Notes on the News
Jude Wanniski, David Goldman and Criton Zoakos
December 10, 1993


FED POLICY: There's a bit of confusion in the bond market due to garbled reports on policy signals between the White House and various Fed governors. What did Vice Chairman David Mullins really say about inflation? What did Gov. Wayne Angell really say in London about dollar/yen targets? Is Alan Greenspan concerned that gold is above $380? Does the White House want the Fed to tighten now so it doesn't have to tighten later? I've just spent two days in Washington, talking to officials at the Fed and White House, and can boil it all down for you: Greenspan is in an extremely strong position; President Clinton, Lloyd Bentsen, Bob Rubin and David Gergen have complete confidence in him, at least at the moment, trusting him to do a better job of keeping long rates down without their public kibitzing. In his six and a half years at the Fed, Greenspan has never been in a stronger political position to get bond yields down by well-chosen words or a snugging of short rates. More importantly, he's never been in a better position to encourage an international discussion about money, exchange rates, and commodity targeting -- which could get the entire world economy onto a faster track. The December 21 FOMC meeting -- Angell's last -- is more likely to produce a stronger bond market than a softer one as there will be serious attention given to the rising gold price. The best report on Mullins's remarks was by Associated Press, which mentioned his concern about gold. Angell clearly thinks the dollar/yen rate should be closer to 120, especially if gold gets back to $350, in order to prevent Japanese wage deflation. The Phillips Curve still has too much influence among the political people at the White House, but Gergen is okay, I think.  (JW)

HELP WANTED: The rumor mill has OMB's Alice Rivlin the front-runner for the Fed slot that opens in February when Angell's term is up, with Princeton's Peter Kenen and Brookings' George Perry in the hunt. None would be very good, with Kenen the best of the trio. The search is still wide open, though, with a serious look for a financial type rather than an economic type, even a financial academic a la Mullins, with extra points for Democrat, black or female. The candidate must be from the following open districts: Philadelphia, Cleveland, Atlanta, Minneapolis, Kansas City, and San Francisco. Believe it or not, I've been asked if I could come up with a few names. If you have any ideas, please scribble them out and fax them to me at (201) 539-4025.  (JW)

AFRO BANK CREDITS: The government and the Fed are getting sucked deeper into a quota system for African-American credit allocation, which can only weaken the banking system and increase racial tensions. Fed Governors Greenspan, Mullins and Lindsey caved in to pressures from the White House and Congress to make bank lending for mortgages easier for blacks than for whites. This afternoon, the Fed discusses proposed new rules asked for by the Administration that would extend this destructive practice to consumer loans. At the White House yesterday, I tried to explain that this credit rationing system was the inevitable result not of racial bias, but of the high, unindexed capital gains tax, which prevents expansion of the capital pool. With a zero capgains tax, banks everywhere would be chasing black borrowers, offering better deals. Congressional Republicans, who will be re-opening the economic issue in January --  on the grounds that 60% of the American people in the latest CNN poll think the economy is poor or very poor -- will be making this point. I suggested the President have a chat about this with Alan Greenspan, who I'm sure will tell him it is so. My suggestion was at least noted.  (JW)

RUSSIAN ELECTIONS: We are, of course, rooting for the defeat of the "Russia Choice" ticket led by Yegor Gaidar, Boris Yeltsin's shock therapist, hoping for a strong showing by the ticket led by Gregory Yavlinsky, an anti-shock economist, and Vladimir Lukin, the Russian Ambassador to the United States, who sought my counsel last month before returning to Moscow for the campaign. Yavlinsky and Lukin were enormously heartened when Senate Minority Leader Bob Dole publicly questioned the shock-therapy approach in a CNN interview last fall, becoming the first Western leader to do so. Gaidar's team held a wide lead in the polls a month ago, but as the Sunday elections approach that lead has been evaporating, and even Yeltsin has been distancing himself from his inept protege. We are also rooting for the defeat of the Yeltsin constitution, which practically establishes a czardom -- enabling him to dissolve the parliament that will be elected Sunday if he doesn't like it. Watch for a huge anti-Yeltsin vote in Siberia and in the countryside.  (JW)

CHINA BOOM: Hong Kong's Hang Seng Index rose 10% for the week and nearly 100% for the year to 10,228. The climb is worth noting not because of its size (even at 12,000 the Hang Seng is a bargain), but because it happened as the Sino-British talks over transition issues broke down. In a fundamental shift, the market signaled its confidence in the staying power of Beijing's skillful economic reform policies. Critical for this shift was Beijing's decision that the next wave of free market reforms be pivoted around a newly independent central bank, now freed from its past responsibility to "promote economic growth," and assigned the sole task of maintaining a strong national currency -- exactly the advice Wayne Angell and Jude Wanniski offered the People's Bank in their Beijing trip in September. With the collapse of the Sino-British talks, the clout of the Hong Kong Chinese business leaders increased enormously as Beijing requested that their Preparatory Working Committee "advise the government on how to proceed should near-dead Sino-British talks on the reform package end unsuccessfully." Morgan Stanley's Barton Biggs, who turned bearish on Hong Kong before this surge and was celebrated when the Hang Seng dipped briefly, now eats crow, but in Manhattan. "Barton will never have lunch in this town again," was the verdict of one of the colony's better known financial figures. The Wall Street Journal, which has been bearish on China and Hong Kong all year, also has egg on its face. It tries to catch-up this morning with a front-pager on the boom, but even so fails to mention Beijing's incredibly important decision on the role of its central bank.  (CZ)

TOKYO BUST: Prime Minister Hosokawa's proposed income tax cuts -- the most effective cure to the Nikkei's malaise -- are stalled by the entrenched Finance Ministry bureaucracy, which insists on both "making up the revenue loss" and blocking issuance of "deficit bonds" -- an Asian version of Gramm-Rudman-Hollings. The Socialist party coordinates with the bureaucrats by vetoing a new consumption tax offered as compromise. Our soundings in the Hosokawa inner circle in Tokyo suggest that the Hosokawa-Ozawa-Hata leadership core is counting on the enormous popularity of the Prime Minister and his deregulation and tax-cut plans to break this gridlock with new elections, as soon as the new election law permits. This means a few months of uncertainty for the stock market. Meanwhile, Tokyo's reformers seem preoccupied with the tasks of accelerating economic cooperation with East Asia, as well as opposing U.S. attempts to turn the Asia Pacific Economic Council into a Brussels-like bureaucracy. The Nikkei may test its lows further before the divided business community converges to break the gridlock devised by the Finance Ministry's bureaucrats.  (CZ)

HAITI UPDATE: Prime Minister Robert Malval's trip to the U.S. in a last-ditch effort to broker a compromise was essentially doomed to failure from the moment he got off the plane. Upon Malval's arrival in Washington to consult with Haiti's exiled president Jean-Bertrand Aristide, our sources say, Aristide nixed the two key items on Malval's agenda: changes in the cabinet to make it marginally more acceptable to the military, and an easing of the trade embargo, particularly on gasoline and oil. Aristide has no interest in appointing cabinet members over whom he would have less control or in backing away from his all-or-nothing stance on the embargo as long as it serves his political interests. "Talks" proposed by the White House and UN would be meaningless. Under no circumstances will the military cede power unless its leaders are legally guaranteed amnesty for their role in the 1991 coup, a key element of the Governors Island accord, which the UN, the State Department and the press have conveniently forgotten. Although an amnesty law has been drafted, Aristide has refused all entreaties to call the recessed legislature into special session, which only he can do under the Haitian constitution. While his constituents starve, Aristide and his "government in exile" are drawing about $2 million per month out of frozen Haitian accounts to support themselves and a pack of high-priced Washington lawyers and public relations consultants. Our bet is that Aristide will refuse all appeals to sanity until these funds are exhausted. This means at least several more months of misery for the Haitian people, unless Washington and the UN suddenly face reality, which we rate as unlikely.  (DG)