O'Neill, it is true, has not been the smoothest of performers. Policy has been wobbly. He had been an outspoken critic of the bail-outs carried out by the IMF in Russia and Argentina. On his watch, Argentina was not bailed out and sank a year ago -- and a year on, despite its efforts, still has not been given any IMF money. Brazil, meanwhile, has been treated quite differently.
O'Neill made comments last July about needing to be assured that money given to Latin America "would not end up in Swiss bank accounts." Brazil was offended, but was not left without funds. A matter of weeks later the U.S. Treasury backed a colossal International Monetary Fund package for Brazil of $30 billion. Still more astonishingly, O'Neill praised Brazil's commitment to sound policy with a finely balanced presidential election just two months away. How could he, or anyone, be sure that policy -- which was, contrary to his assertions, inadequate -- would not grow worse? This, surely, was just the sort of dubious bail-out that O'Neill once decried.
And there have been other inconsistencies. So mystified has the market been by O'Neill's comments on the dollar that in July 2001 he said he should wear a sign saying, "We don't talk about that." The sign might as well have said, "I am uncomfortable in this job."
Larry Lindsey, the White House economic adviser, has been similar, never looking comfortable when required to speak publicly about the economy. Neither the markets nor Congress and the media have been impressed. And Bush now appears to have called a halt. But will the change of team improve the economy?
It is always easy when heads roll to point to their failures and blame them for all that is wrong. But the fact is that O'Neill and Lindsey have been trying to steer the ship in a storm that, we would judge, the world has rarely seen, and one that their critics in Wall Street and elsewhere have been able neither to predict nor to assess. How many times in the past two years has Wall Street told us that the recession -- which it failed to predict in the first place -- was over and recovery was just round the corner?
Recession came suddenly. The U.S. economy lost momentum and went from being "the miracle economy" to being the perplexingly difficult-to-resurrect one we have now.
The reason, we would say, is that the boom in stocks in the late 1990s was unhealthy, a false source of dynamism and wealth that has left the economy over-extended and distorted -- and in need of a slowdown to reduce the trade deficit and rebuild savings and reduce debt. But, again, few U.S. economists appear to have been ready to see the economy in this way. They speak of "strong fundamentals" and see the oasis of recovery as often as delirious men in the desert.
How should the U.S. economy's problems be tackled? Lindsey is a strong economist and one who is said to have warned Bush, when the latter was considering running for president, that he might face a recession when in office. It is impossible to tell from Lindsey's public statements, but he may well have realized what sort of storm the United States faces. He played an important role in Bush's tax-cutting policy which has helped to alleviate the hit to consumers' balance sheets from the negative wealth effect engendered by falling stocks. Policy has thereby helped to maintain growth in consumer spending, averting a deeper drop in the economy. That may well have been the right thing to do.
Perhaps Lindsey and O'Neill did not do so badly after all.
But what about the other side of economic policy, the monetary side? That is in the independent hands of U.S. Federal Reserve Chairman Alan Greenspan; and Bush, we would guess, has approved of Greenspan's activism. Perhaps wrongly.
Greenspan appears to us to have well understood the unusual nature of the problems the United States faces. In April 2001, in an interview with UPI, the Nobel Prize-winning economist, Milton Friedman, said he was of that view, believing that the collapse of the U.S. economy in the 1930s and of the Japanese bubble economy following the real estate boom of the 1980s were "in Alan's mind" and explained why he was cutting interest rates so rapidly.
In a later interview in October 2001, Friedman made another comment pertinent to this discussion. He said, "What's looming over all of us is the very high rate of both consumer and corporate indebtedness. ... Consumer credit is at an all-time high and one part of consumer assets, the stock market has gone way down so the net debt position of the consumer has gotten a lot worse. And the same thing is true of corporates."
Debt, and the rising real value of debt, is a factor that can drag an economy down into slump if prices fall and wages cease to rise. Greenspan now has among his governors an economist with particular expertise on these risks and on the experience of Japan -- Gov. Ben Bernanke. Bernanke made a speech just two weeks ago on averting deflation in the United States -- a danger which he called highly unlikely -- in which he said that "the deflation-induced, ever-increasing real value of debts" had undoubtedly been a part of Japan's long slump.
So let us assume Greenspan has indeed had this danger in mind. Has he done the right thing in cutting interest rates so swiftly? We would say not. And the reason is that these rate cuts have encouraged a boom in mortgage lending and refinancing, which has driven up house prices in the United States -- by two-thirds in some metropolitan areas in the last four years.
The housing boom has been positive, most economists say, a bastion in the U.S. economy. But that boom has also generated more and more debt, mortgage debt, that may weigh very heavily on U.S. households and the U.S. economy in years to come if growth is weak and inflation low, and deflation itself lurks.
The storm is a bad one and difficult to read. It is not easy to know how to steer though it. Greenspan is giving his best shot, as did O'Neill and Lindsey. Tax cuts, carrying out Bush's campaign promises, were probably the right way to tackle the storm. Paying less tax, the consumer can save more, which he needs to do, without cutting his spending so much. Slowdown and adjustment take place, but less severely.
Greenspan, meanwhile, in cutting rates so hard and so fast has helped prevent deeper recession. Cars and houses have been selling. But the rising housing debt Americans are carrying make us fear that the solution he has found to the perfect storm may, in time, make the storm still worse.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to firstname.lastname@example.org