Larry Summers for Treasury Secretary!
Jude Wanniski
July 13, 1998


Memo To: David Sanger,  New York Times 
From: Jude Wanniski
Re:  Bob Rubin’s Replacement

Your Saturday “Washington Memo” on rumors that Treasury Secretary Bob Rubin’s departure is imminent was most welcome reading. Bob Novak cited the rumors in his newsletter earlier last week, but you fleshed out the story nicely, with a handy review of Rubin’s possible replacement. It is widely assumed that Rubin’s deputy, Larry Summers, will step up to the job, and I don’t see why not, as Larry has been de facto Treasury Secretary for the past 3 ½ years anyway. I did have to smile at your opening comment that “every time a rumor surges through the markets that Mr. Rubin, who grew up on the Street, is thinking of stepping down, traders tremble at their terminals.” I can assure you that this is baloney, David. No trader trembles, for they all know Rubin has been Charlie McCarthy to Summers’ Edgar Bergen. When Rubin was named to the post -- having been one of Bill Clinton’s biggest backers in the 1992 campaign, it was clear in his confirmation hearings that he not the slightest idea of what the job entailed, but was assured that Summers would be able to walk him through the macroeconomics. You must have noticed the jokes about Rubin’s patented reply to questions to doesn’t understand: “The fundamentals are sound.”

While Rubin has been a joke on the trading floor, he has been extremely popular in the executive suites. Chief executives officers of the S&P 500, who know less than he does about the mechanics of international money and banking in a world of floating currencies, simply assume that he is responsible for the stock market boom of the Clinton years and the lovely growth of earnings in their enterprises. There is nobody who deserves these accolades less than Rubin, whose only personal contribution to policy was his insistence on making the capital gains tax cut of 1997 tied to an 18-month holding period. This is because he brought with him from the Wall Street foxhole where he made his millions at Goldman Sachs the idea of “patient capital.” That is, people who make bets on an asset should be forced to hold it for 18 months even when when it might succeed in 3 months, 6 months or 12. The idea appeals to ceo’s of big corporations who don’t like the idea of Wall Streeters selling shares in their companies at all and would prefer a 10-year holding period.  This little baby almost blew out the computers at Internal Revenue, as it added several pages of dense language and calculations to sort out all the different kinds of capital gains. I know you are aware that this measure has now been altered in the new IRS legislation to restore the 12-month holding period, even though you may not understand or accept my argument that the reversal is one of the reasons for the boom in NASDAQ equities in recent months.

No, Rubin would do much more for the U.S. economy back on Wall Street, where he does know how to add value as an administrator, where his fundamentals are sound. What kind of Treasury Secretary will Summers make? We do know the President loves him. When you see them together for a Rose Garden photo-op, the Prez can be seen with a hand on Larry’s shoulder. Larry does have a cuddly personality when he is talking up to people in power and he knows how to shmooze the Big Guy. Can he get along with Fed Chairman Alan Greenspan when he is Secretary and not Deputy? I don’t see why not? They both have PhDs in economics, although Alan is 30 years his senior. Summers will have something of a problem with Republican congressional staff, as he appears to be detested by those I know, for his propensity to “kick down,” if you know what I mean. The face that he has two uncles who have Nobel Prizes in economics seems to have persuaded him that he has it in his genes, which makes for a lot of undeserved arrogance. In one area he will be better than Rubin, I think. Rubin didn’t know enough about the way the world worked to be able to resist the propaganda that supply-side economics is the cause of all the terrible things that happened in the last 30 years and that the big tax increase he helped push through Congress in 1993 is behind the Wall Street boom. Summers knows his own profession has been out to lunch for the past 30 years, that traditional Keynesian economics doesn’t work worth a damn, nor does demand-side monetarism. He’s also young enough, barely into his 40s, where he can still discard a lot of the crap he learned at Harvard and append some classional supply-side understanding to his bag of tricks. He knows currency devaluations don’t work as advertised, which is why Rubin mouths support for “stability,” along with “sound fundamentals.” Maybe Greenspan will be able to teach him a bit more about gold and the two will be able to prevent a further decline in the world economy due to excessive tightness at the Fed.

P.S. Remember when we met, I told you I believed the world never left the gold standard, only the governments of the world did so? This means that gold remains the first commodity to respond to a deflationary error by the central bank. Once you understand that, you can call your Times colleague in the New York bureau, Jonathan Fuerbringer, who insists on remaining behind the curve on these issues, no matter how hard I’ve tried to coax him up to speed these past 15 years. Note in the same issue of Saturday’s Times that Jonathan has the lead business piece on how commodity prices are falling all over the place because of the crisis in Asia!!! If you happen to be talking to him, suggest that the dollar gold price was the first to fall, which he doesn’t mention in his piece. If he did, it would screw up the whole exposition, because it would mean the deflation began in Washington, not in Bangkok. If he wants to be a top-drawer financial writer, he has to understand that. You too, David.