SYNOPSIS: A quick note on the long overdue resignation of Treasury Secretary Paul O'Neill

When Paul O'Neill was chosen as Treasury Secretary, there was unanimous applause from the financial press. Well, almost unanimous. What I wrote two years ago looks pretty good right now ...


Optimists expected George W. Bush to take three objectives into account in choosing his secretary of the treasury.

First, most people expected him to choose someone with extensive experience of financial markets. There is every reason to believe that the series of financial upheavals that convulsed the world in the 1990's will continue. Robert Rubin and Lawrence Summers did a yeoman job of containing those crises; until a few days ago most people expected Mr. Bush to choose someone who looked like a Republican Bob Rubin, someone like PaineWebber's Donald Marron.

Second, some thought that Mr. Bush might choose a treasury secretary who could be a symbol of bipartisanship; one name floated was William McDonough, the president of the Federal Reserve Bank of New York.

Finally, given the troubling impression during the Florida fight that Mr. Bush was abdicating responsibility to Dick Cheney, and more broadly to his father's men, most people thought that Treasury would offer a good opportunity to show that the new administration would not be filled with Mr. Cheney's cronies.

Paul O'Neill, the former Office of Management and Budget official who became Alcoa's chairman, wasn't exactly what the optimists had in mind.

Indeed, Mr. Bush himself seemed oddly uneasy during the press conference at which he announced the selection. I'm not big on interpreting facial expressions; but anyone who watched Mr. Bush as Mr. O'Neill spoke can tell you that he was, well, shifty-eyed his gaze darting frantically from side to side. Unless this is a characteristic nervous tic that Mr. Bush successfully concealed throughout the campaign, it was an indication that something was wrong.

What's wrong with Mr. O'Neill? He built his business reputation by reversing efforts to transform Alcoa into something more than an aluminum company, instead refocusing on the core business and engaging in ruthless cost-cutting. This is all very well but overseeing world financial markets is nothing at all like running a large, very old-economy, command- and-control corporation (or, for that matter, working the details of the federal budget). Mr. Rubin excelled at the deft strategic intervention persuading investors, when the situation was on a knife edge, not to pull their money out and turn a temporary loss of confidence into a self-fulfilling prophecy of collapse. Perhaps Mr. O'Neill will reveal a comparable talent, but nothing in his career to date suggests that this is his sort of thing.

And by the way: his long friendship with Alan Greenspan does not constitute a qualification. For all his qualities, Mr. Greenspan is not God. The Treasury Department doesn't need a Greenspan acolyte to second the great man's views; it needs a secretary who, like Mr. Rubin, has enough independent knowledge and gravitas to supplement Mr. Greenspan's judgment, and if necessary challenge it.

Despite Mr. O'Neill's long association with conservative causes, his appointment does not please the hard right. But given Mr. Bush's decision to cave in to the hard right on the crucial matter of the Justice Department, simply appointing a treasury secretary who isn't rabid isn't much of a bipartisan gesture.

And last but not negligibly, Mr. O'Neill is surprise! an old colleague of Mr. Cheney's. And one suspects they are kindred spirits: like Mr. Cheney before his own re-entry into politics, Mr. O'Neill belongs to the class of businessmen the Japanese call amakudari, "descended from heaven" former government officials who later in life enter the business world at the top, not the bottom. None of this says that Mr. O'Neill will necessarily fail. But it does raise questions about what is going on in the Bush transition. Why did the candidate who was supposed to represent the aspirations of the "investor class" reject all the candidates proposed from the investment community?

Here's a guess: despite all the talk of being forward looking, Mr. Bush's people are fundamentally uncomfortable with the modern world. As my colleague Tom Friedman has pointed out, they seem to hanker for the lost certainties of cold-war diplomacy; perhaps they also hanker for the lost certainties of the old economy, where big companies were comfortably settled in stable oligopolies, and didn't have to worry about the shifting tides of financial markets.

In short, they want to pretend the world is still the way it was when some other guy was president can't remember his name, began with a "B."

Originally published in The New York Times, 12.24.00

Originally published on the Official Paul Krugman Site, 12.6.02