WELCOME back. It was a holiday in the United States, too, yesterday and most Americans took advantage of the heartbreakingly perfect weather to do the sorts of things they always do at the weekend that marks the start of summer — frolicking in the pool, charcoal-coating hamburgers on the grill and pondering the identity of the next Secretary of the Treasury.
President Bush spent Memorial Day nibbling hot dogs around the barbecue at Camp David with his old Texas friend Don Evans, fuelling speculation that the former Commerce Secretary was going to get the nod for the Administration’s top economic and financial policymaking job, perhaps as early as this week.
Certainly, the word out of the White House is that The John Snow Execution Vigil is nearing its end. The tumbrils rolled up to the Treasury Building on 15th Street in downtown Washington several weeks ago, but there’s been an awkward silence since then as the Bush team has scrambled to find a replacement.
A quick trawl through the small and diminishing pool of Bush-friendly Wall Street types yielded nothing. Those who might have been interested would have been problematic. Washington is in a tizzy currently about officials’ probity after a series of financial scandals, and though nobody feared anything untoward from any of the names floating around, the prospect of a full ethics and FBI background check on anyone who had accumulated a net worth in the hundreds of millions of dollars was bound to mean further long delay.
In any case, the Wall Street gambit, I suspect, wouldn’t have worked. Few self-respecting Masters of the Universe were likely to be willing to take the corporate jet down to Washington to play second fiddle to Karl Rove, the President’s allpowerful political adviser. One of the sorrier features of the past five years has been the downgrading of the Treasury in the hierarchy of American political institutions to the level of a public relations agency for the White House’s political team. That will only get worse in coming months as Mr Rove battles to get the Republican Party out of its deep hole in time for the mid-term elections in November.
And yet there may still be an important message for financial markets in the imminent announcement. The identity of the next Treasury Secretary could tell us much about the direction of the US dollar. In the past 30 years, a clear pattern has emerged linking the secretary’s professional background with his currency policy. Those from a Wall Street past have tended to be energetic proponents of a strong exchange rate for the dollar. Merrill Lynch’s Donald Regan in the early Ronald Reagan years, Nick Brady of Dillon Read under the first President Bush and most recently and most famously Robert Rubin of Goldman Sachs under Bill Clinton, all ignored powerful constituencies clamouring for currency relief and aggressively pursued a strong dollar.
By contrast, those with an industrial or political background — steel man Paul O’Neill and railroad guy John Snow under Mr Bush, and, looking back, James Baker in the second half of the Reagan Administration and the recently departed Lloyd Bentsen in the early Clinton years — have been quite happy, indeed eager, to see the dollar decline.
This is no mere coincidence. Wall Street types don’t like seeing the value of US financial assets shrink in global terms; they worry about the implications for stability. The political-industrial complex likes a lower currency that helps American exporters and puts pressure on truculent foreigners to open their markets and loosen monetary policy.
Don Evans seems to fit very comfortably into this latter category — a Texas oil man who made his name as a key political operative during Mr Bush’s successive runs for governor and president. If he is appointed, don’t bet on Washington making much effort to halt the dollar’s slide.
THE PRESIDENT has certainly got at least one recent appointment of a Don absolutely right. This month he nominated Don Kohn to be vice-chairman of the Federal Reserve. There may not be a better example of a public servant than Mr Kohn, who has 35 years’ experience at the US central bank, the past 20 in senior roles as head of monetary policy and then as governor of the interest-rate setting open market committee.
There is certainly nobody who knows the Fed as well as the genial Mr Kohn and that knowledge will be invaluable as No 2 to Ben Bernanke, the new Fed Chairman, whose official experience is limited.
One interesting thing about Mr Kohn is that he devoted some time to advising the Bank of England in its early days of independence. He, like others, has been impressed with the Bank’s transition from subservience to political masters to genuine autonomy and he can be counted on as a reliable friend at Threadneedle Street.
Of course these days, if the Bank’s critics get their way, someone like Mr Kohn would never get near the Monetary Policy Committee — he is way too qualified for the job. An absurd dispute is now brewing about the composition of the MPC. Grumpy industrialists say that the Bank needs fewer economic experts and more widget-makers. Conservative MPs are threatening a fight, citing unhappiness at the transatlantic commuting of new nominee David Blanchflower (who, I confess I was surprised to learn, has switched from a brilliant career in midfield for Tottenham and Northern Ireland to the economics faculty at Dartmouth University without a hitch. I think I’ve got that right?).
The fact is that the MPC has worked remarkably well in its first nine years, not just in terms of outcomes — steady growth with low inflation — but also in its methodology. Its openness and effectiveness at communicating to markets has impressed almost everyone who really understands central banking, including some of the smartest economic minds in the US. Though much is owed to the genius of Mervyn King, the Governor, other members have done their part.
The idea that the Bank should jeopardise this record in an effort to become more representative of British society is an unlovely example of anti-elitist political correctness. When people opt for diverse mediocrity over narrow excellence they place themselves on a rapid route to irrelevance and failure.
It reminds me of one of those old jokes about economists: an economist is someone who sees something working in practice and then explains why it will never work in theory.
gerard.baker@thetimes.co.uk
