Paulson's Tripartite Juggling Act

♠ Posted by Emmanuel in ,, at 5/21/2007 02:49:00 AM
Having briefly reviewed Vice-Premier Wu Yi's biography, let us now turn our attention to her counterpart in the upcoming Strategic Economic Dialogue between China and the US, Treasury Secretary Hammerin' Hank Paulson. In general, we know more about him than her:
Before coming to Treasury, Paulson was Chairman and Chief Executive Officer of Goldman Sachs. He joined Goldman Sachs in 1974 in the Chicago Office and became a partner in 1982. From 1983 until 1988, Paulson headed up Investment Banking Services for the Midwest Region and became Managing Partner of the Chicago Office in 1988. In 1990, he was named Co-head of the firm's investment Banking Division, and in 1994 he rose to the position of President and Chief Operating Officer. In 1998, he was named Co-Senior partner, and with the firm's public offering in 1999, became Chairman and CEO [and made lots of money, it goes without saying].

Prior to joining Goldman Sachs, Paulson was a member of the White House Domestic Council, serving as Staff Assistant to the President from 1972 to 1973, and as Staff Assistant to the Assistant Secretary of Defense at the Pentagon from 1970 to 1972.

Paulson graduated from Dartmouth in 1968, where he was a member of Phi Beta Kappa and All Ivy, All East, and honorable mention All American for football. He received an M.B.A. from Harvard in 1970...

As I see it, Paulson needs to accommodate three interests, and this task is far from easy as they ae often conflicting. In order of importance...

1. Wall Street - Poll after poll indicates that a Democrat will likely succeed "Capital G" Bush. With that in mind, Paulson's tenure will soon be over and he will return to the financial services industry. Safeguarding the interests of Wall Street is his primary objective. To be sure, Wall Street has benefited greatly from China and other current account surplus-running countries' "vendor financing" for overextended America. Financial service conglomerates have been busy devising all sorts of financial instruments for them to pile into. In Brad Setser's colorful phrase, it's "financial Dutch disease" as American manufacturing loses out in favor of the financial sector's comparative advantage in offering financial instruments to foreigners.

2. The Bush Administration - I almost forgot that Paulson still works for these guys. You can bet your bottom dollar though that they played a large role in his selection as Treasury Secretary. Undoubtedly, Bush owes a lot to his financial services industry contributors. In 2004, get this--9 out of 10 of Bush's top contributors were from the industry according to

Morgan Stanley


Merrill Lynch




UBS Americas


Goldman Sachs




Credit Suisse Group


Lehman Brothers


Citigroup Inc


Bear Stearns


The Bush administration's interests are thus largely similar to Wall Street's. But, the administration has an additional task in pacifying a Congress keen on slapping all sorts of punitive trade measures on China. It's a balancing act: Wall Street likes things as they are, but Congress is hellbent on enabling tariffs galore. Paulson needs to convince Congress that the administration is acting tough on China to an extent that trade measures are unwarranted. It's not an easy act.

3. China - Lest we forget, Wall Street and Bush were keen on naming Paulson as the Treasury chief since he has cultivated good relations with the Chinese leadership. According to Bloomberg:

Expectations were higher a year ago this month, when President George W. Bush nominated Paulson. As an executive with Goldman Sachs Group Inc., Paulson had visited China more than 70 times, establishing friendships with many in the country's political elite, including President Hu Jintao.

``Managing China is his highest individual priority as secretary of the Treasury by far, and I'm sure that was fully agreed when he came on board,'' Yeutter says.

Managing expectations is a priority now. ``When we met with him last December, he was very careful'' not to raise unrealistic hopes about his talks in Beijing, Michael Campbell, vice chairman of the National Association of Manufacturers' board of directors, said after a session with Paulson in Washington on May 9. ``It was the same this time.''

Nevertheless, I am convinced that Paulson's juggling act is rapidly becoming untenable. China doesn't want to go for a "big bang" revaluation, nor does it want to be seen caving in to America. On the other hand, the US Congress is fed up with Treasury's unwillingness to brand China a currency manipulator. Whether or not China is classified as a currency manipulator at the next opportunity, Congress will be at work on the famed bipartisan, veto-proof (60% majority in both houses to avoid Bush's veto), WTO-legal legislation against China's perceived undervaluation of the yuan. As the old Chinese curse goes, "May you live and interesting times." And, Paulson is at the epicenter of these interesting times--probably more so than anyone else.
Still, Paulson has become resigned to the probability that Congress will act. Punitive legislation is ``not just a possibility'' but a ``likelihood,'' he said in a speech May 2...

Paulson often describes the differences between the U.S. approach and China's as the U.S. wanting a lot in a hurry, while the Chinese are willing to do a little over a much longer period.

``It's hard to imagine anyone with a shorter sense of timing than the Americans, and Chinese rulers don't have to worry about re-election,'' says William Kirby, a professor of Chinese history at Harvard University in Cambridge, Massachusetts.