Paulson Gets Diminishing Return With Bush, Like Powell, O'Neill

-- Henry Paulson escaped the Nixon White House with his reputation enhanced. He won't be so lucky this time around.

Paulson, who stepped down as chairman of Goldman Sachs Group Inc. to become President George W. Bush's Treasury secretary, may fall victim to the same jinx that has tarnished previous administration luminaries. Colin Powell, Paul O'Neill, Donald Rumsfeld and Dick Cheney all had their standing diminished by serving under Bush.

Every presidency produces political stars: Robert Rubin under Bill Clinton; James Baker and George Shultz under George H. W. Bush and Ronald Reagan. Even Richard Nixon, forced from office by scandal, had Henry Kissinger and Peter G. Peterson, the Commerce secretary who went on to co-found Blackstone Group LP.

By contrast, ``I can't think of anybody who has emerged from this White House with an enhanced reputation,'' said Bruce Bartlett, who served as a Treasury Department economist under the first President Bush and a policy aide under Reagan. ``But I can certainly think of lots of people who must rue the day they accepted an appointment in this administration.''

Eighteen months after coming to Washington, Paulson, 61, finds himself fending off an economic storm that includes a squeeze in credit markets, a wave of defaults by subprime borrowers and the growing threat of a downturn.

`Recession'

``If this administration ends in a recession, Paulson will really be under a cloud,'' said presidential historian Robert Dallek, the biographer of Presidents John F. Kennedy and Lyndon Johnson.

Paulson, who in the early 1970s worked as an assistant to John Ehrlichman, a Nixon aide later jailed for crimes related to the Watergate scandal, returned to Washington in July 2006. His 32 years of Wall Street experience led to optimism that he could strike deals with the Democrats who control Congress and persuade Chinese leaders to redirect their export-led economy.

Many expected him to be a Republican version of Rubin, 69, a fellow Goldman alumnus who as Clinton's Treasury secretary got credit for managing the Asian financial crisis and pushing for a balanced budget.

``There were high expectations,'' said Edwin Truman, a former Federal Reserve and Treasury official now at the Peterson Institute for International Economics in Washington. ``The terms on which Paulson came and his background meant the Treasury secretary might be able to play a more important role.''

Dollar

Instead, because of Bush's plummeting approval ratings and growing animosity between the White House and Congress, Paulson has made little progress. What's more, his term has been dogged by a housing slump, record energy prices and the plunge in the dollar's value.

``Secretary Paulson came to Washington knowing these are tough issues and what the political atmosphere was,'' said Michele Davis, a Treasury spokeswoman. ``He'll continue to push through the next year.''

He also has had to contend with tepid White House support for his agenda. Last year, Paulson attempted to revive stalled negotiations on shoring up Social Security, which is forecast to go bankrupt by 2041. His strategy of keeping Democrats engaged by remaining open to all remedies was undercut when Vice President Cheney told Fox News that tax increases were out of the question.

`Results'

As a result, the early enthusiasm about Paulson has ebbed somewhat. ``Paulson hasn't had the results that he and everyone else would have hoped for,'' said Michael Holland, chairman of Holland & Co. LLC, a private investment firm in New York.

To be sure, the Treasury secretary can point to accomplishments, including several measures to lessen the economic impact of the subprime mortgage crisis. He also set up a twice-yearly meeting with Chinese officials to ease trade tensions and address the enduring friction over China's exchange-rate policy.

``Paulson has improved significantly the impact of our interactions with China,'' said Representative Philip English, a Pennsylvania Republican. On subprime, Paulson has promoted policies that he ``successfully calculated would calm the markets.''

In his attempts to take on overhauls of Social Security and the tax code, however, Paulson has suffered the same fate as O'Neill, Bush's first Treasury secretary, who was forced out in December 2002.

Disengaged

Bush, 61, was often disengaged from the policy-making process, O'Neill later said in a 2004 book, ``The Price of Loyalty: George W. Bush, the White House and the Education of Paul O'Neill.''

``I wondered, from the first, if the president didn't know the questions to ask or did he know and just not want to know the answers,'' O'Neill said, describing a meeting with Bush on economic policy.

Julian Zelizer, a professor of history and public administration at Princeton University, said there appears to be a ``recurring pattern'' for high-profile members of Bush's Cabinet. Former Secretary of State Powell ``was talked about as a future president'' when he entered the administration, Zelizer said. Powell left in 2005 amid criticism over the failure to find the weapons of mass destruction that had been invoked to justify the March 2003 U.S. invasion of Iraq.

``He's been devastated as far as Americans think of him,'' Zelizer said.

Defense Secretary Rumsfeld, who served in the same position under President Gerald Ford, also left the Bush administration with his reputation in tatters in the aftermath of the Iraq war. Vice President Cheney, who took office with a reputation for nonpartisan competence, has become widely unpopular among both Democrats and Republicans.

``Failure follows people around,'' Dallek said. Because of Bush's ``stumbles and failures, no one looks good.''

Ireland `Celtic Tiger' Economy May Withstand Property Collapse

-- Ireland's ``Celtic tiger'' economy may continue to purr even if some of the roar has gone, says the economist who coined the term in 1994.

While ``the economy won't grow at the same ferocious rate that it did over the last decade,'' it ``won't give up the gains of the boom,'' says Kevin Gardiner, head of global equity strategy at HSBC Holdings Plc in London, who as a Morgan Stanley economist labeled Ireland a new ``tiger'' economy to rival Asia's.

Ireland's growth was fueled by a fourfold increase in property prices over the past decade. Now a 184-billion euro ($265 billion) government plan to rebuild roads, bridges and power stations, coupled with investments by companies such as Microsoft Corp., may help overcome a construction slump triggered by a real-estate reversal.

Ireland's economy will expand 3.5 percent in 2008 after 4.9 percent this year, the European Commission forecast on Nov. 9. While that's down from an average 5.3 percent in the previous five years, it still beats the 2.2 percent forecast for the euro region and the 1.7 percent predicted for the U.S.

As in the U.S. and Spain, the predictions for economic growth depend on Ireland's ability to weather a housing recession.

Home prices are falling after eight interest-rate increases by the European Central Bank since late 2005 doubled borrowing costs. Prices declined 1.3 percent in October, the most in at least 11 years.

``The construction slowdown is overshadowing the fact that the rest of the economy is doing fine,'' says Alan Barrett, an economist at the Dublin-based Economic and Social Research Institute. ``The pessimism is overdone.''

Stock Market Decline

Stock-market investors, at least, aren't so sure. Irish shares are the biggest losers in the euro region this year.

The drop in real estate and building may be amplified by the euro's rise against the dollar and sterling, says Bernard Connolly, AIG Financial Products Corp. global strategist. That threatens to slow export growth, with some companies including Waterford Wedgwood Plc, the crystal maker, already hurting. Almost 40 percent of Ireland's exports go to the U.K. and U.S.

The benchmark ISEQ Index has slumped 27 percent in 2007, led by Waterford's 79 percent plunge.

``Ireland will suffer more than any other in the euro area from a slowdown in the U.S., which is already happening, and in Britain, which will soon happen, and from euro appreciation,'' Connolly wrote in a research note. He calls Ireland's prospects ``simply dreadful.''

Exports, Spending

The government disagrees, saying exports may rise at least 5 percent through 2010, bolstered in part by U.S. companies lured to Ireland by a 12.5 percent tax rate.

Microsoft, the world's biggest software maker, plans to open a $500 million data center in Dublin. Ireland won more biotechnology and pharmaceutical investments than any other European country in the year to June, according to Belfast-based OCO Global, which supplies foreign-investment statistics.

Growth may even accelerate after next year's slowdown as Prime Minister Bertie Ahern spends more than the gross domestic product on the nation's infrastructure over the next seven years.

The European Commission sees an expansion of 3.8 percent in 2009 as the rest of the economy picks up the slack left by the decline in construction, which accounts for less than one-tenth of GDP. Consumer spending accounts for half of the economy.

New Jobs

Almost 70,000 jobs were created in the year through August, led by financial and business-services companies. Irish Life & Permanent Plc, the nation's largest life insurer, said Nov. 7 it will hire 100 personal financial advisers from across Europe.

A 4.4 percent unemployment rate, the euro-region's third lowest, has so far kept shoppers buying.

The average Irish household will outspend all others in Europe for Christmas gifts this year, according to Deloitte Touche Tohmatsu's annual consumer survey. Retailers Ikea AB and Travis Perkins Plc are planning to expand.

``I know from our radio properties, sales and advertising are very strong,'' says Denis O'Brien, the fourth-richest person in Ireland, according to the London-based Sunday Times. He owns five radio stations in Ireland. ``There's a lot of confidence in Ireland, it's just that the property market is off.''

While household-spending growth may ease to 3.4 percent in 2008, that would still be one-third faster than the euro-area average and twice the pace in the U.S., according to European Commission forecasts.

Even construction will begin to grow again toward the end of next year as homebuilding levels off and the government's plan to fix Ireland's infrastructure moves ahead.

``Housing has got a fair old thump in conversation and analysis overseas at the expense of the wider economic story,'' says David Drumm, chief executive officer at Anglo Irish Bank Plc. ``Ireland's economic story is an extremely strong one, and to that extent, the baby has been thrown out with the bathwater.''

Money Market Rates Fall for Second Day on ECB Action (Update2)

Dec. 19 -- Money market rates fell for a second day, adding to evidence that central banks are making headway in their attempts to counter turmoil in money markets.

The three-month euro interbank offered rate, or Euribor, dropped 7 basis points to 4.81 percent, the lowest since Nov. 30, the European Banking Federation said today. The three-month rate for pounds declined 18 basis points to 6.21 percent, the lowest in four months, the British Bankers' Association said.

The European Central Bank, which injected a record $500 billion into the banking system yesterday, ``stands ready to act'' again, council member Klaus Liebscher said today. The cost of three-month cash remained 81 basis points higher than the main refinancing rate. ECB President Jean-Claude Trichet said the coming weeks may be ``challenging'' for financial markets.

``The liquidity injections by the central banks are starting to have some impact,'' said Ciaran O'Hagan, head of interest-rate research in Paris at Societe Generale SA, France's second-biggest bank by market value. ``Our traders expect the normalization trend to extend further in the coming days.''

In the largest coordinated action since the Sept. 11, 2001, terrorist attacks, central banks in the U.S., U.K., Canada, Switzerland and the euro region are seeking to revive interbank lending to prevent the soaring cost of short-term credit from undermining economic growth. Financial institutions have reported losses of more than $70 billion on securities linked to the collapse of the U.S. subprime-mortgage market this year.

Fed Auction Result

The Federal Reserve will announce the result of an emergency $20 billion one-month money auction today. The ECB loaned 348.6 billion euros ($501.5 billion) of cash for two weeks yesterday, almost 170 billion euros more than it estimated was needed. It was the Frankfurt-based bank's biggest open-market operation. The Bank of England also held the first of two special operations yesterday, offering three-month loans in pounds.

The one-month euro rate fell 7 basis points to 4.56 percent, its fifth consecutive decline, the EBF said today. That's still 56 basis points more than the ECB's benchmark rate. The two-week rate, which tumbled a record 50 basis points yesterday, rose 9 basis points to 4.54 percent. The ECB said today it will drain 133.6 billion euros ($192.3 billion) from the euro-region money market.

``The financial crisis isn't over,'' said Giuseppe Maraffino, a fixed-income strategist at UniCredit Global Research in Milan. ``We need to see how much banks want to borrow and if money market rates fall.''

Treasury notes rose for a third day as stocks in Europe fell and U.S. stock index futures retreated. The TED spread, or difference between what the U.S. government and banks pay for three-month loans, stayed at 1.89 percentage points, up from 35 basis points at the start of the year.

Stocks Fall

The Dow Jones Stoxx 600 Index lost 0.6 percent, taking its decline this year to 1.5 percent, the worst performance since 2002. The U.K.'s FTSE 100 declined 0.3 percent, Germany's DAX slipped 0.5 percent and France's CAC 40 dropped 0.5 percent. Standard and Poor's 500 Index futures expiring in March were down 0.5 percent.

Implied yields on Euribor futures contracts fell from near a four-month high, with the June 2008 contract dropping 5 basis points to 4.43 percent. The implied yield on the March 2008 contract fell 2 basis points to 4.51 percent. A basis point is 0.01 percentage point.

The ECB first offered extra cash on Aug. 9, when it lent 95 billion euros of emergency funds. Banks also borrowed about 2.4 billion euros at 5 percent on Dec. 17, the most since Sept. 26, the ECB said yesterday.

Trichet Speaks

Trichet told the European Parliament's economic and monetary affairs committee in Brussels today that policy makers were responding to complaints from banks that they faced limited liquidity over the end-of-year period, when lending activity is subdued and they are trying to prepare their balance sheets.

``Given the uncertainties, the adjustment process in the financial system in the coming period may be challenging and we have to be prepared to the materialization of risks at any time,'' he said.

The bank's attempts to ease financial-market volatility and deliver price stability would remain separate, Trichet said. ``These two responsibilities are clearly distinct and should not be mixed.''

Trichet Signals No Room to Cut Rates; German Confidence Drops

Dec. 19 -- European Central Bank President Jean- Claude Trichet signaled faster inflation will prevent a cut in borrowing costs as German business confidence fell to the lowest in almost two years.

The Munich-based Ifo research institute's business climate index, based on a survey of 7,000 executives, declined to 103 from 104.2 in November. Economists expected a reading of 103.8, the median of 38 forecasts in a Bloomberg News survey showed.

Waning sentiment underscores the bind facing central bankers as an economic expansion fades. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a ``more protracted'' period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates.

The ECB ``is not of the view at this stage that the outlook has deteriorated to such an extent that inflation risks can be put to one side,'' said Michael Hume, chief European economist at Lehman Brothers Holdings Inc. in London. Policy makers won't change their rhetoric ``until it becomes much clearer that the credit crunch is having an effect on growth.''

The U.S. housing slump has pushed up credit costs worldwide, dimming the outlook for company investment at the same time as a stronger euro makes exports less competitive. Oil prices above $90 a barrel are spurring inflation, sapping company and consumer purchasing power and prompting workers to press for higher pay.

Growth Cools

Growth in Germany will cool to 1.9 percent next year after 2.5 percent in 2007, the Bundesbank said this week. Investment growth in Germany will probably slow to about 4 percent in 2008 from about 9.2 percent this year, Ifo said Dec. 12.

Borrowing costs have surged as banks hoarded cash following disclosures of write offs linked to U.S. subprime mortgages, which are aimed at people with poor credit histories. Losses stemming from subprime mortgage foreclosures will probably reach $300 billion, the Organization for Economic Cooperation and Development predicted on Nov. 22.

Adding to executives' concern, crude oil reached a record $99.29 a barrel on Nov. 21. German producer prices rose the most in 19 months in November as companies passed on higher energy costs. Consumer-price inflation accelerated to 3.3 percent this month, the fastest pace in 12 years. The ECB aims to keep that rate below 2 percent

``The risks to price stability over the medium term are clearly on the upside,'' Trichet said in Brussels today.

`Difficult Situation'

``The ECB is in a very difficult situation. On the one hand you have headline inflation and the way it spills over into inflation expectations, and on the other hand you have a credit crisis,'' said Joachim Fels, co-chief global economist at Morgan Stanley in London. ``Eventually the ECB will be forced into a U- turn and the next move in rates will be down rather than up.''

German consumer confidence dropped to a two-year low last month as inflation is ``poisoning'' spending, research company GfK said Nov. 28. German chemical workers and public employees said they will demand as much as 7 percent more pay next year to compensate for higher living expenses.

At the same time, the euro's 9 percent gain against the dollar this year is eroding export returns.

Airbus SAS Chief Executive Officer Thomas Enders last month called the currency's appreciation ``life threatening'' for the world's largest plane maker and said the company may have to cut its research budget to trim costs.

``Exports are of course being curbed by the strong euro and this weighs on the mood in our industry,'' Ulrich Lehner, chief executive officer of Henkel KGaA, said in an interview today. ``On the other hand, the weak dollar brings advantages on the cost side'' by lowering import prices.

Some German companies are coping with the euro's ascent. Manufacturing orders rose more than economists forecast in October as foreign sales surged, and the economy ``is still in a solid upswing,'' which will continue for the next two years, the Bundesbank said.