The markets are jumpy, the dollar is tired, and Alan Greenspan has sunk below the horizon. Now more than ever the dollar needs a top-class spokesman, and in Hank the Tank it may have found one. Henry Paulson, boss of Goldman Sachs, lion of Wall Street, took some persuading to jump ship and serve as George Bush’s new Treasury secretary, but in the end the sentimental lure of seeing his name on dollar bills proved too much. After all, he owns 700 million of them himself. He seems to think that he will get a say in making economic policy, unlike his two ineffectual predecessors at Treasury, Paul O’Neill and John Snow, whose role was limited to talking policies up. Good luck to him, but the Bush administration has only two and a half years left, and its room for manoeuvre on fiscal policy is all but spent. Paulson, however brilliant his ideas, is not going to change George Bush’s fortunes in any big way, which accounts in part for the general warmth of his welcome. Even Democrats can applaud him.
Commentators have compared Bush’s appointment of Paulson with Bill Clinton’s appointment of Robert Rubin, a previous Goldman Sachs boss, to the same Treasury job in 1995. Bush, like Clinton before him, wants a bigshot banker who can explain Wall Street to Washington and vice versa. But Paulson has a trickier time ahead than Rubin ever did. When Rubin took over the Treasury in 1995, a Republican-dominated Congress had already forced Clinton’s hand in favour of deficit-cutting policies, which helped support a strong dollar. Paulson inherits a big budget deficit and an even bigger current account deficit. Between them, they are almost bound to bring the dollar down whatever else the government does or says. Paulson’s job is to manage the decline gracefully, which is roughly the equivalent in monetary terms of herding cats along a tightrope in time to music.
I like to think there is another reason that Paulson agreed to join the government. Unusually for the upper reaches of both Wall Street and Washington, he is a devout Christian Scientist. He subscribes to a religion which holds illness to be an illusion caused by wrong beliefs, and prefers that it should be cured through prayer and study, not through drugs and surgery. Imagine the windfall if he could translate this into American government policy. The federal government spends 4–5 per cent of GDP each year on healthcare through the Medicare and Medicaid programmes for the old and the poor. If these programmes were replaced by prayer and study, the fiscal deficit would disappear overnight, transformed into a 2–3 per cent surplus. The dollar and the stock market would soar. President Bush has spoken warmly in the past of faith-based initiatives; here is one that could redeem his presidency, or at least its bookkeeping.
As for what Paulson leaves behind him, well, you can see why he took some persuading to move. My colleague at the Economist, Tom Easton, says that when Goldman publishes an earnings statement, the whole of Wall Street stops and stares. The first thing everyone wants to know is how much money Goldman made in the quarter, which is usually more than anybody had thought possible. The second is whether Goldman has let slip how these fantastic profits were earned, which, invariably, it has not. Goldman’s first-quarter figures this year were a classic of the genre. The firm booked $10.4 billion in revenues, paid out $5.3 billion in wages (or roughly $220,000 per employee, right down to the drivers and receptionists, for three months’ work), leaving profits of $2.5 billion after tax and a few other expenses. Two thirds of the revenues came from punting the bank’s own money in the markets and other investment plays, the mechanics of which are a black box. Old-fashioned investment banking — underwriting share issues, advising on mergers — was a smallish sideline by comparison.
Paulson rose through the investment-banking side of Goldman, back when the bank’s big money was still being made there. Now that trading makes the money, control of Goldman is going to veer that way instead. Paulson’s successor is Lloyd Blankfein, who used to run Goldman’s trading in fixed-income, currencies and commodities. He should know better than anyone what’s in the black box and where the risks are buried, which will matter even more when a storm hits. Whereas Paulson’s arrival may prove nothing more than a footnote to the history of the Bush presidency, his departure looks like a watershed in the history of Goldman Sachs. Think of Goldman as an investment bank which had a huge hedge fund growing out of it — now the hedge fund has taken charge.
A declaration of interest: I have a strong personal interest in seeing disasters on both sides of Paulson’s job-straddle — with an investment bank or two blowing up and the dollar crashing. Those things will help accelerate the decline of property prices in Manhattan for a would-be foreign buyer such as myself. I have in mind a one-room flat and, more to the point, a mortgage, the interest on which I can set against my income tax, which is higher in the city of New York than it ever was in Brussels, Paris or Moscow. Happily, property prices are already falling faster than anyone cares to admit. I spotted a studio in a New York Times small ad at $335,000. By the time I got there a couple of days later the asking price was $325,000. When I showed no interest, the agent called me after another couple of days and said $290,000 might do the trick. Part of the problem is that New Yorkers do not know how to behave in a property crash; they are too intrinsically optimistic. Instead of walking around with long faces, moaning about negative equity and begging strangers to buy their houses at half the previous valuation, as Londoners did in 1992, New Yorkers continue to publish absurd asking prices and genuinely seem to think that things will pick up soon. I hope this publication of my own experience will help instil a proper sense of panic.
Robert Cottrell is New York correspondent of the Economist.