Racing back to Washington yesterday on the supersonic Concorde after the worst day in stock market history, a weary Treasury Secretary James A. Baker III looked for slivers of optimism in the chaos on Wall Street that he inadvertently had helped to spawn.
At least the currency markets and the bond markets were stable, he told a friend on the flight. And he had reached an understanding with West German officials on exchange rates and economic policy cooperation.
But Baker, known for his caution, precision and keen political instincts, had apparently pressed too hard in his public lobbying of the West Germans, and in so doing shook confidence on Wall Street and contributed to Monday's market collapse, according to many analysts.
The irony was that Wall Street apparently lost confidence in the one Reagan administration official it had depended on for stability, and Baker recognized that when he returned to Washington, he would have to move quickly to try and repair the damage.
Five hours after Baker landed, President Reagan made a sudden turnaround and announced he would authorize discussions with Congress about a possible budget compromise. This was intended as a signal to the financial markets that Reagan was willing to move against the federal budget deficit. Only yesterday morning, before Baker returned, Office of Management and Budget Director James C. Miller III and White House spokesman Marlin Fitzwater had thrown cold water on the idea of such talks.
The Reagan statement, said one official, was a "total political document," crafted by Baker, Federal Reserve Board chairman Alan Greenspan, White House chief of staff Howard H. Baker Jr. and others, including Communications Director Tom Griscom. The statement included the treasury secretary's points about the stock and bond markets being stable, and referred to his meetings in West Germany.
But it did not ameliorate the criticism from Wall Street, where Baker's hard-earned reputation as the realist and supernegotiator of the Reagan presidency has been tarnished.
Dollar bills with his signature were props for derisive jokes in the big investment houses. Groundless rumors spread in Washington that he would be replaced by Paul A. Volcker, the former Federal Reserve chairman. Even some White House officials wondered among themselves what Baker was doing.
Privately, Baker has not disputed the notion that his remarks about West Germany had the "unintended side effect" of creating anxiety in the markets, according to an official familiar with his views. But Baker maintains that he was intent on dealing with the prospect of rising interest rates in West Germany, and that his warnings to Bonn worked, calming fears of higher interest rates and renewed inflation.
"Where it had a bad effect," said the official, was in suggesting that the whole mechanism "that gave people a lot of comfort," the so-called Louvre accord that established exchange-rate levels and economic cooperation, "was going to come unglued."
On Wall Street, the view was that Baker "made things worse, not better," said political analyst Norman Ornstein. "He helped to foster a sense of unease among the foreigners who hold American stocks. What you have here is people who are feeling like they have been thrown on a roller coaster and there is no driver. They look to Baker to jump in and grab control of that steering wheel and do something. They want a sense you have someone who recognizes the problem."
"Up to now there has been a pervasive feeling of unease about the administration's lack of visible concern," Ornstein said. "And there is concern that when the market drops 500 points you don't have an administration that says, 'This is a fundamentally stable situation.' "
Baker's comments were "ill-timed and unfortunte and were aimed in one direction and had fallout in another," Ornstein said, but he added that Baker alone cannot be held responsible for the drop of more than 500 points in the Dow Jones Industrial Average.
A Wall Street analyst who knows Baker well and asked not to be identified said the treasury secretary had a "blind spot" for how his remarks would affect the stock market. "His background is a politician, not a financier or monetary analyst," he said. "He's never developed an ear for the music in this area, so he tends to have blind spots with respect to his public statements."
While Baker has taken a preeminent position as Reagan's chief economic policymaker, many analysts interpreted Monday's stock market plunge as a message that the White House is drifting away from dealing with problems such as the budget and trade deficits.
"The job for Baker is to make sure this administration has a very clearly articulated set of policies governing the economic parameters under its control," Frederick N. Khedouri, a former Reagan administration official who is now an investment banker with the Wall Street securities firm Bear, Stearns & Co. Inc. said. "That has been lost. The strength of the previous seven years was the markets, and the people had a clear sense of policy. He's the only one who can get us back to that."
He added that Baker needs to "give this administration a sense of coherence again in economic policy" and that "when the difficult moments come, he'll be there."
Yesterday's gesture of conciliation to Congress on the budget came after recent partisan finger-pointing over the reasons for the stock market slide. In weekend television interviews, before Monday's huge drop, Baker said the market was dropping because of the tax bills produced by the Democratic-controlled Congress.
Baker, who often works closely with Democrats and helped build bipartisan coalitions for Reagan in the first and second terms, antagonized the Democrats. "If intellectual dishonesty were a crime, Jim Baker would get 20 years," said House Majority Whip Tony Coelho (D-Calif.).
Returning to Washington yesterday, Baker realized that a conciliatory approach was called for and that it was "important that Reagan be seen to be leading," said the official familiar with Baker's views.
Reagan had long balked at any budget compromise involving tax increases, and as recently as midday yesterday the president said Congress was responsible for the deficits. But Baker engineered a swift reversal. He met with his top five staff members; he spoke by telephone with James Phelan, chairman of the New York Stock Exchange; he then conferred in his Treasury office with Greenspan, chief of staff Howard H. Baker Jr., and Beryl Sprinkel, chairman of the Council of Economic Advisers.
After working on a draft of the statement, they walked over to the residential quarters at the White House to present it to a hesitant Reagan. The president accepted the statement, but it was only a gesture in what Baker has acknowledged has been a difficult effort to convince Reagan to strike a deal with Congress.
Even before the president read the statement, there were doubts about whether Baker could bring Reagan to a budget compromise. Baker "is one of the smartest public servants we ever had," said Rudolph Penner, former director of the Congressional Budget Office. But, he added, "I would like to see him more forceful with the president on the budget. The stubbornness of the president on the issue is extremely well documented."