A TALK WITH TREASURY CHIEF RUBIN...
...about Long-Term Capital, the IMF, Japan, Russia, and the President
Financial storm clouds are swirling around the globe, but there's little sign of a crisis atmosphere inside the U.S. Treasury. Although the New York Federal Reserve Bank had just brokered a $3.65 billion rescue for Long- Term Capital Management, Treasury Secretary Robert E. Rubin was his usual low-key self on Sept. 24 as he chatted with Business Week Editor-in-Chief Stephen B. Shepard, Washington Bureau Chief Lee Walczak, and Washington Senior News Editor Owen Ullmann, interrupting the interview only long enough to take a call from his wife, Judith. Some excerpts:
Q: What is the outlook for the U.S. economy in light of the global crisis?
A: The most likely scenario is solid growth and low inflation. But what has happened abroad has affected certain sectors significantly--for example, agriculture. The risk to our economy has increased as this financial instability spreads and the problems abroad have become greater. It is important to the U.S. that the international community continues everything that is sensible to try to minimize the damage. We in the U.S. need to continue to do everything possible to keep our economy growing, because that is very important to the health of the global economy. It is imperative that we get [International Monetary Fund] funding.
Q: Why was there a bailout of Long-Term Capital Management?
A: That wasn't a bailout. That was an agreement among [creditors] and Long-Term Capital Management, whereby the counterparties, in effect, bought 90% of what had been Long-Term Capital. What the Federal Reserve Bank of New York did was to convene [a meeting]. These creditors made their own private-sector decisions.
Q: There's no government money?
A: There's no public money.
Q: In the wake of Long-Term's rescue, do you think there is a need for tighter regulation of hedge funds?
A: We have asked the Financial Markets Working Group, which includes all the regulators and is chaired by the Secretary of the Treasury, to look at this whole question of hedge funds and determine the implications of their activities so that people can make judgments [about new regulations].
Q: Is there a case to be made for a tax cut to stimulate the economy?
A: A small tax cut provides very little fiscal expansion. But it has the possibility of creating concern in people's minds about whether we still have a firm commitment to fiscal discipline. It's a slippery slope. At a time when there's so much financial instability in the world and so many forces cutting against confidence, I think it's a mistake to do anything that could affect that confidence. That speaks for keeping our fiscal discipline--not having a tax cut.
Q: You and the President have tried to get Japan to stimulate its economy and fix its banks, yet all forms of pressure have pretty much failed. What do you do now?
A: The world really is focused on this. All the talk is that growth in Japan is essential. I think that all any of us can do is try to be constructive in any way we can, in hopes that that can contribute to Japan doing what is in Japan's self-interest. The whole world is rooting for Japan.
Q: What's the outlook for Russia?
A: Russia, obviously, has serious problems. The international community is very supportive of reform. Their government has to make a whole host of decisions about what policy track they want to be on and how they deal with Russia's sovereign dEbt. Unilateralism [in reneging on foreign debts] was not a path they should have taken.
Q: The global crisis has given rise to new proposals for preventing future meltdowns. One is the creation of a global central bank that would be a lender of last resort. What do you think of that?
A: I think the problem that you have with the lender of last resort is, on the one hand, it can provide liquidity at times of crisis, which is good. On the other hand, it raises some ''moral hazard'' issues. You have to reconcile those two issues.
Q: What do you think of the idea of a global ''Chapter 11''process that gives countries time to do a workout?
A: To participate in workouts on a consensual basis seems to me a conceptually sound idea. How you actually implement such a thing in an international regime where there is no Chapter 11 is a challenge.
Q: Do you see any place in the future for some kind of capital controls?
A: There are enormous drawbacks to capital controls that limit currency convertibility. You may get some benefit in the very short term, but there are tremendous issues about workability, the effects in terms of deterring international capital from flowing in. It can readily substitute for doing things a country needs to do. Another [problem] is that if you look at the financial systems in a lot of these countries, they were very badly flawed. If you had better banking systems with better regulation, better credit cultures, and more skilled people, that also would have created a stronger system.
Q: [Former Treasury Secretary] James Baker says Congress shouldn't give the imf the full $18 billion you are seeking until it's completely overhauled. If an ex-Treasury Secretary is saying that, how are you going to get that money?
A: The whole system doesn't function the way it should in certain respects, but that's not an imf problem. It's a broader problem. But in the world that we live in right now, to deal with these problems, it's extremely important to get the funding. I think ultimately that will prevail in the House, but it is a very substantial political challenge.
Q: A number of executives say the Treasury may have been slow in responding to the Asian crisis, and that some remedies were a little too severe. Your response?
A: On the first one, it's just factually wrong. In Thailand, we saw that you had a set of conditions that posed a real risk. That was one that we were very much focused on and concerned about. As soon as a problem developed, we were there. We made the judgment that the most effective way to work on that was through the imf, which I think was correct. If you speak with the Thais today, they will say that we were a very powerful part of trying to deal with this from the beginning. The other thing that we recognized in Mexico [during the 1994-95 peso crisis] was the risk of contagion. There are people who said that I was exaggerating the risk. I always said there was a low probability, but there was a real risk of contagion. That's precisely what has happened.
It's interesting, as people line up, some say the imf was too austere in trying to protect currency rates. There are other people who say that they weren't stringent enough and allowed devaluations. There are some people who say they should have focused solely on macroeconomics and shouldn't have focused on structural reforms. Then there were people who said they didn't focus enough on structural problems and were focused too much on macroeconomics. My own instinct is that they probably had it about right on monetary policy because you wanted to limit the collapse of the currencies. On fiscal policy, I think it's a closer call. Even if they were somewhat too stringent, on the whole they made good judgments in the face of unprecedented and extremely complex problems.
Q: Given the President's difficulties with Republicans in Congress, are hopes for a bipartisan approach to fixing Social Security pretty much dead now?
A: I don't think they should be. Certainly, the President is fully committed to moving ahead with Social Security reform. I think Congress should be similarly committed.
Q: Is the recent volatility in the stock market taking some of the steam out of the drive to invest part of Social Security in equities?
A: I do think that the debate about investing in equities was being affected by the ebullience in the stock market. I think you'd probably have a more balanced discussion today. I have concerns about investment in equities.
Q: You spend a lot of time with the President. People wonder how he is holding up. What is your observation?
A: I can't speak to how he relates to [the Lewinsky scandal] personally. I just don't know. All I can tell you is when dealing with the issues that I deal with him on--and I deal with a lot of issues--he's very effectively focused.
Q: In light of rumors that you plan to leave soon, many businesspeople say they're not that concerned about the President's political future so long as Bob Rubin and Alan Greenspan stick around.
A: I think that represents a fundamental misunderstanding of what has happened over the past six years. The President had a well-developed sense of what he wanted to do in office. He laid out the framework that we've had ever since. He has been the absolute leader of the economic team in this Administration. I think the best bulwark we've had in this Administration against nonsensible decisions is the President.
To read a letter to the editor about this story, click here.
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