The answer is, the head of the Fed is known to be leaving when his term expires, and the head of the U.S. Treasury Department, John Snow, is thought (and rightly) to be leaving in a matter of weeks. It probably wouldn't hurt for the president to begin making up his mind about a new Fed chairman (Martin Feldstein, Glenn Hubbard, Manuel Johnson) sooner rather than later. And if John Snow is stepping down or getting a gentle shove out the door, the Bush White House needs to execute the change yesterday.
Before we consider the new Treasury lineup, a word or two on behalf of Mr. Snow is in order. Although advisors close to Bush complain he lacks international finance gravitas, the fact is, you get what you hire. When Mr. Snow came in, the man heading for the egress was Paul O'Neill, who declined the president's request to push a second round of tax cuts that the White House deemed an imperative as the U.S. economy slogged into 2003.
Snow got the job thanks to his urging the president, from the outside, to go with his gut, and he got the tax cuts through. Furthermore, he did a credible job internationally, especially considering the fact that he wasn't given the Treasury Secretary's traditional authority over global economic policy and the dollar.
For Iraq reconstruction, as Snow and Secretary of State Colin Powell both told Friends of Bush in mid-2003, Vice President Dick Cheney was the alpha and the omega. Where the dollar was concerned, Fed Chairman Alan Greenspan always referred questions to Snow, but he didn't defer to Snow on policy -- this in contrast to the way, for example, that James Baker fairly dominated the late Volcker Fed under Ronald Reagan. Indeed, it's been Baker himself who's taken over the job of renegotiating Iraq's sovereign debt.
This being said, Snow never fought for his turf either, though others urged him to. But he was in a catch-43. Seen as lacking influence by China, Europe, and Japan, he had no stick. Having no stick, he lacked influence.
Snow did what he could to at least to put the matter of China's irresponsible monetary policies (and the due-for-collapse banking system that flow from them) on the global agenda. He encouraged a Euro easing which Europe should have implemented, but didn't. Given all the other sensitivities in these relationships at a time of war, Snow didn't even have jawboning as a very effective tool.
In short, on domestic tax policy, Snow should get an "A." On the dollar, he gets a "C-minus" for results, but a "B-plus" for results in light of having no hand to play from the president and his prime minister veep. On spending matters, regulation of Fannie Mae, and the like -- well, it's about a "D-minus." Then again, the rest of the Bush Administration gets an "F-plus," or, at best, an "incomplete."
In any case, the dollar's slide is based on the macro uncertainy of not only one, but both greenback-backers being on the way to that most desired of elephant graveyards, the private sector. This needs fixing. And it's only a third, added task for the new man or woman at Treasury.
President Bush, after all, means to push the ambitious agenda of Social Security reform and a flat tax -- and rightly figures, according to his press conference, that he has about 12-18 months to do it.
On tax policy and even, to an extent, on spending, the Treasury Department's vast (and skilled) bureaucracy has no counterpart in government. The Congressional and White House budget offices pale in comparison, and are not staffed by an all-volunteer army of careerists who have been there, done that. Only the Fed matches Treasury in stature, and of course, can only dip a light oar in the water on tax and spending reform debates. And Mr. Greenbackspan is leaving too.
Whom will Mr. Bush name?
The insiders: The three clear favorites are Commerce's Don Evans, former economic advisor Glenn Hubbard, and White House chief of staff Andrew Card.
Evans is competent and gives good talkshow, but as a Republican's Republican is the wrong man to move Social Security reform past a Senate filibuster. (Get ready for terms like "stealth privatization.") A better upgrade for him would be the Office of Management and Budget.
Knowing where all the big-business bodies are buried, he could work with John McCain, Harry Reid, and other moderates and budget-cutters to take the knife -- nay, the chainsaw -- to corporate welfare, agrisubsidies, and other deficit-cutting reforms. And note: If the president gets a qualified item veto -- which he should, by the way, make H.R. 1 in January -- OMB would be one powerful spot.
Hubbard would be wise to take it, though he wants to replace Greenspan. He's a young man, and could gain global stature by moving two great policy reforms through Congress. He's sharp, and could get these jobs done. But at his age and experience level, he's roughly as dollar-defense-challenged as Mr. Snow is and O'Neill was.
The job should be Card's if he wants it, and if Card is smart, he wants it -- emulating the 1985 move of America's Bismarck, Mr. Baker.
Card can help the president more, at this point, by bringing his knowledge of government and hand-clasp-close relationship of trust with Mr. Bush to bear on the administration's agenda for Treasury -- probably the most ambitious plan for a Treasury Secretary since the late Don Regan in 1981, or Mr. Dillon in 1961.
(Trade advisor Robert Zoellick is an insider long-shot. But Bush shouldn't name him, and the abrasive Mr. Zoellick, who by virtue of doing his job has ruffled many anti-trade Senate and House Democrats, shouldn't want it. Mr. Zoellick is on the brink of major trade agreements, and should move from those to becoming this administration's Will Clayton, the author of a multi-lateral, NAFTA-sized trade union with the Middle East.)
Anyone from the outside has a near-zero chance, according to knowledgeable sources, but "Bottom Line" would suggest consideration of such dark horses as Lawrence Kudlow and Jack Kemp. Mr. Bush's father made the mistake of not elevating Kemp in 1991-92, and paid the price. Mr. Kudlow is mainly known as a (somewhat fawning, but loyalloyalloyal) television pundit.
Either would make a terrific tele-lobbyist for the Bush agenda, an important consideration. And Mr. Kemp has ties to and affection in the Democratic Party (remember the Democratic Party?) Indeed, he did tax reform in 1986, the Kemp-Kasten bill being the best flat tax ever designed by human DNA -- passed into law thanks to a wonderful bond Kemp formed with Bill Bradley, Dick Gephardt, and other Democrats. Mr. Bush could do far worse than to have someone credible on both aisle sides, especially when it comes to taking on the Third Rail of Government.
Assuming it comes down to One of the Above, however, the important thing for investors to watch is not so much "who," but "when."
President Bush has reportedly been sounding out the prospects for the job. When he actually moves, it'll be time to cover any and all dollar shorts -- and on the theory this may happen over the weekend, it wouldn't be too soon to start covering today. Although it's late in the afternoon, sometime soon the White House will wake up and get someone on the TV to give the markets a clue.
(Memo to Andrew Card: If you want the job as Jim Baker the Second, walk down the hall and suggest that the president of the United States might want to ask someone in his administration to have something to say about the matter, and pronto.)
The dollar may have another tick or two down, but we are close to the nadir. Buy dollars, short gold and the yen.
Gregory Fossedal manages international investment research for Emerging Markets Group. His clients may (and usually do) hold long and short positions in many of the investment securities and opportunities mentioned in his reports. "Bottom Line" is compiled from sources we believe to be reliable, but no representation is made that they are necessarily accurate or complete. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of UPI or EMG. Furthermore, they are subject to change without notice.
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