Memo To Jim Baker: Keep One Eye On Wall Street

The best advice anyone could give James A. Baker III as he tries to jump-start President Bush's reelection campaign may well be this: Ieep Wall Street happy.

If Baker's record is any guide, though, using him to calm the nation's financial markets during the ups and downs of the Presidential campaign is something akin to putting Mike Tyson in charge of a rape crisis unit. The problem? Despite ample personal experience, the former Treasury Secretary doesn't seem to grasp how easy it is to spook Wall Street.

Indeed, when Baker talks, the markets have a way of gasping. Take the reaction to his Aug. 13 farewell speech to State Dept. employees. In his remarks, which were offered just as the Treasury was auctioning $10 billion in 30-year bonds, Baker suggested that lower taxes may be part of the Administration's second-term agenda. The GOP, he said, "should build on the fundamentals of lower taxes and limits on government spending."

That line, when carried over the financial wires, sent credit-market bears on a wild tear. Their worry? Lower taxes might beget bigger government deficits, reigniting inflation. That threat immediately sent the price of the 30-year bond plunging, lifting the yield from 7.32% to 7.41%. Rates have since dropped back a bit, but the credit market remains wary of the prospect of politically inspired budget-busting.

BIG `GAFFE.' No question, Baker has had a success or two. The 1985 Plaza Accord, negotiated during his tenure at Treasury, is a feather in Baker's cap. It prompted the seven major industrialized countries to coordinate intervention in the foreign-exchange markets. The pact marked one of the rare times governments set aside their parochial interests and worked toward a common economic goal. And, by making U.S. exports more competitive via a lower dollar, it headed off dangerous protectionist legislation that was winding its way through Congress.

But that success seems to be the exception. In the fall of 1987, for example, then-Treasury Secretary Baker criticized Germany for raising interest rates, which had worsened the U.S. dollar's plunge. Baker responded by saying that the U.S. might have to lift its own rates to support the greenback. Those comments--coupled with Baker's proposed return to a "gold standard" for foreign currencies--sent a shudder through Wall Street. They're remembered still as one of the triggers of the October, 1987, stock market crash. Mickey D. Levy, chief economist at bond dealer CRT Government Securities Ltd., still thinks that Baker's precrash remarks are "the most glaring gaffe of the century."

Baker's 1985 plan to deal with the Third World debt crisis also seemed ill-conceived--at least as far as the financial crowd was concerned. The scheme called for more loans--including $20 billion from commercial banks--to developing countries that, at the time, couldn't even pay the interest on their existing debt. Not surprisingly, banks balked at adding still more Third World loans to their portfolios. The initiative never got off the ground.

POOR GRADES. Then there was Baker's strong role in crafting the Tax Reform Act of 1986. The deal wiped out a host of tax breaks in return for lower rates but failed to simplify taxpayers' lives. Nor did the Treasury under Baker do much about the mounting savings and loan crisis. In particular, in the summer of 1988, Baker deferred action until after the Presidential election. Earlier efforts probably would have reduced the bailout's $500 billion price tag. Finally, White House insiders say Baker gave at least tacit approval to the 1990 tax hike that's causing Bush such grief now. Add it all up, and financial economists such as Levy rate Baker's tenure at Treasury as pretty poor.

As Bush's chief of staff, Baker knows that talk of lowering taxes and safeguarding Social Security plays well with voters. But he must bear in mind that anything smacking of still-bigger federal deficits will be panned by investors. And while Wall Street may account for only a few thousand voters, its power over interest rates--and thus the economy--could make Baker's job of getting his boss reelected far harder than it already is.

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