Heidi Moore over at
Deal Journal has posted an analysis of Hank Paulson as a politician, feeding off the piece on the Treasury chief in Tuesday's Wall Street Journal. There's a lot to agree with there, and worth saying: Paulson has proved to be the moving force in a number of crises, from Bear Stearns Cos. to Fannie Mae and Freddie Mac, and he has so far left his imprint on what appears to be a rapidly evolving regulatory makeover. He has blown by lesser lights like Christopher Cox at the Securities and Exchange Commission, and Congress seems to be either in awe of him or simply clueless.
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But there are flaws in this picture, and comparing him to Robert Rubin make for a tough comparison. Paulson's first year in office was pretty much a nonstarter. His campaign for capital markets reform -- remember how London was killing an overregulated New York? -- now smacks of Calvin Coolidge. His efforts to talk the Chinese into opening up fizzled. And he had no more idea than anyone else how serious the subprime problem would prove to be. In short, Paulson has come to resemble the one-eyed man in the land of the blind. The Bush administration has not been kind to Treasury secretaries -- no one over in the White House seems to care -- and activism of any sort runs against an ideologically driven laissez faire attitude toward intervention of any kind. Nonetheless, Paulson has shown a will to act and an occasionally craftiness that's put him at the center of events.
More problematic is Moore's notion that Paulson has made Bernanke and the Federal Reserve a unit of Treasury. She seems to view that as a good idea -- or at least a sign of Paulson's political skill and power. You could also look at it, however, as a real weakness. Again, Paulson is filling a vacuum in Washington when it comes to ways of reorganizing regulatory matters. There are good reasons why the Fed shouldn't be drawn into the role of super-regulator and one of them is embodied in Moore's notion that the Fed is now perceived to be a mere adjunct of Treasury. The Fed has always had a nominal independence from the rest of the government because of the need for some sort of "objective expertise" in monetary policy. Paulson, beginning with Bear and continuing through to Fannie and Freddie, is erasing that autonomy, without anyone really offering any evidence that the Fed can effectively become a market stabilizer. The legacy of Paulson's reg reorg may well be a diminished Fed and greater regulatory disarray.
In fact, Paulson is riding this succession of crises to stampede over a so-far recumbent Congress. It's a little like the days after Sept. 11 when no one really wanted to question the great leader. It's too scary out there. There are two realities that have to be taken account of as we try to get a sense of Paulson's legacy. He may only be around until next November and the legislative backing for a reg reorg will probably not be in place. And at some point, Congress will stir itself and attempt to reassert its influence, perhaps with a Democratic president. Will the Fed-Treasury duo be so entrenched at that point that Congress accepts the reality of that pairing? Will the ascension of the Fed to super-regulator prove to be an effective monitor and guide, not only for safety and prudence, but for growth and competitiveness? Or is this just a ramshackle solution driven by events?
Paulson does loom large right now, mostly because no one in Washington seems to question anything he does. That won't last forever. - Robert Teitelman
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