In most countries, an antagonistic if not hostile relationship between the president and Treasury has always been seen as a good sign by the markets, particularly to cushion against political expediency. In the United States, Fed Chairman Paul Volcker, according to his successor, Alan Greenspan, began the Ronald Reagan presidency by refusing a courtesy visit by the newly elected President of the United States into the Feds’ office (Alan 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 the treasury, political expediency is always a worry – in that, when elections come, government is always prone to increase spending and abandon prudence in order to win votes. To say nothing of any other political pressure that may result in government or its leaders being responsive with extra spending.

Here lie the problems of Malusi Gigaba. His first statements in office did not make it clear, beyond any already entrenched doubt, 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 treasurer-general because of a difficult relationship with that treasurer-general gets punished by the markets, it’s not a sufficient condition.

In the late ‘70s into the early ‘80s, 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 new President Ronald Reagan’s approval ratings plunging.

First, in the late ‘70s, an increasingly unpopular Jimmy Carter, seen as weak, was facing re-election against Ronald Reagan. Paul 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-CEO who was chairman of the Fed. Carter didn’t have the luxury of waiting, because financial markets were in a state. Paul 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 (Robert J. Samuelson: Washington Post 2015).

Due to the uncompromising nature of Paul 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. Jimmy Carter would later blame Volcker for himself losing elections.

When Ronald Reagan took over, he 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 with Chairman Volcker several times during the past year,” he said in early 1982. “I have confidence in the announced policies of the Federal Reserve.” This patience enabled Volcker to succeed…

It’s doubtful whether 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 Alan Greenspan had a difficult relationship with George Bush Snr, 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 around the personalities and personal lives of those in charge of the Treasury play an important part in reassuring investors of money-tightening when necessary. Volker 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, wrote David Beckwith for people.com. At the Fed, Volcker had applied the same strictures to the US economy that he applied to his personal life.

Malusi Gigaba, at least according to public perceptions and reports over time, along with his partner, have not led a penny-pinching life, and 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 important is that the ANC needs to be alive to the size, impact and importance of speculative investments. Speculative investment 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 simply 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. SA mostly attracts short-term speculative investments. What this means is that the nagging fear that RSA’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, he always, particularly around his budget speeches, came across as the adult in the room, the one we wanted to follow.

This leaves Malusi Gigaba 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 they need to invest in the future of our country.

Malusi Gigaba 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. DM

Yonela Diko is ANC Western Cape Spokesperson