Back in July, when George W. Bush–the very personification of pep and sunshine–appointed Dick Cheney as his running mate, we should have known that the Age of Exuberance was at an end.
Yes, the Nasdaq was off its March high of 5,000 and tech stocks had come in for a nice shave, but it was surely a mere correction, a short and much-needed wringing out of some of our excesses. Growth was still booming; we would buy on the dip, mop up some Cisco and be rewarded–as the age had taught us time and time again.
But not this time. The advent of Mr. Cheney, 59, brought us Paul O’Neill, 65, as Treasury Secretary, and Donald Rumsfeld, 68, for his second run as Secretary of Defense. The Nasdaq fell in a clump to 2,300 as though hit with Kryptonite, our beloved Internet stocks have been destroyed, pink slips from Internet blow-ups and mergers piled up. There is talk of recession, and of a word you may remember from nightly newscasts in the dread 70′s– stagflation . “It’s clear that these guys are not amateurs,” said Deutsche Bank Securities strategist Ed Yardeni. “They know stagflation when they see it. Bush wants a tax cut; this just gives him more ammunition. You can’t fault him for that.”
The Age of Exuberance has ended. “A lot of people discovered themselves in this market,” said Yale University economist Robert Shiller, the author of Irrational Exuberance . “Their psychology was affected. It was a warm, wonderful feeling to invest and to get rich. That’s been wiped out.”
Pessimism with a mid-70′s flavor is making a comeback. A pessimism embodied by these stolid gray men with their big-framed glasses, colorless suits and meandering bureaucratic histories. Alpha Republicans: the type of men who still believe in Rand Corporation studies (Mr. Rumsfeld sits on the board, Mr. O’Neill chairs it), systems analyses, missile shields, the importance of sage counsel in tough, trying times–the type of advice that thrives in closed rooms. The kind of advice that nobody’s taken … in years. Tight-lipped and meticulous, they won their bureaucratic wars and boardroom putsches, soaked up private-sector riches and sold out at the top. And now their very appearance tells us that the Age of Exuberance–or giddiness, or uncharted, almost abstracted wealth and happiness–is through.
And that they, wise and old, are needed to lead us through our next dark period.
Do these men want a recession? In fact, they may want one right now–so they can save us from a depression. “When the Bush team talks about the recession risk, they tread a very thin line,” said hedge-fund manager and Democratic fund-raiser Orin Kramer. “It’s understandable that they want to inoculate themselves and strengthen their tax-cutting hand. On the other hand, the state of today’s economy has a lot to do with confidence. The risk is that they create a self-fulfilling prophecy.”
Indeed, Mr. Cheney and Mr. Bush have made numerous and specific allusions to the build-up of soft economic data. Why? The simplistic answer is that a weakening economy justifies the administration’s case for its trillion-dollar tax cut. The more complicated one though, is this: The specter of a recession accompanied by a moribund stock market is fertile ground for these resuscitated wise men. (Just like old generals get hopped up in the early days of almost any war.) Remember, all three–Mr. Cheney, Mr. O’Neill and Mr. Rumsfeld–not only survived but thrived during the dying days of Nixon and the brief time of Mr. Ford. It was a dreary stretch: high inflation, unemployment, OPEC oil embargoes, Vietnam, a stagnant stock market.
Don’t blame these men, then, for the ache they may feel for their lost, gloomy youth. For they are in many respects the antithesis of the New Economy stars who have been at the forefront of the Clinton boom years. It has been a time of openness and bandwidth, a time of broad economic light–the unleashing of information, the empowerment of the financial cowboy, the day trader. It has been an anti-bureaucratic time–a time for the spinning of new ideas and dreams. Jeff Bezos at Amazon, Jay Walker at Priceline, the riffraff at Yahoo, Candice Carpenter at iVillage–and their Wall Street cheerleaders, Mary Meeker at Morgan Stanley and Henry Blodget at Merrill Lynch.
They were New York stars, reveling in Wall Street’s sudden status as the center of the universe. The Internet delivered them from obscurity; it gave them a virtual winner’s platform to self-congratulate, and keep selling. And the money! There was so much of it; with interest rates so low, inflation nonexistent and the dollar so strong. It seemed so easy and free; people were giving it away.
Presiding over it all was that graceful prince of a man, Bob Rubin. A New Yorker, tilting more to his trading desk at Goldman than his corner office at the Treasury Building. Mr. Rubin refused even to buy a house in D.C., living his six years in a suite at the Jefferson Hotel. Thin and angular, with that beguiling little smile and the Sphinx-like silence–such a contrast to Mr. Bush’s main economic adviser, Larry Lindsey. Plump and jowly, with his desk at the American Enterprise Institute, Mr. Lindsey was, physically and spiritually, the Washington wonk. For him, the market’s rise was something to be scorned–very publicly, he pulled out his assets and termed it a bubble . In November, the dollar dipped briefly, on comments attributed to him in support of a weaker dollar.
Mr. Rubin, on the other hand, never showed his hand. How the markets loved his placid calm! The dollar remained strong, the Dow and Nasdaq soared; he was like a proud, beneficent parent allowing us all to wallow in our riches. Anyone with a modem and a view could get rich–even if the wealth proved to be all too ephemeral.
Mr. Bush has spurned Wall Street in choosing a Treasury head. In fact, some noted Wall Streeters themselves have not been surprised by the selection. “I don’t think its necessary for Wall Street to claim the secretaryship,” said Felix Rohatyn, the former chairman of Lazard Frères, and one who is open to the idea of the Bush tax cut plan. “As a matter of principle, I’m not opposed to tax cuts. The important thing is to preserve growth.”
No, for Mr. Cheney, a Wall Street pro like Don Marron or Walter Shipley would not do. Now would be the time for bureaucrats, not bankers. The locus needed to shift from Wall Street to Washington. He needed someone he could trust in a dark old time. A member of the old Washington guard.
Enter Paul O’Neill. Mr. O’Neill has been presented to the public as a successful chief executive. True, he turned around the old-economy aluminum giant Alcoa. But Mr. O’Neill’s formative professional years–1961 to 1977–were spent in Washington as a systems analyst at the Veterans Administration and a ranking bureaucrat at Office of Management and Budget. His reputation then as a bureaucratic networker was formidable.
“He is scary,” said one ex-O.M.B. hand who worked with him then. “He has no values. Whether the peg is round or square, he will just push it through. He knows every little number. He is the consummate bureaucrat. He is John Sununu and David Stockman. He is by far the best networker I’ve ever seen.”
Take his relationship with Alan Greenspan. They became pals during their days in the Ford administration. Then, in 1987, when they were both directors at Alcoa, Mr. Greenspan cast his support for Mr. O’Neill for chief executive in a bloody little boardroom battle. No wonder that Mr. O’Neill spent so much time talking–almost slavishly, it seemed–of his friendship with Mr. Greenspan at the appointment press conference. Some believe, however, that a former apolitical Washington hand who has reinvented himself as a chief executive may be just the man to sell a tax cut to Congress and the public.
“Look, the bidding war has started,” said supply-side economist Larry Kudlow of ING Barings. “You will get a tax cut. O’Neill may have disagreed with Reagan on tax cuts 25 years ago, but he buys into it today. It helps as well that he has a Main Street, not a Wall Street, bias.”
Then there is Mr. Rumsfeld, as good a bureaucratic player as Washington can produce: the White House, the Pentagon, ambassadorships, campaign chairman. Richard Nixon persuaded him in 1971 to become director of the Cost of Living Council, the bureaucratic body charged with implementing the price side of Nixon’s wage-price freezes. “He is a manager,” said supply-side goad Jude Wanniski, who has served in the past as a consultant to Mr. Rumsfeld. “He can do free markets, he can do price controls; he can do tax cuts as well as tax increases. There is not an ideological bone in his body.”
Adroitly, Mr. Rumsfeld remained unsoiled by Watergate, and due to his friendship with Gerald Ford from his Congressional days in the 1960′s, was tapped as Mr. Ford’s first chief of staff in 1974. His deputy then was Richard Cheney, who succeeded Mr. Rumsfeld when he moved to the Pentagon in 1975. Inflation, pent up from the wage and price controls, was beginning to soar at 12 percent. Out came the WIN–Whip Inflation Now–buttons. It was a time of self-sacrifice and conservation, of car pooling and low room temperatures, a time of self-denial that no doubt appealed to Calvinistic impulses all over, including those of Mr. Rumsfeld and Mr. Cheney and Mr. O’Neill, by then a deputy director at the O.M.B. They flourished during this stringent time.
When Jimmy Carter came along in 1976, they all went their separate ways–Mr. Rumsfeld and Mr. O’Neill to the private sector and Mr. Cheney, briefly, to Congress and later to the Bush administration; his payday came during the Clinton years. All three leveraged their Washington connections to get rich during the 1990′s–Mr. Cheney at Halliburton, Mr. Rumsfeld at General Instrument Corporation, Mr. O’Neill at Alcoa. None had relevant private-sector experience in the field he had entered. But each knew people in that good old effortless, clubby white-male way. And these relationships got to the heart of their conservative philosophy–a philosophy contrary to the inclusive, free-flowing explosion of information and wealth in the 1990′s. If the Internet did one thing, it freed up information for all; it took the information out of the closed room and put it on the broad band, with nothing more to conserve, nothing more to contain.
Not that any of them denied the time for himself. Look at Mr. Rumsfeld: After a long run at G.D. Searle & Company from 1977 to 1985, he was brought in by Republican Ted Forstmann’s L.B.O. firm in 1990 to preside over the restructuring of General Instrument, a badly focused conglomerate of television and satellite devices. Mr. Rumsfeld followed through with an aggressive program of downsizing, asset sales and restructuring. In 1993, he moved on, $23 million dollars richer as the company’s stock soared. In 1998, he presided over a commission sponsored by conservative Congressional Republicans to come to a bipartisan conclusion about the missile threat from rogue nuclear states. His (and the commission’s) conclusion: The threat was real, worse than the C.I.A. was estimating, and a missile shield was needed.
It was an explicit conclusion; the Cold War was over, but there were still threats to be contained–Iran, North Korea, Pakistan. We had enemies out there, and we would need men like Mr. Rumsfeld to come back and provide the kind of classified advice for our ultimate protection. Left unsaid: All the munificence of the long boom had left us a bit soft and a little too self-contented. A return to the harsher stringencies of containment would be good for us. “Weakness is provocative,” Mr. Rumsfeld noted sternly at his press conference with Mr. Bush.
So ends our exuberance. Nasdaq is crushed, consumer confidence is on the wane, Internet companies are on their butts. And New York is where the Clinton team is setting up shop. Which is fine for Mr. Bush. New York has always thumbed its nose at the Bushes; Greenwich, no matter what you hear, has a strange, placid detachment from the city. Unlike Mr. Clinton, Mr. Bush has no affinity for the town. Let the recession come–he and his grizzled elders will hunker down nicely in their Washington lairs, close the doors and contemplate an appropriate time to cut taxes.
For here is the rub: The markets soared under President Clinton because he did, in effect, nothing. Strangely (for a Democrat), he was the very definition of laissez faire; he was, indeed, a clement weather system that allowed a balanced budget and low interest rates to fertilize the market’s efflorescence, with New York as the center of this bloom. No more. With the return of stagnation will come the need for intervention. And–here’s a queasy contradiction to the Republicans’ arguments against states’ rights in the recent election crisis–this time, economically, it will be the Republicans doing the intervening. It’s once more time for Washington-based solutions to be implemented by those good old, steady, inside-the-Beltway hands who brought you the 70′s. Welcome back to Washington, Mr. Cheney, Mr. O’Neill and Mr. Rumsfeld. It seems like only yesterday.