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The O'Neill-Greenspan Show.

Several years ago at a Caribbean resort over Christmas, I ran into then Treasury Secretary Robert Rubin. Though over drinks the highly regarded financial policymaker offered no real specifics, written clearly between the lines was the signal that he soon planned to retire. Another point was equally clear: Rubin's confidence in Deputy Larry Summers as his replacement could not have been higher. At that point, I posed the question of what advice, or warning, he would offer the next Secretary of the Treasury? Rubin's response was instantaneous: If the next Treasury chief gets into trouble, he predicted, the mistake would likely stem from an underestimation of the speed and ferocity of today's global financial markets, particularly the foreign exchange markets.

This conversation came to mind recently with the appointment of Paul O'Neill as George W. Bush's Treasury Secretary. No, this is not to suggest that only financial market leaders can be successful in financial pop icymaking. Clearly, Mr. O'Neill enjoys a reputation as a heavyweight decision-maker in both business and policy worlds. This is hardly a man who has known failure. Yet the risks are everywhere. The nature of markets themselves has changed even since the first Bush administration left office in 1992. The situation today compared to 1976 when the Ford team left town is stunningly different. Today's markets arbitrage information at a lightening-quick pace that would have left 1970's policymakers aghast. There is now little room for mistakes. The policymakers' weapons (central bank reserves, for one) are absolutely tiny relative to the size of today's markets. Indeed, even in the fifteen years since the famous Plaza Accord, the G7 central banks' reserves taken together have shrunk dramatically relative to the size of the global foreign exchange market. Even the Fed's control over the powerful Federal Funds rate entails what is essentially a negotiated settlement with the markets. The leading question for Fed policymakers after any change in Fed Funds rate: How have the markets reacted? Have we retained our credibility?

That's why today's financial policymakers have no choice but to live by their wits. In a sense, a Treasury Secretary is one of the main actors in an elaborate global financial "theater." Success stems less from one specific powerful policy act or speech than from an ongoing series of persuasive performances. In the Rubin theater, of course, the first act always opened with the main players worshiping at the shrine of the U.S. long bond, after which the main protagonist would utter the line: "We believe a strong dollar is in the best interest of the United States."

Notice that in the history of financial theatrical performances, the Academy Award goes to Federal Reserve Chairman Alan Greenspan. Greenspan is the Laurence Olivier of the financial theater. He has been the most credible handler of the U.S. financial system precisely because he acts the part so well. His power stems in large part from his skillful, knowledgeable performances.

The job of Laurence Olivier is becoming tougher. In a sense, Alan Greenspan is no longer head of the U.S. central bank; he is now central banker for most of the world, a world now rapidly becoming dollarized. Whether the Fed has kept short-term interest rates too high for too long is a global question. The reason: the transferal effect of high U.S. rates and the relative strength of the dollar in the context of a globally connected financial system. It is a system in which U.S. credit markets seemingly can seize up overnight in the event of turbulence in overseas markets, not to mention from financial accidents at home.

Which brings back the issue of Paul O'Neill. Perhaps the most reassuring message during his introductory press conference was his longstanding personal and professional ties with the Fed Chairman. O'Neill's job description appears to be to guide passage through Congress of the Bush tax cuts as an anti-recessionary measure. But the medicine may arrive too late. In 1981, Ronald Reagan, after a landslide victory and the outpouring of sympathy in the wake of an assassination attempt, struggled until August to enact his tax cuts. Enactment of a Bush tax cut reconciliation package could take just as long. Meanwhile, as the U.S. economy slides down further and the Fed struggles to reduce interest rates, Paul O'Neill and his trend Laurence may need to deliver the most persuasive theatrical performances of their lives.
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Title Annotation:Alan Greenspan, Paul O'Neill
Publication:The International Economy
Article Type:Brief Article
Geographic Code:1USA
Date:Jan 1, 2001
Previous Article:Two-Way Brain Drain.

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