David Malpass, a veteran of two previous Republican Party administrations as well as a former chief economist for the now-defunct investment bank Bear Stearns, has been nominated to serve as undersecretary of Treasury for international affairs. It’s a critical crisis management role in the federal government, and one that Malpass certainly has the broad résumé for.
But despite decent paper credentials, Malpass has a striking track record of poor judgment about major economic issues over the past decade — cheerleading the economy on the verge of the Great Recession while warning of a collapse just as recovery was getting underway.
In August 2007, for example, the housing market had been cooling for a year or more, and it was becoming clear that economic problems were going to spread to some of the financial institutions that had invested heavily in mortgage-backed bonds. Stocks were sliding, and overall credit was drying up in some markets. Into the breach stepped Malpass, then of Bear Stearns, with a reassuring Wall Street Journal op-ed titled “Don’t Panic About the Credit Market,” urging the Federal Reserve and other policymakers not to overreact.
“It's frowned upon to look for a silver lining when markets tumble and painful losses accumulate,” he observed, but “the housing- and debt-market corrections will probably add to the length of the U.S. economic expansion.”
In reality, by December the broader economy had slid into recession. And as Jordan Weissmann writes, investigations would reveal that “Bear Stearns' own hedge funds were already in turmoil due to mortgage losses” at the time Malpass’s op-ed ran. By March 2008, Bear Stearns was bankrupt. And the problems obviously only got worse from there.
You don’t get a financial crisis without a lot of people at a lot of banks making a lot of mistakes, but Malpass stood out from the crowd by aggressively telling everyone to calm down while his own employer was actually on the bleeding edge of the disaster.
Malpass will be Trump’s point man in some crises
The good news about Malpass is that in contrast to many of Trump’s other high-profile appointees, he is qualified in a conventional sense. He served as a deputy assistant secretary of the Treasury under James Baker when Ronald Reagan was president, and when Baker shifted to become George H.W. Bush’s secretary of state, Malpass came along as a deputy assistant secretary in the State Department. He did a stint as the GOP’s staff director on the Joint Economic Committee in Congress, and served on a congressional blue-ribbon panel on tax scoring in 2002-’03.
In short: Malpass has worked in the private sector, but he understands how the government’s international economics work gets done.
Which is a good thing, since neither Trump nor Treasury Secretary Steve Mnuchin nor National Economic Council Director Gary Cohn have any experience in government on any level, and they may find that it’s useful to have someone on hand who knows what the government does.
The international affairs desk is a particularly good place to have someone competent, since it deals with complicated international financial crises — coordinating with the International Monetary Fund and foreign finance ministries on issues that, as financial issues inevitably do, propagate across borders. If a House Republican tax reform plan ends up leading to dramatic shifts in exchange rates that cause waves of bankruptcies in developing countries, which reverberate back onto American financial institutions, you’ll want a good undersecretary on hand who understands the different pieces of the puzzle.
Malpass’s analytic track record is not inspiring
This is where we get back to the part where Malpass was chief economist at a soon-to-be-bankrupt investment bank, telling a country teetering on the brink of disaster that everything was okay.
The fact that he was utterly wrong didn’t stop him from trying again. In 2011, he popped back up with another Wall Street Journal op-ed urging the government to implement a policy of higher interest rates. Malpass said higher rates would lead to a stronger dollar and bigger economic growth. This is, to say the least, not how the majority of economists think this works. In 2012, Malpass warned that rejecting his advice was going to lead to a recession in 2013.
Obviously, that didn’t happen. Instead, the Fed kept interest rates low, leading to years of continuous job growth, which, in turn, led to a gradual strengthening of the dollar.
Bruce Bartlett, writing four years ago about Malpass’s poor track record, used it as a prime example of partisan bias in economic forecasting.
A perhaps optimistic view would be that Malpass was being deliberately biased in his past forecasts — trying to boost the fortunes of GOP politics as an outside propagandist while as a senior member of the Treasury team he’ll be boosting their fortunes by offering sound advice.
A bleaker view, however, would be that Malpass is a die-hard true believer who couldn’t contemplate the possibility that the low taxes and light regulation of the Bush years could be compatible with a catastrophic financial crisis. In an administration that’s already packed to the brim with Wall Street voices, that could be a very dangerous setup indeed.