Paul O'Neill's test

Robert Novak
Posted: Jan 15, 2001 12:00 AM
WASHINGTON -- A test question for Treasury Secretary Paul O'Neill: What would happen if every run-of-the-mill American corporation found themselves paying 5 percentage points more for money than their gilt-edged competitors? His answer will grade his suitability for the job -- and much more. A confidential memo that has found its way to President-elect Bush's advisers poses this test for O'Neill: "If he thinks affected firms would simply 'adjust prices or go on,' I can assure you that 'W' made a bad choice (for Treasury). If he says that such circumstances would lead to an economic catastrophe if it was allowed to continue for any length of time, he's the right man for the job." These are not ravings from an outlaw Web site. It was written by the financial strategist for a great global corporation. He is frightened by what he calls "the worst squeeze on corporate markets since Saddam invaded Kuwait." But it's much longer-lasting and much more menacing than in 1991. There are vast disagreements concerning details, but wide agreement about the general situation. The American economy is in trouble, and that means trouble for the global economy. Notwithstanding the Clinton White House propaganda machine's complaint that Bush is "talking the country into recession," it is taken for granted in political circles that the economy will drop during the first two quarters of this year into a recession. What to do? Nearly everyone in the financial community now is desperate for quick action by the Federal Reserve Board to end a liquidity crisis. Capital formation would be aided not by poll-driven tax cuts (such as a repeal of the marriage penalty) but by rolling back the 1993 Clinton increase on high incomes and by further reducing the capital gains tax. More obscurely but perhaps more importantly, the Securities & Exchange Commission (SEC) should end Clinton-era restrictions on capital. The pressure is on the Fed. Whatever else must be done, everyone agrees that Chairman Alan Greenspan has to walk back the six unnecessary interest rate increases that he presided over. The drop of 50 basis points (one-half of one percent) on Jan. 3 was welcome but only a beginning. A drop of 300 basis points is needed over the next few weeks, but the Fed has to do more. That is the opinion of Columbia Prof. Robert A. Mundell, winner of the 1999 Nobel Prize for economics. "The money has been tight," Mundell told me. "They (the Fed) need to push more money into open-market operations -- not just cut interest rates. With that, the price of gold will go up, say to $310 (compared to the current deflationary $264 per ounce)." Most politicians persist in Greenspan worship, but Senate Republican Leader Trent Lott cautiously suggests that the chairman wears no clothes. "I think he overshot the mark a little bit," Lott told me on CNN over the weekend. "I think he should not have been raising the rates as much as he was, and I think he should have cut them earlier." Lott also departs from Bush's policy in urging a cut in the capital gains tax to 15 percent from the present 20 percent. Apart from adding a few nickels to the shopper's purse, Lott seeks to boost sources of capital. One well-placed industry source points to the SEC's recent regulations. In an unpublished paper, he contends that "the SEC's rule essentially cuts off access to money market fund investors," who were forced to seek funds at a higher cost. He urges a new look by the government at restrictive SEC policies. Private market self-regulators also have a part to play, but it all starts with the Federal Reserve. Once Greenspan took the first step Jan. 3, the spread between high-grade companies and the pack was narrowed by private market activity. Paul O'Neill, a career bureaucrat who struck it rich in corporate America, has no experience in blending central bank, regulators and private market forces to avert disaster. Neither did the fabled masters of the economy in the Clinton administration. But they are now well out of it, leaving a crisis that began 2 1/2 years ago and is now in the laps of George W. Bush and Paul O'Neill.