Treasury Scramble Jude Wanniski January 25, 2001

The Undersecretary for International Affairs slot at Treasury is one of the most important to the multinational banks, which is why there is always an terrific fight over it. The WSJournal today indicates, on page A22, that the leading contenders are 1) Charles Dallara, who represents the big banks as he has in previous administrations, including that of Bush the elder; and 2) Adam Larrick, an economist who has opposed bailouts of foreign governments that he says have really bailed out their bank creditors, as in Mexico.

The WSJ report on Dallara is already obsolete, as we were told Dallara has been scratched. This decision was made yesterday, we understand, after a WSJ lead editorial blasted Treasury Secretary Paul O'Neill for having told the Senate Finance Committee in his confirmation hearings that he thought the Clinton Treasury had done a good job in the Mexico bailout. The editorial, almost certainly written by Editor Robert L. Bartley, took dead aim at Dallara as an agent of the banks. The problem was not the bailout, though, but the total incompetence of the Clinton Treasury in supporting the peso devaluation that brought on the crisis. The Mexican economy was wrecked by the IMF and its pals in the multinational banks, who saw a chance of making a quick billion or two by shorting a peso they knew the new Mexican government of Ernesto Zedillo was going to devalue -- because acting Treasury Secretary Larry Summers made that a condition of U.S. assistance. Note the WSJ news story today says that as head of the Institute for International Finance, Dallara had "pushed the Clinton Treasury Department to provide banks with confidential information about looming crises," which would make it all the easier for the banks to short the currencies of troubled currencies. Yuk.

Larrick, though, is the candidate of the "let's kill the IMF" crowd led by Milton Friedman and his monetarist allies, including former Treasury Secretary George Shultz, who floated the dollar in the Nixon administration on the advice of Professor Friedman (they had been colleagues at the University of Chicago). You will also notice Alan Meltzer's name in the WSJ editorial yesterday, he being the second most important academic economist after Friedman. Larrick is Meltzer's protégé. There is of course no way the problems of global poverty would be lessened with Larrick at Treasury, where he also would be U.S. director at the IMF, and of course there is no likelihood the U.S. Treasury could resist crises that would topple banks if they were ignored. The only real solution is to fix the dollar/gold price, which would prevent the global swings from boom to bust in the poorer commodity-producing countries, but of course the monetarists would fight that to the death. Chances of Larrick have improved, though, because Ken Dam, the #2 at Treasury, is a protégé of George Shultz, for whom he worked in the Nixon years as deputy director of OMB. Dam at least got Larrick on the interview schedule, we suppose, but he does not necessarily support him for the job.

Surprisingly, the WSJ story did not list David Malpass, director of international research at Bear Stearns as being considered for the post. They mentioned David Mulford, who had the post in the last Bush administration, when Malpass was an assistant to him. In his personal column in the WSJ, Bartley had endorsed Malpass for this post, and we know Jack Kemp also has urged a Malpass appointment. A regular contributor to the WSJ editorial page and recognizable to Wall Streeters as a frequent commentator on CNBC's "Squawkbox," Malpass would be the most effective of the bunch in getting things to work better on the international side of Treasury because his strength is in problem solving, not ideology. The IMF has to be fixed, not killed.

GREENSPAN: The Fed chairman, who always speaks with forked tongue, did President Bush no favors today with his testimony supposedly favoring the Bush tax cuts. Several times he reminded the Budget committee that the Ford tax cut of 1975 did not help the economy. Greenspan, who was Ford's chief economic advisor at the time, did not mention that it was a $50 rebate, not a tax cut at all. Ford easily could have won the 1976 election over Jimmy Carter if Greenspan had steered him away from fiscal austerity in 1974 and the rebate in 1975.