US Treasury's Paulson faces heady challenges

WASHINGTON - Henry Paulson says he likes to run at problems, not away from them, and as the Bush administration's third Treasury secretary, the former Goldman Sachs chairman faces some big ones.

Two months after Paulson was sworn in, President George W. Bush is counting on him to press China on its currency system, help get the Doha Round of world trade talks back on track and re-energize the effort to rein in entitlement spending.

Paulson also serves as the administration's chief emissary to financial markets.

The hard-driving Wall Streeter, whom the White House courted to take over Treasury in July when John Snow resigned, made China an early stop last month.

In Beijing, he took up a push to get China to tackle economic reforms and make its currency more flexible, which could help shrink the huge US trade deficit.

He claimed a victory before he left.

"I find it very encouraging that there are very few differences on the principles," Paulson said of his meetings with Chinese leaders.

"Where there is discussion is on the timing."

Possibly so, but some analysts have their doubts.

"I don't think there's been a significant break from prior policy at all, which was to quietly keep encouraging China to adopt flexibility but without indicating any penalty if they didn't do so," said New York-based economist Roger Kubarych of Hypovereinsbank.

Whether or not the substance has shifted, there clearly has been a break in style at Treasury to stress differences between Paulson and his two businessmen predecessors -- one-time CSX Corp. head Snow and former Alcoa chief Paul O'Neill, who was forced out in December 2002.

O'Neill was seen as loose-lipped, prone to tossing off remarks that irked the White House, while the affable Snow sidestepped controversy to the point where he was viewed more as a salesman than a policy-maker.

Paulson is more deliberate. Early on, his staff made known he had secured a deal with the White House: he would not have to spend his time travelling to key election states like Ohio to trumpet the latest economic news, as Snow had to do in 2004.

White House economic adviser Allan Hubbard called Paulson the "leader of the team" on economic policy and said the new Treasury chief wants to work the big issues.

"He's very good at recognizing what's important and focusing on that," Hubbard said.

Some liken Paulson's elevated role to that of former Treasury chief Robert Rubin, a Wall Street veteran who served under President Bill Clinton.

"I think that is the correct approach, to build up the Treasury secretary's stature because that can mean a lot if and when things don't go according to script," said economist Mark Zandi of Economy.com in West Chester, Pennsylvania.

In China, Paulson spurned reporters' efforts to pry out details of talks with Prime Minister Wen Jiabao and President Hu Jintao, saying he preferred to negotiate in private.

But back in Washington, he got restive lawmakers to set aside proposed punitive tariffs against Chinese imports, a feat Snow had not managed.

That won him marks with China experts like Nicholas Lardy, an economist with the Institute for International Economics who praised the secretary's sway with industry and lawmakers.

"I hope he's on the right track with China," Lardy said, adding that it would take time to see how Beijing responds.

One issue Paulson wants to tackle is the projected soaring costs of health and retirement programmes for older Americans, calling it "the biggest economic issue facing our country."

In meetings on Capitol Hill, he underscored that he wants bipartisan solutions, but the Bush administration's earlier push to change Social Security proved polarizing. Much may depend on who controls Congress after the Nov. 7 election.

The White House hopes Paulson's clout and friendships across the aisle could help build momentum on the politically thorny issue.

Paulson has hosted weekly lunches of Cabinet-level policymakers that used to be held at the White House, in another sign he has boosted Treasury's stature.

As for agreeing to keep him off the campaign trail, the White House view is that it is worth it because of the Wall Street luster Paulson brings.

As an individual with a net worth estimated at $700 million, he might not identify with blue-collar voters anyway.

"He probably has a more effective relationship with the financial community than with Joe Sixpack," said one official, who spoke on condition of anonymity.

- REUTERS