The O'Neill-Greenspan Show

Article excerpt

Several years ago at a Caribbean resort over Christmas, I ran into then Treasury Secretary Robert Rubin. Though over drinks the highly regarded financial policymaker offered no real specifics, written clearly between the lines was the signal that he soon planned to retire. Another point was equally clear: Rubin's confidence in Deputy Larry Summers as his replacement could not have been higher. At that point, I posed the question of what advice, or warning, he would offer the next Secretary of the Treasury? Rubin's response was instantaneous: If the next Treasury chief gets into trouble, he predicted, the mistake would likely stem from an underestimation of the speed and ferocity of today's global financial markets, particularly the foreign exchange markets.

This conversation came to mind recently with the appointment of Paul O'Neill as George W. Bush's Treasury Secretary. No, this is not to suggest that only financial market leaders can be successful in financial pop icymaking. Clearly, Mr. O'Neill enjoys a reputation as a heavyweight decision-maker in both business and policy worlds. This is hardly a man who has known failure. Yet the risks are everywhere. The nature of markets themselves has changed even since the first Bush administration left office in 1992. The situation today compared to 1976 when the Ford team left town is stunningly different. Today's markets arbitrage information at a lightening-quick pace that would have left 1970's policymakers aghast. There is now little room for mistakes. The policymakers' weapons (central bank reserves, for one) are absolutely tiny relative to the size of today's markets. Indeed, even in the fifteen years since the famous Plaza Accord, the G7 central banks' reserves taken together have shrunk dramatically relative to the size of the global foreign exchange market. Even the Fed's control over the powerful Federal Funds rate entails what is essentially a negotiated settlement with the markets. The leading question for Fed policymakers after any change in Fed Funds rate: How have the markets reacted? Have we retained our credibility?

That's why today's financial policymakers have no choice but to live by their wits. In a sense, a Treasury Secretary is one of the main actors in an elaborate global financial "theater. …