax policy but I don't know for sure. Must make some inquiries.
===========================
If Larry Kudlow below is any indication, he'll be well to the right of Rubin
on tax policy.
My sense is that Paulson has been primarily brought in to reassure the US and international bourgeoisie that there'll be a strong Treasury secretary to a) preside over an orderly fall in the dollar and the realignment of global exchange rates, b) to smooth the bumps in the burgeoning US-China economic relationship through his equally close ties to the Chinese and congressional leaderships, and c) to take another crack at trimming US social benefits after the mid-term elections. Of course, the Bush administration also wants to trade immediately on Paulson's cachet for more partisan reasons, to burnish its economic record heading into the elections.
* * *
Paulson of the Treasury
By LAWRENCE KUDLOW June 1, 2006; Page A14
In spearing a big-fish successor for departing Treasury Secretary John Snow, our first MBA president finally turned to Wall Street for another MBA: Goldman Sachs CEO Henry Paulson. According to all news accounts, Mr. Paulson was a tough man to recruit -- but it's a bullish sign for the fate of the president's supply-side agenda as well as the U.S. dollar.
In the Rose Garden this week, President Bush said Mr. Paulson "has an intimate knowledge of financial markets and an ability to explain economic issues in clear terms." Wall Street would agree. But more importantly, the president said that "As Treasury secretary, Hank will be my principal adviser on the broad range of domestic and international economic issues that affect the well-being of all Americans."
There's a change going on here, probably a big one. Under the new Josh Bolten-run White House, Mr. Paulson is essentially being appointed deputy president for economic policy -- a mandate not given to his two predecessors. This is a bigger shakeup than meets the eye.
Up to this point of the Bush presidency, economic policy has emanated from the West Wing. The spokesmen at Treasury and OMB have been designated as communicators to sell that policy. My hunch is that the Henry Paulson appointment marks a power shift in policy making.
As Mr. Bush noted, Treasury has the play on taxes, financial markets, federal spending, trade and currency policy. So if Mr. Paulson -- the astute and highly successful financial man from New York -- has any new ideas, he will have an opportunity to forcefully present them, even if they represent a new policy direction. Mr. Paulson's formidable background will serve him well in D.C. He won't hear the phrase "You don't know what you're talking about" in the Oval Office, the Senate or the House. He has been an engaged, hands-on, sharp-elbowed Wall Street operator; a man who brought Goldman Sachs and its share price to the loftiest levels in the storied firm's history.
Surprisingly for a CEO, Mr. Paulson has a considerable paper trail of economic and political opinions. He is a confirmed free-trader who has cultivated an expanding economic and business relationship between the U.S. and China. He is also a tax-cutter, one who strongly supported Mr. Bush's broad-based tax cuts of 2001 and the economic-growth-igniting tax incentives of 2003. In the Rose Garden, Mr. Paulson echoed the supply-side message of these tax cuts, just as he has in op-ed pieces on this page and elsewhere: "Put capital behind people and ideas."
Yes, he is a capitalist. And yes, there is a "green" environmental component to the man. He was chairman of the Nature Conservancy, and some critics believe he shouldn't have used Goldman money for certain transactions regarding that venture. But this seems a trifle. Former Goldman insiders say he is no Al Gore.
Perhaps more important, Mr. Paulson has been a staunch supporter of Mr. Bush in the upper reaches of the Goldman executive suite, not easy ground to hold according to several sources. But Mr. Paulson is a religious man of strong character who does not change his principles on the basis of polling data. Ah-ha . . . yet another connection between him and Mr. Bush.
On the policy front, Mr. Paulson could resurrect the tax-reform agenda that fell through the White House cracks last year. If broad-based reform doesn't work politically, he could take the advice of Loews CEO James Tisch and push to equalize the 35% tax rate on corporate capital gains with the 15% charge on individuals.
Mr. Paulson might also zero in on reducing the 35% corporate income tax, move toward full cash expensing for the depreciation of plant and equipment, or work in general to strike down the double tax at home and abroad on the increasingly globalized U.S. business sector. The U.S. has fallen behind other major industrial countries in terms of the level of corporate taxation. All of this would make our firms more competitive in world-wide trade and also help offset some of the unnecessary regulatory costs imposed by Sarbanes-Oxley.
At the beginning of his tenure, however, Mr. Paulson will hopefully look at the falling state of the dollar, a trajectory that has caused great angst in the stock markets and threatens higher inflation and interest rates. Statutorily, Treasury has the play on the dollar through its control of the $43 billion Exchange Stabilization Fund, which can be used to buy and sell currencies in order to send important signals to world-wide forex markets. These interventions have no permanent dollar impact. That's left to the Fed's $760 billion in government securities. The Fed uses these holdings to buy and sell in the open market and thus add or drain cash from the financial system. This is the ultimate driver on dollar value and inflation.
But Mr. Paulson can lend a helping hand to Fed chairman Ben Bernanke. Mr. Paulson could signal that the U.S. wants a harder greenback as part of its inflation-fighting arsenal, while over at the Fed the FOMC could take additional steps to drain reserves and raise its target fed funds rate.
It is worth remembering that predecessor Treasury secretaries hailing from Wall Street have opted for a hard dollar in order to promote the price stability that is so necessary for sustained economic expansion. Robert Rubin (also a Goldman alum) during the Clinton 1990s and Donald Regan (the former Merrill Lynch CEO) during the Reagan 1980s chose dollar strength over weakness in order to support durable economic growth. Mr. Regan has passed away, but Mr. Rubin is alive and well at Citibank. It wouldn't surprise me if Mr. Paulson got on the phone a few times with his old confrere to talk about a hardening of the wartime dollar -- a development that would instill economic and financial confidence and thus serve the nation's bipartisan best interest.
The Bush administration may claim otherwise, but it has exercised a policy of benign dollar neglect which now could be reaching a dangerous tipping point. The solution is a Treasury-Fed hard-dollar operation. As the new deputy president for all things financial, Mr. Paulson has a golden opportunity to do Wall Street and Main Street an enormous favor.
Mr. Kudlow hosts CNBC's "Kudlow & Company."