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Rubin: Romancing Those Bondholders

May 16, 1999|Charles R. Morris | Charles R. Morris, a Wall Street consultant, is author of "The Cost of Good Intentions," about the New York fiscal crisis. His new book, "Money, Greed and Risk: Why Financial Crashes and Crises Happen," will be published in August

NEW YORK — Governments usually get far too much credit for "managing" the economy when things go well. But the accolades being showered on retiring Treasury Secretary Robert E. Rubin, the chief architect of the Clinton administration's economic policy for the past six years, are mostly deserved, not so much for what he did as for what he symbolized.

Rubin inherited a quarter-century of almost malignly incompetent economic policymaking by a succession of presidents of both parties. President Lyndon B. Johnson chose inflation over taxation to finance his unpopular war in Vietnam. President Richard M. Nixon debased the currency to rev up a short-lived boom in time for the 1972 election. Jimmy Carter printed dollars in Weimar-sized carloads in hope of inflating away the '70s oil-price increases. Ronald Reagan quadrupled the national debt so he could ratchet up military spending at the same time as he pushed through highly popular tax cuts.

The Clinton team came to office with a superficial understanding of textbook economics, but little appreciation of real financial markets. Consciously aping John F. Kennedy's "Let's get the country moving again" campaign theme, they promised a melange of ill-considered interventions, like the takeover of the health-care industry, in the activist image of president as economic helmsman.

But the 1990s were different: The country's creditors, the people who hold its bonds, were in quiet revolt. They couldn't haul the United States into bankruptcy court, but they could dump its IOUs whenever it acted irresponsibly. A sell-off of bonds causes interest rates to rise: The buyers of your bonds have to be paid more to hold on to them. Interest-rate hikes trash the stock market and devastate housing and business investment, which is a heavy club to hold over a president hoping to be remembered for his economic achievements.

Think of Rubin as the receiver for the benefit of creditors, the court-appointed fiduciary assigned to keep the government on the straight and narrow. His long career at Goldman, Sachs & Co. and his judicious mien and general common sense made him perfect for the job. Unlike the rest of the Clinton team, he was a member of the fraternity, rather than an academic or a politician. He'd run Goldman Sachs' stock and bond departments, so he understood the fragility of investor sentiment. The caution of his public statements was music to bondholders' ears.

The new rules were simple. The government could do whatever it pleased--bondholders are born agnostics--it just couldn't increase spending, at all, on anything. It took President Bill Clinton a couple of years to get used to it, but this most adaptable of presidents now visibly enjoys lecturing Republicans on the irresponsibility of tax cuts that risk unbalancing the federal budget.

The current economic boom is not a gift from the government. It is the result of 20 years of industrial restructuring in the wake of the devastating assault on U.S. markets by Japanese and European competitors in the 1970s. Even more fundamentally, the economic stability of the 1990s reflects the maturing of the U.S. work force. The 20-year-olds who turned the country upside down in the 1960s and 1970s have transmuted into thick-waisted 40- and 50-year-olds, working hard to pay off mortgages and raise kids. But the administration deserves full marks for standing aside and letting it happen--and most of that credit goes to Rubin.

The record in international economic affairs is more mixed. Academic nattering aside, it is absurd to blame Rubin or the administration for the recent problems in Asia or Russia. It is a policy wonk's delusion that Americans have magic buttons that could have expunged the thousand-year heritage of czardom in Russia or prevented the foolish and wasteful skyscraper competition in the Asian "little tiger" countries.

But Clinton and Rubin deserve much of the blame for the Mexican peso crisis of 1994-1995. Anxious to rebuild its ties with unions in the wake of the North American Free Trade Agreement, and fighting off an odd alliance of Richard A. Gephardt Democrats, Patrick J. Buchanan Republicans and H. Ross Perot-style populists, the administration encouraged a consumer-goods export boom to Mexico. It was financed mostly by hot-money mutual-fund investments in short-term Mexican securities.

Rubin had to know the export boom to Mexico was an economic absurdity. Poor countries advance by selling to rich countries, not the other way round. But his reassuring presence and the Treasury Department's upbeat reports on the Mexican economy probably extended the Mexican binge and made the ensuing crash far worse than it needed to be. His leadership of the subsequent bailout was in the nature of an atonement.

In the longer view, Rubin will be seen as a pivotal figure in achieving a new political consensus on the public-private balance in a mixed economy. The new balance does not come without costs. Economic adaptability is purchased at the price of insecurity; rapid growth comes with growing economic inequality.

A decade or so from now, when the boomers go on Medicare, the public-private balance will be wrenchingly revised yet again. But the Rubin dispensation has some years left to run, and he will surely be remembered as the most effective Treasury secretary of his era.

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