Friday, June 02, 2006

The limits of finance

Henry Paulson's appointment to the position of Treasury Secretary brings yet another Goldman Sachs player (Joshua Bolton was recently made Chief of Staff) to the Bush team. Upon hearing the news of Paulson's appointment my first thought was that the US has been declared bankrupt and Goldman Sachs has been appointed receiver. Perhaps holders of US debt are getting a bit antsy with the "deficits don't matter" approach of Cheney et. al.

This is to invert the arrow of causation described in most press reports. Rather than thinking the Bush team chose Mr. Paulson, perhaps it was the global financiers, worried about the most recent spike in commodity prices, inter alia, who are driving the changes. Most press reports suggest that Mr. Paulson will have a much greater voice in policy than his predecessors, which fits with the inverted arrow of causation model. Goldman Sachs will now be driving US financial policy.

Alas, but at least in my view, the problems the US faces are not financial but political, although the political miscalculations have financial repercussions. That is, the corporation that is the US government is not a well run ship that has unfortunately been unable to navigate the financial waters but rather seems to me more and more like one of those never profitable internet companies that were the rage in the late 90s.

The collective sigh of relief press reports describe emanating from Wall St. is to me a sign of confusion as to the power of finance. A well run finance department can extract more profit from an already profitable corporation, and can put off the day of reckoning for a non profitable one but it can't turn the latter into the former.

Moreover, the ability of the financial wizards to obfuscate the underlying financial facts on the ground (think Enron) tends to lead to a reduction in pressure to get the underlying business in shape in much the same way as as an ability to forge a report card tends to lead to a reduction in pressure to actually do well in school. Financial legerdemain then becomes counter productive to the true goal.

And it is the true goal that ultimately matters. In the case of a commercial corporation, the true goal is underlying profitability. In the case of a governmental corporation, the true goal is a sound economy which includes such features as ultimately balanced fiscal and trade accounts.

So, while Mr. Paulson may well be a financial wizard, he will likely not have the answers to the underlying problems of current US policy. He will not be able to help win the wars in either Afghanistan or Iraq and without victory on those fronts, the US will eventually have to deal with the failed experiment in imperialism.

You see, when President Bush says that it is imperative that we win the War on Terror I believe him. The US is, as they say in games of Texas Hold 'em, all in on a hand of military dominance. If the Afghanis and Iraqis prove as tough as the Vietnamese to subdue, the hand the US is playing with will not take the pot. And then the markers will come due, regardless of who runs Treasury.

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