It’s becoming harder and harder to believe that anyone is really in charge of the world’s largest economy. Each day brings a new catalogue of woes, miscues and missteps, each of which should have been foreseen long ago. And at the centre of each fresh foul-up stands one man: Treasury secretary Hank Paulson, ‘Hammerin’ Hank’, once boss of mighty Goldman Sachs, now reduced to a sort of Frank Spencer figure, constantly bemused by domestic disaster. Only in Hank’s world it’s the American mortgage industry that’s falling apart, not just the kitchen table.
The latest stress test for America’s embattled economy is the sudden, alarming decline in the shares of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Association), institutions that together guarantee and fund $6 trillion worth of mortgage debt. Traditionally, both fall under the purview of the Treasury, yet Paulson has been notably slow to respond. Only after Fannie Mae’s stock plummeted by more than 22 per cent on 11 July did he act, announcing that both retained the unequivocal support of the entire US financial apparatus, such as it is.
Of course he had to say that. The mere suggestion of Fannie or Freddie failing is unthinkable. The knock-on effects would be apocalyptic, utterly unpredictable in their scope and reach. So how did all-powerful America come to this? Amazing though it seems, it’s barely more than 12 months since the very same Hank Paulson announced to a business summit that any trouble facing the US housing market would be ‘largely contained’, and that the subprime disaster ‘wouldn’t amount to much’.
And this is the man who once ran the world’s most successful global investment bank; a top college athlete and committed Christian Scientist who kitted out the bathroom of his private Goldman Sachs jet with solid gold bath taps. His stock until recently remained high in Washington, where he was seen as a saviour after the disastrous tenure of his even more clueless predecessor, John Snow.
Yet when George W. Bush announced that Paulson was in charge of the current crisis, the look of discombobulation on the President’s face was priceless. Paulson insisted that Freddie and Fannie simply needed ‘better oversight’ and were not in need of fresh capital. But it is the general lack of good oversight that has led America’s financial sector into this blind alley. When he was unveiled as the Treasury head in May 2006, Paulson promised above all to tighten financial regulation. In reality he’s done nothing of the sort. In effect, he spent much of the last two years twiddling his thumbs while his investment banking pals continued to rack up huge bonuses. One result: the failure of one of America’s most famous broking firms, Bear Stearns. Yes, Paulson was one of the men who over the course of a weekend helped engineer a reasonably priced takeover of Bear by JPMorgan. But he was also the man who should have prevented the firm from unravelling in the first place.
Elsewhere, his record — soon to be his legacy, when a new president is sworn in next January — is equally wretched. One example is China, where Paulson is widely known and well liked. In his Goldman incarnation, he visited the country some 70 times. Chinese industrialists liked his forthright manner and were flattered by his attention, as were leading Party officials. Leading mainland academics were lavish in their praise: as recently as April this year, the former head of China’s National Bureau of Statistics, Li Deshui, described Paulson as a ‘strong market maker from Wall Street’ with ‘rich operating experience and political savvy’.
Yet a closer look at Paulson’s record on China again makes him look more paper tiger than leaping lion. America wants China to let its currency, the yuan, appreciate more rapidly against the dollar, making Chinese exports more expensive and cutting into the ever-widening US trade deficit. Beijing is doing so, but at more of a limp than a stride, and while the Communist Party listens politely to Paulson’s constant urgings to speed up the process, its decision makers continue to plod along at their own pace, and for good reason. America’s other great hope with the yuan — that Beijing will allow it to float free against the greenback — just isn’t yet a viable alternative for China’s largely untested financial system.
With little else to occupy his time, Paulson resorted to creating the US-China Strategic Economic Dialogue. It’s the sort of bland, bilateral talking shop of which any Party bureaucrat would be proud. And while it may allow senior American and Chinese officials to talk openly on issues as wide-ranging as intellectual property and energy security, in terms of concrete action it amounts to little more than a good reason to get together and eat sea cucumber. It’s hardly the sort of legacy Paulson would wish for. And yet, with shares in Freddie, Fannie and every other corporate Tom, Dick and Harry continuing to head south, this could be as good as it ever gets for Hammerin’ Hank.