Larry Kudlow, US President Donald Trump’s top economic adviser, still remembers the time in the early 1990s when he brought David Malpass into Bear Stearns, the Wall Street investment bank that eventually collapsed during the financial crisis.
Mr Malpass had just ended two stints in Washington working for the Ronald Reagan and George HW Bush administrations, and Mr Kudlow — then chief economist at Bear — wanted him on board to cover global economic trends.
“I knew how well-versed he was in international affairs and macroeconomics in general, and he was terrific,” Mr Kudlow said in an interview on Monday. “He fit right in . . . and did a great job.”
Mr Malpass’s hiring launched a fifteen-year career at Bear, which set the stage for the 62-year-old Michigan native to take a senior role in the US Treasury under Mr Trump, and this month, to be tapped by the US president to lead the World Bank.
To his supporters inside and outside the Trump administration, Mr Malpass is the right man for the job: a supply-side economist who will refocus the multilateral lender on helping the world’s poorest countries. “Low tax rates for growth, minimal regulations for growth, stable money for growth: he will bring that to the bank,” Mr Kudlow said.
But his record as an economist at Bear has attracted criticism, as it has included various controversial prescriptions, visceral criticism of multilateral institutions, particularly the International Monetary Fund, and reassurances about the state of the credit markets even as his own investment bank was unravelling, leading to Bear’s eventual sale to JPMorgan Chase in 2008.
Throughout his career, Mr Malpass also has demonstrated a strong inclination for fixed exchange rates — which is not uncommon among his strain of conservative economists but is at odds with most mainstream economists’ belief that floating currencies are vital economic shock absorbers, particularly during a crisis.
“If his ideas were implemented, they would be a profound departure from the current norm for most economies,” said Brad Setser, a senior fellow for international economics at the Council on Foreign Relations in Washington.
Some former colleagues at Bear — run at the time by Jimmy Cayne, a cigar-smoking, bridge-playing chief executive known for his stinging observations — remember Mr Malpass fondly. They stress that he was simply challenging conventional wisdom.
“He is a very sophisticated economist who understands both international economics and international finance. He was a conservative but that doesn’t mean he was an ideologue,” said Warren Spector, the former co-president of Bear Stearns and now chairman of Balbec Capital, a private investment firm. “I never heard Jimmy Cayne say a negative thing about him,” Mr Spector added.
The Tequila experiment
In January 1995, after Mexico had plunged into a currency crisis — and US and international authorities were scrambling to arrange a bailout — Mr Malpass proposed an “experiment in public choice economics” to solve the problem. The Mexican government could “buy every peso in existence in a matter of weeks”, to reverse the devaluation and restore its pre-crisis exchange rate.
“History awaits you, President Zedillo,” he wrote in a Wall Street Journal opinion piece.
At the US Treasury, officials regarded Mr Malpass’s controversial suggestion that the currency could be re-pegged as naive and problematic, undermining their effort to provide support to Mexico City. Inside the Mexican finance ministry and the country’s embassy in Washington, officials were seething.
CV David Malpass
8 March 1956
Studied Physics at Colorado College, his MBA at the University of Denver, and International Economics at Georgetown University’s School of Foreign Service
Undersecretary of the Treasury for International Affairs
Appointed senior economic adviser to Donald Trump during his election campaign
Ran for the Republican nomination for the US Senate in New York, placing second
Founded Encima Global, an economic research and consulting firm
Chief global economist and senior managing director at Bear Stearns
Served under the Reagan and Bush administrations in roles including deputy assistant secretary of state, deputy assistant secretary of the Treasury, Republican staff director of Congress’s Joint Economic Committee and senior analyst for taxes and trade at the Senate Budget Committee
Certified Public Accountant at Arthur Andersen’s consulting group and contract administrator at Esco Corporation
Married to Adele Malpass, chairwoman of the Manhattan Republican party. They have three children.
A few weeks later, following the backlash to his plan, Mr Malpass wrote a letter to the Journal saying he had only offered one possible option for Mexico, and would still support US assistance to the country.
But in late 2017, at a speaking engagement at the Council on Foreign Relations, Mr Malpass pointed to policy errors at the time of the Mexican peso crisis to explain the failings of the North American Free Trade Agreement.
“When we negotiated Nafta, the peso was at 3.5, and yesterday it was at 18.55,” Mr Malpass said. “And over those years, the 25 years or so since Nafta was concluded, it wasn’t maintained, and so that means imbalances built up.”
IMF-bashing on Argentina
As Mr Malpass’s career proceeded, a growing scepticism of multilateral institutions emerged, with the IMF emerging as a primary target of his wrath.
In late 2001, at the height of the Argentine debt crisis, Mr Malpass wrote in another Journal opinion piece that it was “tempting to argue for the abolition” of the IMF.
“The IMF's policy pattern is as clear in Argentina as in previous collapses around the globe,” he wrote. “It gives countries bad economic advice, then lends heavily to them, allows them to waste the new funds, and watches as the government’s popularity plummets.”
Over the past two years, however, as the US Treasury’s top official on international affairs, Mr Malpass did work with the IMF on a new Argentine bailout, the largest in the fund’s history. A person familiar with the matter said this included provisions limiting the money supply, which stabilised the peso, lowered inflation and allowed Argentina to rebuild its reserves.
All clear on the debt crisis
A day after Mr Spector resigned from Bear following the collapse of two of the bank’s hedge funds in August 2007, Mr Malpass wrote an opinion piece in the Journal saying that concerns about a spillover from the mortgage crisis to the real economy were overblown.
“Main Street is not that fickle. Housing and debt markets are not that big a part of the US economy, or of job creation. It’s more likely the economy is sturdy and will grow solidly in coming months, and perhaps years,” he wrote.
Mr Malpass was not the only economist trying to offer soothing messages at the time — earlier in the year, Ben Bernanke, the then Fed chairman, had said the mortgage crisis was likely to be “contained”.
“Economists should help clients sort through risks, I don’t expect them to be in the crystal ball business,” Mr Spector said.
In response to questions about Mr Malpass’s record at Bear Stearns, a US Treasury spokesman said Mr Malpass had “40 years of experience in international economics in both the public and private sector”.
“His varied experiences at the highest levels of Wall Street and Washington will be instrumental at the World Bank, where he will advance pro-growth, anti-poverty economic policies,” the Treasury spokesperson added.
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