‘Tough Choices’ in a rough economy

When Robert E. Rubin went to work as an economic advisor to President Clinton in 1993, the federal budget deficit was nearly $300 billion, 4.7% of the country’s annual output of goods and services, or gross domestic product, at that time.

Rubin, first as the organizer of Clinton’s National Economic Council and then as secretary of the Treasury, devised the policies that eliminated that budget deficit. As a result, Rubin says, interest rates declined, business people felt more confident about investing and the United States saw the great economic boom of the 1990s.

Today the deficit for fiscal 2004 is climbing toward $500 billion, 4.5% of today’s larger GDP. Rubin, back in private business since 1999, writes in his new book that he fears continued large deficits will “diminish confidence in our economy and currency abroad, impair the ability of the federal government to serve purposes the American people wish it to serve (including Social Security and Medicare) and undermine our resilience in dealing with future recessions or emergencies.”

The Bush administration and many Republican economists disagree with Rubin’s analysis, just as they discount his budget balancing achievements of the ‘90s. Still, the economy’s record under Rubin’s stewardship looks good, and today’s many economic uncertainties lend weight to his fears about the present.

One reason Rubin has written this book, in collaboration with journalist Jacob Weisberg, is to remind Americans of his and Clinton’s triumphs and, by contrast, the perils of the present. But “In an Uncertain World” is not a mere partisan argument about Washington politics or a settling of scores with former colleagues and adversaries.

Too impersonal and bland for a biography, yet too personal for a history, the book is a contemplation on how the world has changed in the nearly 40 years of Rubin’s professional career at the pinnacle of Wall Street finance, where he led the elite firm Goldman Sachs, then at the White House and Treasury and now as a director of CitiGroup, the world’s largest U.S.-based banking institution.

Rubin was part of a quiet transformation of the world’s economies in which investment flowed to countries and purposes as it never had before. A graduate of Harvard College and Yale Law School, Rubin joined Goldman Sachs in risk arbitrage, an activity that resembles high-stakes gambling in which investment houses trade currencies, bonds, options, interest rate swaps and many other arcane financial instruments. The purpose of such gambling is to hedge risks and thus enable transactions across companies, countries and continents.

Poor countries were able to get more capital through international financial markets than ever before. “It’s no longer just banks,” Rubin writes, “but investment banks, endowments, pension funds, mutual funds and, through them, retail investors who have assets” in the developing world.

The volume of world trade in merchandise and services multiplied a thousandfold, accompanied by almost incalculable amounts of trading in the currencies and financial notes that define the global economy. When Rubin joined Goldman Sachs in 1966, it had 650 employees, all in the United States. When he left for Washington, it had more than 6,500 employees around the world.

The very day Rubin was sworn in as Treasury secretary in January 1995, Mexico was facing defaults on its international debts. As the country had been able to borrow and attract investment from the richer countries, particularly U.S. banks and institutions, so it had taken on more debt than its fledgling economy could handle. In late 1994 and early ‘95, a loss of confidence among international investors was forcing the nation to the wall. “Mexico, despite reforms in many areas, had made the mistake of borrowing too much in good times, leaving it vulnerable when sentiment shifted,” Rubin writes, applying a mantra he uses repeatedly to lecture about the U.S. government today.

Mexico’s default would have hurt the U.S. and international economies and condemned that country to another decade of underdevelopment and deep poverty. So Rubin, Federal Reserve Chairman Alan Greenspan and Rubin’s deputy Lawrence Summers, later Treasury secretary and now president of Harvard University, lobbied markets and governments around the world to gain support for Mexico. Ultimately, Clinton intervened, congressional leaders of both parties cooperated, loans were made and the crisis passed.

Government did not always work so cooperatively. In the fall of 1994, Clinton and the Newt Gingrich-led Republican Congress played a game of budgetary chicken that shut down the government. Rubin found a way to borrow from federal trust funds to finance day-to-day operations, then was vilified by Gingrich and others and threatened with impeachment for his ingenuity.

In the end, his tactics helped the administration win that fight, and soon opposing politicians were again cordial. But Rubin writes: “I couldn’t relate to the idea that you shouldn’t take it personally when someone calls you a liar and a thief,” as if Washington were tougher and meaner than the cutthroat Wall Street where he made his fortune.

Late in Rubin’s term, the new world of loans and investment flowing to developing countries suffered seizures. The Asian crisis erupted in 1997 with bankruptcies in Thailand spreading to all the countries of the region. Lenders and investors from the United States and other countries had become overenthusiastic, and so had borrowers. Anwar Ibrahim, then deputy prime minister of Malaysia, told Rubin: “For every bad borrower there is a bad lender.”

Rubin relates how crisis followed crisis, from Asia to Russia to Brazil to an obscure firm of investment traders and Nobel economists in Greenwich, Conn., named Long-Term Capital Management. All of them, giant nations and alchemist computer traders thinking they had a foolproof system, threatened the stability of the world economy and had to be rescued and supported by government efforts.

Rubin, who made his fortune and spent most of his career trading in high-risk markets, left the Treasury in 1999 stoically respectful of how the world had changed and would change. “The entire Asia experience left me with the view that future financial crises are almost surely inevitable and could be even more severe,” he writes. “The markets are getting bigger, information is moving faster and trade and capital markets have continued to integrate.”

On the other hand, Rubin, who was in his midtown Manhattan office at CitiGroup on Sept. 11, 2001, when terrorist attacks destroyed the World Trade Center and part of the Pentagon, writes that he was reassured by the ability of governments and markets to keep the world financial system functioning.

But he is sternly critical of the tax cuts and growing deficit financing of the Bush administration. “Fiscal ill-discipline,” he writes, “could be especially dangerous to the United States under current circumstances, when we are dependent on large inflows of foreign capital to sustain a trade deficit and substantial savings shortfall.”

As it happens, signals are shifting at this moment in the U.S. economy. Interest rates probably will be raised in the months ahead. The dollar is falling in value and global investors are buying gold. Rubin writes that there is trouble ahead, even if others are oblivious, so far.