It's not nearly as fun as the Veepstakes, but let's handicap who should be treasury secretary in the next administration. My nominee: Henry Paulson. He'd fit in fine with either John McCain or Barack Obama as his boss.
Paulson has already been treasury secretary for two years, of course, and as the nation's financier in chief, he's been far from perfect. The former Goldman Sachs CEO arrived in Washington in 2006 with a predictable conservative agenda, hoping to use the waning Bush years to loosen rules on Wall Street and shoo the government out of the moneymakers' way. The timing couldn't have been worse. The return of a Democratic Congress later that year ended Paulson's quest for "reforms." Then, when the air started to leak from the housing bubble in early 2007, Paulson, like most, did more chin-scratching than anything else.
But look what's happened since then. As the housing crisis morphed from a contained correction into a national disaster, Paulson bucked the trend among Bush administration cabinet secretaries: His ideology yielded to pragmatism. He helped end partisan bickering so Congress could pass a $168 billion stimulus package earlier this year—no panacea, but probably a modest economic boost.
Paulson also helped broker a solution to the Bear Stearns meltdown in March, which could have dragged down other financial firms and tied the nation's banking system in knots. Billions in shareholder value went poof, and the Federal Reserve got saddled with a stinky portfolio of sour loans. Critics on both sides complained about the details. But banks continued to lend, and the critics have mostly gone silent since then.
Now Paulson has again shed the conservative cloak, helping assemble a housing-rescue package that would have seemed unthinkable when he first left his gilded New York office for the confines of the beltway. By reining in mortgage giants Fannie Mae and Freddie Mac, the legislation could be the most significant new banking regulation in years. Rather than loosening government oversight, the Paulson reforms embolden the regulators. The White House even says that Paulson persuaded President Bush to change his mind about vetoing the bill, which Bush had planned to do on account of some urban subsidies that conservatives derided as giveaways.
Quiz: When was the last time a cabinet official persuaded President Bush to abandon his conservative principles on an issue where he had already taken a public stand? Granted, Bush probably would have caved anyway and signed the bill, to avoid being cast as the enemy of the distressed American homeowner. But pinning the about-face on Paulson, a wise man of Wall Street who has built cred on both sides of the aisle, has helped inoculate Bush inside his party. Heard much criticism of Bush flip-flopping on the urban subsidies? Not really. That's because Hank said it was OK.
Clearly, this is not a good time to experiment with market solutions—it's the market itself that got us into this mess. But government intervention isn't a victory for Bush-bashing liberals—it's a victory for ordinary consumers who want the politicians to shut their yaps and get something done for once. Elected and appointed officials often exploit moments of misfortune to jam through new rules that advance a pet cause. Paulson, by contrast, has apparently put aside his old beliefs about the unlimited virtues of the free market to find fast, practical solutions to problems that need to be addressed now.
This is what shaken consumers need. Sure, consumers are spooked by obvious things like $4 gas and disappearing jobs. But they're also alarmed because systems they've learned to count on suddenly don't seem to work. "American people are really losing trust in our institutions," says Duke University economist Dan Ariely, author of Predictably Irrational. "Bankers [give] crazy loans to people who can't pay them back. Then they turn around and sell the same mortgages to people who know even less about them. It's causing incredible distrust in the markets."
Politicians arguing about the same old liberal and conservative bromides don't reassure consumers. But a leader who navigates between both sides and helps solve real-world problems does. "Paulson seems to be moving in a fast and logical way and doing the things that will stabilize markets," says Jim Barth, an economist at the market-oriented Milken Institute. "From a pragmatic standpoint, one has to give him high marks."
Paulson probably can't wait to get out of Washington. And neither McCain nor Obama will want to be upstaged right off the bat by a treasury secretary who shows more leadership on the economy than they do. So Paulson's probably a goner. If we're lucky, the next treasury chief won't have quite as much to do.