Re: James A. Baker III

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Henry,
      Two points.  One is that although Baker may
be influential with Dubya Bush, it will not be on
economic policy.  Larry Lindsey has the lead there,
and he has a record of hostile relations with
Greenspan dating from his service on the Fed BOGs.
That is the one to watch (along with the bizarre rumor
of a possible reappointment of Summers as Treasury
Secretary, presumably to keep friends with the 800
pound gorilla at the Fed).
      The other point is that there most certainly is no
"genetic" opposition to money center banks by the
Bushes.  George H.W. Bush was born and raised in
New England.  His father, Prescott, was Senator from
Connecticut and very friendly with the New York money
elite, as was his son, even after his move to Texas.  Part
of the Bush appeal along has been the ability to unite
the "Yankee" and "Cowboy" wings of the Republican
Party.  Dubya may be more of a Texas native, despite
his attendance at both Yale and Harvard, but I don't see
any anti-money center populism coming out of this
"born with a silver spoon in his mouth" spoiled brat.
Barkley Rosser
-----Original Message-----
From: Henry C.K. Liu <hliu@xxxxxxxxxxxxxx>
To: pkt@xxxxxxxxxxxxxxxx <pkt@xxxxxxxxxxxxxxxx>; gang8@xxxxxxxxxxx
<gang8@xxxxxxxxxxx>
Date: Monday, December 18, 2000 11:05 AM
Subject: James A. Baker III


>Many expect James Baker to be an influential voice in the new
>Adminstration.  It is undeniable that he has a score to settle
>with Greenspan whom both bush Sr. and Baker blamed for Bush's
>one term presidency.  Baker's record of outsmarting Fed Chairmen
>is nevertheless impressive.
>
>Jim Baker's pushing down the dollar in 1985 was to cure the
>anemic US economy, not to cause it.
>Baker became Reagan's White House Chief of Staff in 1980 with
>Regan of Merrill as Treasury Secretary.  Volcker was a leftover
>Fed Chairman from Carter whose supporters justifiably thought
>Volcker policies were the reasons for Carter's one term
>presidency.
>
>Volcker on September 29, 1979 presented the Fed's "new operating
>system" to combat hyper-inflation in a meeting on board Treasury
>Secretary Miller's official plane on the way to an IMF meeting
>in Belgrade to Miller and Charles Schultz, CEA Chairman.  While
>agreeing that the Fed must do more to tighten money supply and
>credit, both immediately opposed the idea that would set the Fed
>on a course of target money supply, a pure monetarist measure.
>Miller the businessman objected that if the Fed targeted
>reserves directly, it would result in more volatility in
>interest rates that would exacerbate both inflation and market
>instability.  Schultz the economist objected to fundamental
>issues of locking the Fed on a course toward recession it could
>not reverse. Volcker listened politely but held on to his belief
>that the technical decision was the Fed's "independent"
>prerogative. The new operating system caused the Fed to lose
>control of interest rates and cost Carter another term.
>
>The economic disorder that had helped to elect Reagan reached a
>new height as he took office. Price inflation remained in double
>digits. Interest rates were driven to double digits by inflation
>and the Fed's tight money supply policy.  Bank prime rate hit
>21%.  Unemployment hit 7.4%.  Both were rising with no end in
>sight.  Reagan declared that government was the problem, not the
>solution, reversing the failed Carter approach of relying on
>government policy to halt inflation.  The Reagan cure was a 30%,
>three year tax cut and a balanced budget, cutting $100 billion a
>year from government revenue over the next five years and a $41
>billion budget reduction in the first year.  Voodoo economics
>was in full swing.  Reagan wanted "sound money", a fixation of
>his half-baked monetarist preoccupation. Optimism was going to
>defy economic logic. Volcker made obscure speeches on the
>unavoidable clashes between monetary restraint and economic
>growth, but the White House was not listening.  The nation was
>ignoring an economic truth about inflation, that the economy
>must always decline first, before prices will decline.  Sound
>money means capping the money supply which means either price
>inflation or real output would fall.  Historical data have
>always sided with real output falling first, before prices will
>fall.  Thus sound money is a recipe for negative growth:
>recession, way before any benefit can appear.  More over,
>despite slogans, Reagan policies of slowing the economy and tax
>cuts were heading for increased deficits, the opposite direction
>of sound money. Reagan rehabilitated classical economics which
>had been discredited since 1930 and its four main strands of
>conservative economic thinking: monetarism, tricking down growth
>and balance government budgets and unregulated markets.
>
>Baker was  uneducated about monetary policy and did not claim to
>be otherwise.  Ironically, Reagan, who was a passing president
>on most other issues, was forceful on monetary policy as a
>result of decades of ideological incubation.  He was a diehard
>anti-inflation monetarist and an apt student of Friedman.  Now
>Baker and the two Bushes, being all Texans, have a genetic
>hostility toward big money center banks, and despite being
>financial elite, are imbedded with Texan populism.  Bush Sr.
>even proposed as VP, an excess profit tax on banks if prime
>rates remained high.  But the king has spoken and everyone
>worked to give the king what he wanted.  The economy plunged
>from the frying pan to the fire. Penn Square bank failed from
>bad loan due to falling oil prices and Third World debt crisis
>developed due to a fall in inflation engineered by the Fed, most
>dangerously in Mexico which was about to default on $80 billion
>of debt, and the US banking system was under threat of collapse.
>What severe pain suffered by American citizens could not
>accomplish, the threat to the banking system produced immediate
>government action.  A deal was made between the Fed and the
>White Hall to cut interest rate and raise taxes to cut the
>deficit. A mexican bailout with $3.5 billion from the Fed and
>the Treasury, plus a $1 billion advance payment oil purchase
>from Mexico by the DoE, another $1 billion line of credit from
>Dept of Agriculture for future purchase of US grain and a Fed
>orchestrated $1.85 billion from other central banks, half from
>the Fed.  This was the beginning of the international debt
>crisis that is still unresolved totally.  This set the basic
>formula for protecting the banks while the price is paid by the
>world's poor in hunger and deaths. The total dependence of the
>banking system on government only made bankers like Wriston of
>Citibank more aggressive in demanding less regulation., to get
>the Fed off the banks backs except at bailout time.  Allan
>Greenspan has essentially followed this policy.  The Fed has
>since shifted its role from regulator to that of a cleanup crew.
>
>By August 1982, Congress enacted a package of $100 billion in
>tax increases, paring the deficit down slightly.  Jim Baker as
>CoS demanded  a Fed interest cut.  By then Volcker had long
>abandoned his new operating system and fell back to using ff
>rates as the Fed preferred tool.  But Wall Street had by then
>all the measuring devices of M1 in place, on everyone's trading
>screen.  And the reading in August for M1 jumped 10%, but the
>monetarists in the White House and the Treasury were told to
>keep their concerns to themselves.  Stockman, boy budget
>director noted: " No one listened to them."  Baker turned from
>his boss' sound money to supply-side on the interest rate issue
>overnight and continued to push Volcker to ease further.
>Stockman was quoted as saying the Baker lost all confidence in
>Volcker for not lowering rates sooner.
>
>By the beginning of 1984 the economy was recovery. By March, the
>Fed decided to take the punch bowl away to ward off inflation.
>Volcker worried publicly about "bottlenecks" of production and
>labor in a strong economy that could spell inflation ahead - a
>theme Greenspan learned well a decade later.  There were the
>usual talks of government borrowing crowding out private
>borrowing and interest rate kept rising while prices were still
>stable.  Volcker was called to the White House to meet with the
>President to whom he gave a rambling discourse on interest rate
>and inflation.   After the meeting, it was reported that Reagan
>turned Don Regan and Jim Baker to find out what Volcker said,
>and neither could say.  Evans and Novak reported that the White
>House told the Fed not to trigger another recession "just to
>calm the inflationary nightmare of the creditor class."  Reagan
>saw Volcker as a class warrior.
>
>Since November 1982, the ff rate target was held within a range
>of 6-10%.  Now Volcker raised the ceiling to 11.5%, taking
>advantage of a deferential press.  Instead of the mid-course
>correction (the equivalent of Greenspan's soft landing) the new
>ffr target marked the end of the Reagan boom that began 18
>months ago in an election year. Unemployment reverse its
>downward trend stopping at 7.1%.  The exchange value of the
>dollar was drive high by high domestic interest rates.  Jim
>Baker was furious at Volcker.  He was reported to have told
>Wriston that Volcker did not keep his end of the deal: a budget
>under control from the White House with a three year $150
>million 3 year package with a tax increase of $48 billion which
>Reagan resisted and finally agreed to as a "down payment", in
>exchange for Fed easing.  On April 6, 1984, the Fed raised the
>discount rate to 9%, first change since November, 1982.  Prime
>rate jumped a second time in six weeks to 9.5%.  Baker went
>ballistic. The Administration unleashed a full force attack on
>the Fed, disguised as a war on high interest rates. Instead of
>"where is the beef," the tune was "where is the inflation."
>
>Volcker had allies in the White House in Martin Fieldstein and
>David Stockman and called "the wrath of God" down on Baker.
>Wall Street joined it, with the bond market choking up by not
>being able to find buyers for $4.5 billion in new treasuries.
>Analysts were blaming the collapse of the bond market on Fed
>bashing.  The White House called a quick press conference in
>which the President aid the Fed was doing the best it could.
>But it did stop the Fed from further tightening.  Then on May 9,
>the day Don Regan attacked the Fed, a wire story reported that a
>Japanese bank was negotiating to buy Continental Illinois bank.
>Asian holder of Continental cds panicked and $1 billion left the
>bank and started a global run.  By Friday, May 11, Continental
>had to borrow $3.6 billion at the discount window. Continental
>had bought from Penn Square $1 billion of bad loans, but the
>regulators were keeping their eyes closed, much as the Fed and
>FDIC had done in recent years.  The Fed standard answer was to
>regulate earlier would only panic the market.   A $2 billion
>infusion of capital from the FDIC did not help. Over the
>weekend, another $4.5 billion loan, engineered by Morgan
>Guaranty failed to stop the hemorrhage when the money markets
>opened on Monday.  On Tuesday, the Fed announced a $4.5 billion
>rescue package in immediate new capital injection, plus all the
>bank needs in loans to stay afloat, which turned out to be $8
>billion.  The Fed was finally working for a living.  The most
>controversial part of the rescue was a guarantee to protect all
>depositors from loss, beyond the $100k FDIC limit.  The NY Fed
>reported: "The funding problems of Continental cast a long
>shadow ever the financial markets ...", meaning kicking up
>interest rates.  Some voices in Congress objected to this
>assumption of public obligation by fiat, in a scale that drwafed
>the NY City bailout, without any public debate.  During 1984, 43
>banks failed, mostly small agricultural banks. None of the
>depositors get their money back beyond FDIC guarantee. The Fed
>could not find another bank o buy Continental because the buyers
>found in their own audit that Continental had $4 billion in bad
>loans instead of the Fed's audit of $2,7 billion. The Fed had to
>nationalized Continental in July at a price of $5.5 billion. So
>Ronald Reagon, the free enterprise president became the first
>president to national a private bank since the Great Depression.
>
>When Baker left the White House in 1985 to become Treasury
>Secretary, he brought with him an insight he gained at the White
>House: that a legitimate lever the executive branch could use to
>pressure the Fed to change its monetary policy was the issue of
>the exchange value of the dollar.  By law and tradition, the
>Executive Branch has the responsibility of managing the exchange
>value of the dollar; it is a national interest issue. And the
>Fed is obliged to support the Executive branch on this.  Baker,
>upon setting up at Treasury immediately abandoned any pretense
>of free market ideology and instituted an interventionist,
>activist policy of pushing down the overvalued dollar to protect
>US manufacturing.  Two year earlier, Martin Filedstein had
>worked out the economics of globalization by saying the loss of
>US manufacturing jobs overseas was no big deal as long as the
>trade surplus was recycled into dollar assets and debts  But
>Baker had been hearing complaints from corporate CEOs.  Baker
>told Volcker that lower interest rate was needed to lower the
>dollar to save American jobs.  Baker told Volcker that if the
>Fed did not bash the Administration on fiscal policies, the the
>Administration would not bash the Fed.  It is a two way street.
>Thus on September 22, 1985 the G5 agreed to the Plaza Accord to
>push to dollar down via coordinated central banks efforts.
>Volcker led the discussion and lent his imprimatur, while
>privately he knew that the Fed had been trapped into a monetary
>policy of low interest rates to prevent the dollar from rising.
>It would be unpatriotic!
>
>The fall of the dollar by over 30% (back to 1981 level) failed
>to deliver the therapeutic result Baker had hoped.  The damage
>to the trade sensitive sectors did not reverse, but deteriorated
>further: trade deficit grew to $150 billion, ten times what it
>was in 1981.  The same dollar exchange rate of 1981 was
>producing 10 times the trade deficit. The reason was a decade of
>price advantage for foreign competitors had built up enough
>profit margin that enable the importers to refrain from exchange
>push price hikes.  In fact, if anything it made the Japanese and
>the German producers meaner and leaner. As Fdereick List
>observe, once a nation falls behind in trade, the disadvantage
>became structural.  Once factories are closed, production cannot
>be revived at competitive cost.  Then US ingenuity found wo
>solutions, with the fall of the USSR, the US's attitude toward
>the Third World changed.  It no longer need to compete for the
>hearts and mind of the Third World. So trade replaced aid.  The
>US embarked on a strategy to use Third Work cheap labor and
>non-existent environmental regulation to compete with its
>industrialized rivals, such as Japan and Germany.  In the
>meantime, the US pushed for financial deregulation and emerged
>as a 500 lb gorilla in the global financial markets that left
>the Japanese and European in the dust.  The tool of the this
>strategy was the residual role of the dollar as the sole
>currency for world trade. Out of this emerged an international
>financial architecture that does real damage to the real
>producers for the benefit of the financiers.  Money, instead of
>a neutral agent of exchange, became a weapon of massive
>destruction more lethal the nuclear bombs with more blackmail
>power. Trade wars are fought through currencies. Trade deficits
>become the bait for capital account surpluses.  To mask this
>unfair regime, the term GNP is quietly replaced by GDP.
>Gross Domestic Product: Total value of a country's output,
>income or expenditure produced within the country's
>physical/political borders.
>Gross National Product: Gross domestic product plus " factor
>income from abroad" - income earned from investment or work
>abroad.
>Under globalization, these two technical term take on new
>relationships.
>In 1991, the GNP was turned into the GDP - a quiet change that
>had very large implications, as the 1990 was the decade of rapid
>globalization.
>Gross National Product attribute the earnings of a multinational
>firm to the country where the firm was owned and where the
>profits would eventually return.
>Gross Domestic Product, however, attributes the profits to the
>country where factories or mines or financial institutions are
>located, even though they do not stay there permanently.
>This accounting shift has turned many struggling nations into
>statistical boomtowns, while aiding the push for a global
>economy. Conveniently, it has hidden a basic fact: the nations
>of the Core are walking off with the periphery's resources and
>calling it a gain for the periphery.  The figures are 'gross'
>because GDP does not allow for the depreciation of physical
>capital - wear and tear on factory machines, office equipment
>becoming outdated etc, or environmental degradation.
>When the value of income from abroad is included - what domestic
>companies earn abroad minus what foreign companies earn here and
>expatriate - then the GDP becomes the Gross National Product
>(GNP).
>This is particularly important for economies with large traded
>sectors, which includes many developing countries.     When Adam
>Smith wrote the Wealth of Nations in 1776,  he probably had no
>idea that the title of his classic tract  would remain a
>contentious issue amongst economists, but for most of us real
>wealth will not be found in the arcane alphabet soup of economic
>indicators but in the starker credit and debit entries of our
>bank statements.
>
>But Baker in 2001 had less room to maneuver.  The odds are that
>he will still push down the dollar at least by 10%.  But it will
>not save the Us economy from collapse.
>
>
>
>
>