This is no 2008 - Mnuchin borrows from Paulson's economic crisis playbook

By David Lawder and Andrea Shalal

WASHINGTON (Reuters) - U.S. Treasury Secretary Steven Mnuchin has stepped into the breach as the Trump administration's point man to rescue the economy from coronavirus devastation, taking on the role his former Goldman Sachs boss, Hank Paulson, played over a decade ago.

Mnuchin has closely followed the financial crisis playbook used by Paulson when he led the Treasury Department in 2008, reactivating Federal Reserve credit market backstops and asking Congress for $1 trillion (857.4 billion pounds) to prop up companies and consumers as the economy grinds to a halt due to the spread of the virus.

Paulson, responding to a deepening subprime mortgage crisis that caused turmoil in financial markets, sought https://www.reuters.com/article/us-financial-bailout/u-s-launches-all-out-attack-on-credit-crisis-idUSN1945959820080919 $700 billion to buy up toxic mortgage assets. Like Paulson at that time, Mnuchin has warned that inaction would bring dire consequences for the economy.

However, many observers including Paulson acknowledge the current crisis bears little resemblance to the one in 2008.

"Together with the rest of the world we face a formidable economic challenge which is different than any in our history," Paulson said in an email to Reuters.

Paulson, who was Goldman Sachs' chairman and chief executive officer before joining then-President George W. Bush's administration in 2006, said he found it "reassuring" that Mnuchin had the reins at Treasury and praised his "deep, hands-on knowledge of financial markets."

"He has the confidence of congressional leaders on both sides of the aisle," said Paulson, who noted that he is in contact with Mnuchin. "And, very importantly he has the confidence of the President. Now, his ability to deliver results is essential to all Americans of both parties."

Some economists, investors and foreign officials, however, question whether the 57-year-old former banker and Hollywood film financier can strong-arm executives or influence President Donald Trump to take the drastic steps the unprecedented crisis may demand.

U.S. senators were trying to hammer out a deal on the $1 trillion emergency aid package proposed by Republicans and described by Mnuchin as key to stemming the fallout from an outbreak that has killed at least 200 people, infected more than 12,000 and upended life in the country.

"It's a good first step, but much more will be needed, even with the Fed's recent moves to intervene across private markets," said Kenneth Rogoff, a Harvard University economist.

One key obstacle is the president, critics say. Trump downplayed the initial threat posed by the virus before reversing course after stock markets cratered on fears the global economy was falling off a cliff.

"One can only assume that Mnuchin has to deal with vastly more unpredictability from his boss than Hank Paulson ever did," Rogoff said.

SLOW TO ACT

Officials the world over have been slow to grasp the speed and depth of the impact of the outbreak, but the White House's lag has been dramatic. On March 13, Mnuchin was encouraging Americans to fly domestically. Three days later, the country was told to avoid unnecessary travel, and by March 19 the governor of California had ordered his state's nearly 40 million residents to stay at home.

Mnuchin this week predicted the U.S. economy would come "roaring back" in the fourth quarter. Rogoff, on the other hand, warned there will be "staggering economic and social costs" as the battle against the virus unfolds.

Global coordination, however, is one area in which Mnuchin is not following in Paulson's footsteps, according to diplomatic sources who say the United States has not steered the G7 and G20 nations to take action.

At a meeting of finance leaders from the Group of 20 industrialized nations in February in Riyadh, U.S. Treasury officials pushed back against a stronger statement about the coronavirus outbreak, relegating it to a passing mention as one of several risks to be more closely monitored in the group's communique https://g20.org/en/g20/Documents/Communique%CC%81%20Final%2022-23%20February%202020.pdf, multiple sources familiar with the talks said.

Leaders of the Group of Seven richest nations pledged coordinated action in a call on Tuesday, but the message lacked urgency and rang hollow just days after Trump restricted air travel between the United States and 26 European nations, including G7 members France, Germany and Italy, without prior warning, financial and diplomatic sources said.

"The G20 and the G7 played a very positive role in the global financial crisis, but we're not seeing that in this case," one diplomatic source said.

Mnuchin has also been unable to persuade Trump to remove U.S. tariffs on some $370 billion of imports from China. U.S. manufacturers, retailers and small businesses believe doing so would save them billions.

The Treasury Department did not respond to requests for comment on this story.

'NO TALKING POINTS'

House of Representatives Speaker Nancy Pelosi, a Democrat who spent much of the past 10 days nailing down initial economic rescue bills with Mnuchin and who also negotiated with Paulson in 2008 in the same role, sees both men as "similarly pragmatic," a senior Democratic source told Reuters. "It’s just the facts. No talking points."

When Trump at first insisted on a general payroll tax holiday, a provision that Pelosi, Democrats and some Republicans considered a non-starter because it didn't help people who were out of work or would be as a result of the crisis, Mnuchin shifted to a plan to send $1,000 checks directly to Americans, and persuaded the president to go along, the source said.

Mnuchin's willingness to accept nearly all of the Democrats' demands on an initial bill, including increases to food aid, helped speed up the talks, the source said.

Some were not impressed. Pelosi "ate Mnuchin's lunch," argues Christian Whiton, a senior fellow with the Center for the National Interest, a conservative think tank in Washington.

Bigger fights loom during the next phase, including how hundreds of billions of dollars of aid to larger corporations will be structured. Mnuchin has insisted these will not be "bailouts," but he is taking fire from conservatives here, too.

"There is no justification for an exercise in profligate spending under the cover of the coronavirus crises," researchers at the conservative Heritage Foundation wrote https://www.heritage.org/public-health/report/the-third-inning-next-steps-congress-addressing-the-coronavirus on March 17.

Tony Fratto, who was a White House spokesman during the 2008 financial crisis, credited Mnuchin for a practical, "non-ideological" approach and said he is "actually rising to the occasion."

It's the occasion itself that's the problem, he said. "This really is like an asteroid hitting from outer space."

(Reporting by David Lawder, Andrea Shalal and Richard Cowan; Writing by David Lawder; Editing by Heather Timmons and Paul Simao)