The bond market is now dominated by presidential politics. Short rates are at 30-year lows and long rates remain stubbornly high because the bond market has to assume a President Clinton would reflect the Democratic Party's inflationary bias. Until it sees that President Bush will be re-elected or that a President-elect Clinton will appoint a sound-money Treasury Secretary, the 30-year bond will have to remain nervously bid way up the yield curve.
In our August 7 letter, "Three Days in Washington," we had noted that Robert Shapiro, a Washington economist close to Governor Clinton, "is definitely not an easy-money, dollar devaluationist," and "If President Clinton were to turn economic policymaking over to a roomful of Shapiros, his administration would not be all that bad." Now, though, chances are that Shapiro would be submerged by the party's power elite. Clinton has not said a word about monetary policy as far as we can tell, which is not surprising, since our crackerjack political press corps doesn't know enough about monetary policy to phrase a question. In any case, what he says would be less important than who he picks for Treasury.
In 1976, after Jimmy Carter was elected, he named Michael Blumenthal, the CEO of Bendix, to be his Treasury Secretary. The Carter Administration was effectively destroyed when the party's intellectuals -- working through Vice President Mondale -- sent him C. Fred Bergsten to serve as his Assistant Secretary for International Affairs. Bergsten was and is an agent of Nobel Laureate James Tobin of Yale, the most influential economic guru in the Democratic Party. Bergsten, like Tobin a fanatical easy-money devaluationist, persuaded Blumenthal that a cheap dollar was the route to economic expansion. Blumenthal "talked down the dollar" as the Fed pumped reserves into the banking system, the price of gold climbing steadily to $250 by the summer of 1979 from $150 at the end of the Ford Administration. With the aim of re-electing Carter with easy money, Bergsten turned up the pressure after Carter appointed Paul Volcker Fed Chairman in the spring of 1979. That fall, Volcker flooded the banking system with reserves even as demand for dollars collapsed. Gold went as high as $850 in early 1980. In Robert Barro's Wall Street Journal article yesterday, giving President Bush a B- on economic policy, we see that the worst economic record since World War II was Carter's. According to Barro's numbers, this is entirely because of the performance of the Volcker Fed on interest rates and inflation. (If you take the Greenspan Fed's performance out of the Bush years, his report card would be as bad as Carter's, by the way.)
The cluster of easy-money devaluationists around Bill Clinton is ominous. Yale's Tobin is once again the leading guru in the party's plan to expand the economy by the traditional Keynesian method of increasing taxes on the wealthy and "investing" the money on infrastructure and education. Tobin has been steadily bashing Greenspan for two years and last month told The Wall Street Journal that the Fed should simply "go for it," i.e., growth via inflation. The theory is that if the Fed creates enough bank reserves, by printing money, the banks will be forced to make loans that now look risky. Tobin, of course, is a behind-the-scenes puppeteer in the Democratic Establishment and would not be a candidate for the Clinton Treasury post. Two leading candidates are Peter Peterson and Roger Altman, both of Wall Street's Blackstone Group. The Blackstone Group is also currently the home of David Stockman, the supply-side turncoat. Peterson is among the most Old Guard of Republicans in the business community, a fanatical budget-balancer. He knows zero about monetary policy, leaving that field to the folks at the Institute for International Economics in Washington, D.C. Peterson is chairman of the think tank. Its executive director is none other than C. Fred Bergsten. Felix Rohatyn would love to be Treasury Secretary and he too admits to knowing little about monetary policy, except what he reads in The New York Times. If he were named to the post, Tobin and Bergsten would supply him with an Undersecretary that would do their bidding. (In case you forgot, Nick Brady's inept Undersecretary for International Affairs, David Mulford, was trained by his deputy, Charles Dallara, now an executive at J.P. Morgan. Dallara is another Bergsten protege.)
The two other men mentioned as potential Treasury secretaries are Bob Rubin of Goldman Sachs and Paul Volcker, both Democrats. Volcker is said to be actively campaigning for the job. I would imagine the Tobin/Bergsten clique would do anything to prevent Volcker from getting the job because he now knows their game. He would not sit still for a Bergsten clone at his elbow and he would be careful in his recommendations to the Fed. I've long ago given up thinking I could trust Volcker, a consummate insider whose highest priority is preserving his reputation within the Eastern Establishment. Volcker, though, would likely produce marginally better policy than the rest of the gang because of his influence on monetary policy, but the Beltway would continue to balloon with fiscal and regulatory adventures.
I don't know Rubin except by reputation, which is that he is among the smartest men on Wall Street, but has no concrete views on macro economics -- which was the book on Michael Blumenthal. The Wall Street Journal's Washington bureau, which remains a Keynesian enclave at the paper, last month noted these possibilities for a Clinton Treasury. It also said that two "moderate" economists would be in line for high posts: Harvard's Lawrence Summers and MIT's Paul Krugman. Summers is an incompetent Keynesian who was named chief economist of the World Bank, on the recommendation of Nick Brady, nudged by Mulford, nudged by Dallara, nudged by Bergsten, nudged by Tobin. Krugman is the incompetent Keynesian who massaged the statistics of the Joint Committee on Taxation to "prove" that the richest 1% of Americans got 90% of the benefits of the Reagan years. He fed the material to Sylvia Nasar of The New York Times, which put this nonsense on its front page, to be immediately cited as gospel by Governor Clinton.
What was most interesting about the Journal item is that it mentioned Robert Shapiro as a potential deputy budget director, a demotion from past citations. This is clearly a sign that the big guys are getting ready to elbow Clinton's entrepreneurial wing into a corner. This was the pattern with Jimmy Carter, remember. Carter brought his pal Bert Lance with him as budget director, a post too powerful for a Main Street banker with entrepreneurial instincts. The big guys fed a few Bert Lance stories to The Washington Post and Lance was gonzo, replaced by faceless agents of the party establishment. One of them, John White, was the man the Establishment fed to Ross Perot last spring. White designed the austerity plan that transformed Perot from a supply-side populist, who wouldn't raise taxes in peacetime and would eliminate the capital gains tax, into a blathering big-time taxer and budget balancer.
Clinton's people are now telling journalists that the size of Clinton's victory will determine who he names to Treasury. If it is a narrow victory, like JFK's over Nixon in 1960, he might follow the model of appointing a Republican with Wall Street credentials. If he wins big, he'd appoint a liberal Democrat and go for the liberal agenda. Paul Craig Roberts is now arguing among supply- siders that he'd prefer a big Clinton victory and a bozo at Treasury who would so thoroughly foul up the economy that Jack Kemp would win easily in 1996 and be able to bring in a wall-to-wall growth cabinet. That's a bit too messy for my tastes, although I agree we might see it. The pros are now saying that even with the possibility of debates shaking things up, a Clinton presidency is now certain: The voters are freezing in their disdain of the Bush Administration.
Were the President to name Kemp Treasury Secretary, as Ted Forstmann suggests, at least the move would narrow Clinton's victory and obscure his mandate, and more Republicans would be elected to the House and Senate. As it is, the GOP faces catastrophe. President Clinton could interpret his victory as a mandate for tax progressivity, national industrial planning, and mandated socialism. The liberal media would be able to write that all their agenda lacked in 1988 was a telegenic candidate.
The debates will increase the likelihood the President will come up with several surprises to confound the Clinton camp, of the kind Jim Baker pulled in proposing four debates. One might involve policy commitments to pursue with the new Congress. This could only have credibility if the President named a new economic team that would elevate Kemp. The Clinton people don't think this will happen because of Kemp's political rivalry with Jim Baker. I'm assuming JBIII is smarter than that and that he will do what he has to do. If we see something of this kind (to return to our original theme) I'd think the long bond market would then be able to relax a bit.