Robert Rubin contributed to systemic risk as a deregulatory Treasury secretary and later as a top Citigroup (C) executive. Now he has warned the Federal Reserve about it. In an op-ed article (paywall) written with Harvard economist Martin Feldstein (President Ronald Reagan’s chief economic adviser) and published on Tuesday in the Wall Street Journal, Rubin said it’s “imperative” that the Fed have “a realistic view of the breadth of the possible systemic risks and of the tools that are available to deal with such risks.”
Fed officials. including Chair Janet Yellen, frequently flag concerns about excesses in asset markets, so it’s not immediately clear what Rubin and Feldstein hoped to contribute. Rubin, a Democrat, and Feldstein, a Republican, didn’t say the Fed should raise interest rates to quiet financial speculation. “Weak labor markets are and should be a deep concern and a pressing issue,” they wrote. This means they agree with the Fed that—for now, at least—the right medicine is regulation.
Their main point seems to be to question the potency of the medicine the Fed has available. “Current tools are not nearly as broad and comprehensive as the existing range of systemic risks,” they wrote. They also worry about whether the Fed can put its tools to work quickly enough. “It might take considerable time for the FSOC [Financial Stability Oversight Council] and the relevant agencies to reach a decision to act,” they wrote.
Rubin and Feldstein highlighted various indications that markets are overheated, such as the low yields on junk bonds and growth in “covenant-light” loans, before repeating that the Fed should not raise interest rates now—and then half-reversing themselves by writing, “the Fed should also take into consideration the possibility of excesses brought on by low interest rates that could create financial crises.” That leads back to their saying again that the Fed should have a “realistic view” of the power of the regulatory tools at its disposal.
Rubin was at Citigroup from 2000 to 2009, encompassing a period in which the banking giant made unwise investments and then nearly collapsed in the financial crisis. He was a chairman of the Citigroup executive committee, a senior counselor, and briefly, the company’s chairman. When Citigroup hit bottom, the federal government was forced to inject $45 billion and guarantee some $300 billion of illiquid assets. In a 2012 article in Bloomberg Businessweek, Nassim Nicholas Taleb, author of The Black Swan, was quoted as saying, “Nobody on this planet represents more vividly the scam of the banking industry.”
Rubin, who is now co-chairman of the Council on Foreign Relations, doesn’t deny that mistakes were made, but he portrays the culpability as collective, not personal. “All of us in the industry who failed to see the potential for this serious crisis and failed to see the multiple factors at work bear responsibility,” Rubin told members of the Financial Crisis Inquiry Commission in 2010.