- The Washington Times - Tuesday, May 30, 2006

After months of media speculation casting doubt on the ability of the Bush White House to convince a top flight investment banker to leave Wall Street for the U.S. Treasury, President Bush reached into the Wall Street community yesterday and snatched its arguably biggest superstar, Goldman Sachs CEO Henry M. Paulson Jr. Upon confirmation, which is as certain as these things get, Mr. Paulson will be replacing John Snow as secretary of the Treasury.

Here are some of the challenges that will greet the secretary. Intensifying inflation fears are dogging the bond market. The Doha round of trade negotiations is approaching collapse amid rising pressures for protectionism. Equity markets in developing countries have been tumbling. After tripling over the last three years, oil prices are hovering above $70; and Goldman Sachs — yes, that Goldman Sachs — managing director Arjun Murti asserted over the weekend that his March 2005 hair-raising scenario projecting $105 oil would now be a conservative estimate if a major oil outage occurred. Goldman Sachs — yes, that Goldman Sachs — accurately predicted in March 2003 that the nation’s long-term budget outlook was “terrible, far worse than the official [Bush administration] projections suggest.”

Meanwhile, in the short term, annual budget deficits have averaged $370 billion over the past three fiscal years. The personal savings rate, which has been relentlessly falling in recent years, entered negative territory in 2005 for the first time since the Great Depression. Consequently, the United States became nearly 100 percent dependent upon foreign investors for the financing of $1.1 trillion in federal red ink over the last three years. The current-account deficit reached an annual rate of $900 billion in the fourth quarter (more than 7 percent of GDP). The U.S. financial markets are sternly testing the anti-inflation bona fides of rookie Fed chairman Ben Bernanke, who celebrates his four-month anniversary today. The bubble-like U.S. housing market, which has helped to finance rising consumption in recent years, is threatening to lose air. Increasing volatility pervades financial markets all over the planet. The dollar has been falling at a rapid clip in recent weeks. Well, all of a sudden, the media’s speculation seemed somewhat understandable, didn’t it?

Welcome aboard, Mr. Paulson. That rather large pay cut you commendably just took will look puny compared to the size of the global responsibilities you have just assumed. You will soon be the chief spokesman and, it is hoped, a major architect of world economy’s indispensable engine. The U.S. economy you will be overseeing has been expanding at an annual growth rate of 4 percent during the last three years. But as the litany of concerns cited above clearly attests, there are major structural imbalances and challenges to address.


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