Extravagant Gigaba must prove he isn't a lackey

In most countries, an antagonistic if not a hostile relationship between the president and Treasury has always been seen as a good sign by the markets, to cushion against political expediency.

In the US, Fed chairman Paul Volcker, according to his successor, Alan Greenspan, began the Ronald Reagan presidency by refusing a courtesy visit by the newly elected US president into the Feds office (Greenspan 2007). Volcker wanted the independence of the Fed never to be questioned.

Of course basic politics will tell you that when you have an overt politician nominated as either governor or in Treasury, political expediency is always a worry. In that, when elections come, the government is always prone to increase spending and abandon prudence to win votes. Political pressure may also result in the government or its leaders responding with extra spending.

Herein lies the problems of Malusi Gigaba. His first statements in office did not clear doubts that he will be vulnerable to political pressures. The markets were obviously comfortable with the difficult relationship between President Zuma and Minister Gordhan. It provided the desired confidence in the minds of investors that Gordhan would never give in to political expediency, even from the president.

Any president who removes a Treasury general because of a difficult relationship with that Treasury general gets punished by the markets, it’s not a sufficient condition.

In the late 1970s into the early 1980s, at the height of the Opec crisis and rising inflation, Volcker as Fed chairman of America’s Central Bank, was determined to bring inflation down, even at a heavy price. He tightened monetary policy, sending interest rates sky high, with mortgage rates going above 18%. What followed was a severe recession that drove unemployment to double digits but also broke the wage-price spiral.

As the gruesome social costs of Volcker’s policies mounted – the monthly unemployment rate would ultimately rise to a post-World War II high of 10.8%, resulting in the new President Ronald Reagan’s approval ratings plunging.

First, in the late 1970s, an unpopular, and perceived as weak, Jimmy Carter was facing re-election against Reagan. Volcker was not Carter’s first choice. To improve his approval ratings before the 1980 election, Carter had dismissed five cabinet members, including Treasury secretary W Michael Blumenthal.

Carter couldn’t find a leading business figure to replace Blumenthal and so turned to G William Miller, an ex-chief executive who was chairman of the Fed.

Carter didn’t have the luxury of waiting, because financial markets were in a tizz. Volcker, then head of the New York Federal Reserve bank, was an obvious default choice, though some Carter officials disliked his tough views on inflation.

Due to the uncompromising nature of Volcker, no political expediency and pressure faced by his boss on election, would make him abandon his almost obsessive mission of bringing inflation down, whatever the interest rates spirals, whatever the rising unemployment. Carter would later blame Volcker for loosing the elections.

When Reagan took over, him and Volcker accomplished an economic and political triumph, not because they were friends and agreed, but because Reagan came to realise that Volcker was the kind of leader who took actions that, though initially painful and unpopular, served the country’s long-term interests.

Volcker imposed tight money supply; Reagan’s support enabled him to maintain the painful and unpopular policy (the monthly unemployment rate peaked at 10.8%) long enough to purge inflationary psychology.

As would be expected, the Reagan administration was not united in its support of Volcker; some officials criticised the Volcker Fed. Still, Reagan supported the Fed.

“I have met chairman Volcker several times during the past year, I have confidence in the announced policies of the Federal Reserve,” he said in 1982. This patience enabled Volcker to succeed… It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing.

During Volcker’s monetary onslaught, there were many congressional proposals, backed by members of both parties, to curb the Fed’s power, lower interest rates or fire Volcker. If Reagan had endorsed any of them, the Fed would have had to retreat. Reagan was the nation’s chief political officer.

Five words from him withdrawing support from Volcker would have been worth more than 50 000 from administration technocrats complaining about the money supply. Volcker made Reagan understand that high inflation was not an intrinsic condition of wealthy democracies. It was the product of bad economic policies.

Fed chairman Greenspan had a difficult relationship with George Bush sr, who later said, I reappointed him and he disappointed me. The markets have always been comfortable with such antagonism. The existing political and economic environment contributes to how the markets view the change in government portfolios.

Perceptions on the personalities and personal lives of those in charge of the Treasury play an important part in reassuring investors of money-tightening when necessary.

Volcker was known as a penny-pincher, a man who clung to his suits to the point that their shine surrounded him with a sort of corona. And his availability as extra man at so many Washington dinner parties, said a friend, was partly a function of his love of free meals, writes David Beckwith for people.com. At the Fed, Volcker had applied the same strictures to the US economy that he applies to his personal life.

Gigaba, at least according to public perceptions and reports over time, along with his partner, have not led a penny-pinching life. Many would say they have led a rather extravagant public life and as elsewhere, investors can draw a straight line between how you lead your personal life and how you will handle the nation”s finances.

More importantly is that the ANC needs to be alive to the size, impact and importance of speculative investments. Speculative investments is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable at a future date.

Speculation is a higher risk form of investment. The Holy Grail of economic policy is attracting foreign direct investment (FDI) to fund new export-focused production capacity.

South Africa mostly attracts short-term speculative investments. What this means is that the nagging fear that our country’s decline is inevitable means we have been losing FDIs, known and unknown, because no one wants to invest in a country whose future looks bleak.

Pravin Gordhan succeeded in investor reassurances, acknowledging that Treasury must prevail over the country’s and investors’ mood and disposition, which is harder to rule. At a time when our country was becoming more polarised, our discourse pettier and more poisoned, Gordhan always, particularly around his Budget speeches, came across as the adult in the room.

This leaves Malusi with not only big shoes to fill but with market investors doubting whether he will stand with principles of investments (even when they disagree with those of politics), and whether he will give investors the reassurance investors need to invest in the future of our country.

Malusi needs to make some big gestures that prove that he is no political lackey positioned at the Treasury for easy access to the nation’s reserves.

Diko is ANC Western Cape spokesperson