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March 09, 2005

Paul Blustein on Paul O'Neill, John Taylor, and Company

Blustein on O'Neill and Taylor

Paul Blustein does not like Treasury Secretary Paul O'Neill or Treasury Undersecretary John Taylor:

p. 145: Intense as the IMF's internal debate... the one under way within the Bush administration was even more bruising... disjointed and disorganized... high-level conference calls... top members of the administration were on their August vacations. Bush... in Crawford... Paul O'Neill... in Bethany Beach, Delaware....

Hubbard and his colleages on the CEA were the most hawkish.... Representatives of the NSC and the State Department were much more favorably inclined toward giving Argentina more IMF money.... In between... was the Treasury Department. That may seem surprising, given the criticism O'Neill had leveled at the Clinton administration.... Treasury officials concluded that the IMF ought to give the country a new sort of loan.... The upshot... was to make a hash of a rescue that was already a very long-shot proposition. Argentina... would be done a disservice by being used as a guinea pig for a novel approach... that can only be described as muddle-headed. For this, blame belongs to O'Neill and... undersecretary John Taylor....

Taylor... guarded his access to O'Neill and made it clear that he was the one primarily responsible for delivering advice.... Taylor tended to resist... prodding with the explanation that Washington could not, and should not, order countries around.... Treasury economist found him unwilling even to entertain the idea that Argentina should be challenged on the need to forcibly restructure its debt....

From that conversation [between Cavallo and O'Neill] sprang the idea... that at least some of the IMF money would be used to help Argentina restructure its debt. How this was supposed to work was never spelled out in detail, and even some of the economists who worked on it later pronounced themselves mystified....

Treasury staffers protested that the numbers did not add up... a few billion dollars in IMF money could not be "leveraged" into a much greater amount of debt restructuring as O'Neill seemed to think. In response, O'Neill went into... CEO [mode].... "You're smart people," O'Neill told them. "Why can't you figure this out?"...

As much as Hubbard preferred to refuse any IMF loan... he said that if a loan must be granted, he would favor making it much bigger than the $8 billion being contemplated, so that it could actually do some good.... Hubbard... declared during one interagency conference call that the Treasury position "failed introductory finance."...

Rogoff fired off a scathing memo.... The memo ridiculed the notion that the money could be leveraged into a restructuring of much greater value. "After one strips out all the window dressing, there is no way to make $6 billion in liquidity worth more than $6 billion in liquidity," the memo stated. "But there are many creative ways to make it less."...

O'Neill's heals were well dug in, however, and Taylor showed no sign of breaking ranks with his volatile boss, telling those who questioned the approach that some way had to be found of making it work.... [T]he British, Canadians, Japanese, and others voiced strong objections.... [M]uch head-scratching ensued over the portion of th epress release concerning the debt-restructuring proposal.... "It was quite embarrassing for us," recalled Alberto Ramos.... "People were calling and asking, 'What is this for?' And I had to say, 'I don't know'."...

Glenn Hubbard is, of course, right. If you are the U.S. government and if you have confidence that the government of Argentina is committed and if you believe that it is worth supporting, then you count up Argentina's foreign debt--$95 billion. You authorize the Treasury or the Federal Reserve or both to buy up to $95 billion of Argentina's foreign debt as long as Argentina's government runs a month-to-month budget surplus, and not otherwise. If the problem is that you don't trust the Argentinean government to follow through, you change its institutions so you do trust it before you commit the money. Stand up and announce that Argentina's fiscal policy is sound, that its currency peg is secure, that its debt is undervalued, that the U.S. government has been buying bonds and will keep buying bonds until (a) prices rise to proper fundamental values or (b) the U.S. owns them all.

If you want to change market expectations, then change market expectations.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

Posted by DeLong at March 9, 2005 05:57 PM