Hank Paulson: ‘I think it’s pretty likely we will see a recession’

I’ve arrived in Barrington, Illinois, an hour early for my lunch with Hank Paulson. The cloudless prairie sky is as huge because the city is small. Though simply 40 miles north-west of Chicago, Barrington betrays no shadow of its hovering city neighbour. The primary avenue even has a kiosk the place you’ll be able to deposit your “retired flags” for sacred disposal — a customized that’s just about confined to small-town America. 

That is the place the place Paulson — the US Treasury secretary in the course of the 2008 monetary disaster — was raised and retains his major residence. We’re to fulfill on the city’s compulsory Italian restaurant, a meatball-serving household institution that’s considerably incongruously referred to as Ciao Child!

Having scouted the principle avenue and crossed the railway tracks, I present up 10 minutes early. “Mr Paulson is ready for you,” says a girl who’s clearly looking out. She ushers me to an ethereal room on the again. Paulson, 77, who nonetheless has the strapping gait he had as a high-school wrestler and a lineman on his school’s American soccer group, greets me with an iron handshake. “I’m glad we received to do that,” he says. 

Establishing this lunch took a bit of preparation. I approached Paulson throughout final month’s meltdown of Silicon Valley Financial institution and Signature Financial institution — a mini monetary panic that the markets are calling “March insanity”, with the implication that it’s already over. Paulson believes that’s wishful considering.

Ciao Child!
232 E Important St, Barrington, IL 60010, US

‘Very chopped’ salad $12
Ravioli with marinara sauce $16
4-cheese baked pasta $14
Drinks (Arnold Palmer iced tea x1 and Weight loss program Coke x1) $4
Whole inc service and tax $64.59

As the person who in 2007 and 2008 served as George W Bush’s level particular person for what historical past abbreviates to the GFC — the worldwide monetary disaster — few are higher positioned to take the temperature. Paulson’s tenure was way more important than the 2 years it spanned. The primary yr he spent serving to to reset a Bush presidency that had gone badly awry.

This earned Paulson the sort of belief that enabled Bush to delegate all the large calls to him in the course of the second yr, when the monetary crash was engulfing the western world. His and the Federal Reserve’s big-bazooka response to the meltdown saved the US economic system but additionally helped spawn the populist Tea Celebration backlash that adopted. It’s notable that Paulson, a life-long Republican, endorsed Hillary Clinton over Donald Trump in 2016.

Though Paulson talks regularly to Janet Yellen, immediately’s Treasury secretary, and Jeff Zients, Joe Biden’s chief of employees, he tends to show down interviews. “As somebody who sat within the seat and had folks shoot at you from the surface, I do know what it’s like,” he says. He has determined to make an exception immediately as a result of there are issues he needs to say. These boil down to 2 themes: the damaging state of US-China relations, and the fragility of America and Europe’s monetary techniques. I think about it my obligation to not let the dialog get too hemmed in. 


I start by asking about the city the place he grew up. Since Paulson is a Christian Scientist and teetotaller, I do know higher than to press a glass of wine on him. He orders an Arnold Palmer — an iced tea and lemonade combine named after a US golfer. I get a Weight loss program Coke. Each are repeatedly refilled. We agree to separate an antipasti salad. One salad seems to be far too huge for 2: the smaller the city, the bigger the portion. 

Paulson talks of how he constructed a house subsequent to his dad and mom’ right here within the early Nineteen Seventies, after he had began to generate profits at Goldman Sachs, the place he was later to develop into chief government. His mom died two years in the past at 99. 

“We’re surrounded by 1000’s of acres of forest protect and I can get to O’Hare [Chicago’s biggest airport] shortly as a result of I journey so much,” he says. The primary workplace of the Paulson Institute, his “assume and do tank”, is in downtown Chicago, the place he additionally retains an residence. The institute focuses totally on carbon and inexperienced finance and China, the place it additionally has employees. 

Although he has been to China greater than 100 occasions, subsequent week he’ll fly to Beijing for the primary time for the reason that begin of the Covid pandemic. He is aware of all its leaders nicely, together with Xi Jinping and his predecessor Hu Jintao. “This can be a very completely different China to even just a few years in the past,” says Paulson. “The US-China relationship is on the brink. Communications have floor to a halt. There’s so much happening on the planet that’s troubling however to me it’s the US-China relationship that’s the most worrying.” 

I ask who’s in charge. “What we’re seeing proper now’s Biden ready to have a sorely wanted name with Xi and in the meantime Xi’s everything-but-America technique is a whirlwind of exercise,” Paulson says. “Xi is taking part in the worldwide statesman, assembly with heads of state around the globe and in China. The Chinese language are arguing that the US is making an attempt to include them and the Chinese language folks undoubtedly imagine that. They’re placing out to the world, and to American CEOs, that China is open for enterprise once more. If America goes too far in curbing commerce and funding with China and we go far past what our allies and companions wish to do, the consequence will probably be to isolate the US.”

I observe how radically issues have modified since Paulson was in Washington, when he arrange a routine dialogue between the US and China that died beneath Donald Trump. In these days, American companies would foyer vigorously for extra engagement with China, because it contributed such a big share of their backside line. As we speak, enterprise is conspicuous by its silence. “Persons are quiet as a result of for those who’re a CEO and you’ve got enterprise in China, and also you take a look at what’s acceptable to say in China and what’s acceptable to say in America and also you draw a Venn diagram, there’s little or no white area,” he says. 

“This can be a harmful scenario. I strongly imagine that Biden wish to stabilise the China relationship however each Republicans and Democrats in Congress have staked out a really sturdy line which complicates issues for Biden. I’ve a priority that Congress is underestimating the relative energy of China, the permanence of China, and China’s relationship with so many different nations.” 

Paulson brought about a stir earlier this yr when he wrote an essay in Overseas Affairs journal with the headline “America’s China coverage isn’t working”. Together with only a handful of different senior US statesmen — notably Henry Kissinger, who will flip 100 subsequent month, and Michael Bloomberg, the previous mayor of New York, who’s 81 — Paulson goes in opposition to the grain of America’s hawkish consensus. Maybe that’s the reason he’s urgent his level so onerous. No matter modest dent has been made in our salad is sort of solely all the way down to me. 

I ask whether or not there may be any precedent in historical past for 2 huge powers to rub alongside peacefully. “This can be a very harmful interval,” he says. “Nice powers don’t look to go to struggle: they stumble into it by some mixture of miscalculation or misjudgment or accident. So I believe it’s necessary that we tone down the rhetoric on Taiwan. Regardless of what you learn, the very last thing that Xi wants is a struggle for Taiwan.” Subsequent yr will probably be a momentous one, he provides. Not solely is there a US presidential election in 2024, there may be additionally one in Taiwan earlier within the yr.

So what would it not take for the 2 giants to stay and let stay, I press. “Once I requested a Chinese language chief plenty of years in the past if he might consider a scenario the place you might have an current energy and a rising energy coexisting stably, this man, who could be very smart, mentioned, ‘I can’t consider any, however we’re going to do it this time as a result of if we don’t the result’s going to be catastrophic.’” So failure isn’t an choice? “Appropriate.” 

I do know Paulson has mentioned what he wished to say on China. However I wish to know what accountability he thinks China bears for immediately’s worsening deadlock. I level out that Xi basically closed down Hong Kong’s “one nation, two techniques” association in 2020, which despatched a fairly stark sign to Taiwan that the carrot is off the desk. All that appears to stay is the stick. Furthermore, there isn’t a area in immediately’s China for Chinese language Paulsons and Kissingers and Bloombergs to contest Xi’s line. Who’re Paulson’s Chinese language counterparts? 

“I by no means defend the actions I’ve seen China has taken. I abhor them,” Paulson says. “However what I say is we have to be sensible and hard and do issues in a sensible means that can work. I’m excited about outcomes. Our ‘One China coverage’ [under which the US recognises the People’s Republic of China as the sole legal government of China but only acknowledges Beijing’s position that Taiwan is part of China] has served us very nicely over time and it’s crucial that we follow it. If we follow One China and have a deterrent within the area, struggle isn’t inevitable.” 


Now we have lengthy since deserted the one salad coverage. Our separate predominant programs arrive. Paulson will get the home ravioli in marinara sauce. I’ve flouted widespread sense by going for the four-cheese baked pasta. “Would you want parmesan on that?” the waitress asks. I believe I’ve sufficient cheese in the interim, I reply. 

It’s also time to alter matter. Is the banking panic over, I ask. “No,” says Paulson. Please stroll me by why. “Some issues we all know and a few issues we don’t know,” Paulson replies. “What we all know is that for those who’re working a small or regional financial institution proper now, you wouldn’t be lending. The capital markets shut down for 2 or three weeks. Now they’re opening however to not the extent they had been. So I believe it’s fairly possible we’ll see a recession for those who take a look at what’s taking place to credit score.” When will that hit, I ask. “It can take some time to present itself.” 

He goes on. “One other factor we’re virtually sure to see is credit score provision shifting outdoors the regulated banking sector. That is completely different to the extent that the panic strikes faster when you might have social media, and Twitter, and who is aware of the place it’s going to crop up once more. There will probably be quite a lot of give attention to Europe, the place monetary establishments aren’t as sturdy or as nicely capitalised as they’re right here.” 

Simply to make certain I perceive you, I say, the disaster will present up in two methods — in recession and in additional small financial institution failures? “Within the final couple of weeks you’ve had $300bn in deposits transfer out of the banking system, perhaps a trillion for the reason that starting of the yr. These deposits have gone to cash markets, and have additionally moved from regional to huge banks. There’s quite a lot of turmoil.” 

So extra regional banks will go beneath as depositors flee? “I’ve been round lengthy sufficient to not predict something. There may be uncertainty and extra to return.” 

I ask if Paulson is pleased with the truth that the US authorities is now basically guaranteeing each deposit within the land. Isn’t that getting near having a socialist banking system? “It’s been an actual wake-up name. Confidence has been shaken. The dangers are nonetheless on the market. There was a idea that within the midst of a systemic disaster, the federal government might wind down a failing establishment and cease a panic with out damaging the economic system. That ought to have been disproved by Covid. In early March, the failure of two banks, which had simply over 1 per cent of US banking property, threatened to destroy the regional banking system, and the Biden administration got here with a really fast response to cease that. There shouldn’t be a delusion that ‘too huge to fail’ has been solved, as a result of it hasn’t.” 

Paulson then units out in some element why Congress wants to present US regulators broader emergency powers to resolve future systemic crises. “We are able to by no means abolish monetary crises,” he concludes. “They are going to at all times occur.”


Did he have hassle sleeping when he was in cost in 2008? I ask as a result of I can always remember the darkish rings beneath Paulson’s eyes as he wearily stepped in entrance of the cameras after yet one more establishment had gone beneath. “I’d say there’s nothing worse than feeling a terrific sense of accountability and never having all of the authority you want,” he replies. “I did have hassle sleeping. However the truth that it moved so quick and we’re taking part in offence the entire time helped me by it.” 

I remind him of the well-known second within the 2008 election when John McCain, the Republican candidate, introduced that he was suspending his marketing campaign to return to Washington and remedy the disaster. This pressured Bush to summon McCain and his opponent, Barack Obama, in addition to leaders from Congress, to thrash out a standard line to stem the panic. Paulson smiles on the reminiscence. “For good or for unhealthy that’s an everlasting picture,” he says.

The White Home assembly shortly degenerated right into a shouting match and the Democrats retreated from the cupboard room to the Roosevelt Room down the hall. Paulson adopted them. “They had been in a huddle round Obama and so they had been outraged and turned to shout at me. In a second of levity, I dropped to 1 knee, and Nancy Pelosi [the Speaker] mentioned, ‘Hank, I didn’t know you had been a Catholic.’ It broke the ice. I mentioned, ‘I don’t need you to blow this up,’ and somebody mentioned, ‘We’re not those blowing this up.’” 

How did it really feel to have the well-known actor William Harm play you within the subsequent film, Too Massive to Fail? “Those that know me mentioned Harm was so laid-back and calm that he positive didn’t seize you,” replies Paulson. “My children mentioned, ‘You have to be comfortable as a result of he’s the nicer model of you.’”

How do you reply to individuals who say that, it doesn’t matter what occurs, the wealthy at all times get bailed out? “Yup. It’s unlucky, as a result of that’s what occurs. The actions it’s worthwhile to take to guard everybody trigger the fairness markets to go up, and people who personal the equities profit extra.” 

I begin on one other query however Paulson all of the sudden appears to be like involved and says he fears that he’s “dumping everywhere in the messages I wish to get out” as a result of now we have been ranging too broadly. I guarantee him that I’ll faithfully convey what now we have mentioned. I sense, nevertheless, that it’s time to wrap up. Additionally, I’ve a flight to catch again to DC. 

One other small-town truism: the invoice is as modest because the parts had been massive. Paulson and I stroll across the nook to a non-public car parking zone the place he left his automotive. It’s now not there. “I’ve been towed,” he says, with a touch of panic. “I didn’t anticipate that.”

What can I do to assist, I ask. “No, no, you need to catch your flight,” he insists. I really feel a twinge of guilt glancing again at a stranded Paulson as I’m being pushed off in my Uber. He should bail himself out. I really feel partly chargeable for his surprising misfortune. 

Edward Luce is the FT’s US nationwide editor

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