Review of Robert Rubin’s In an Uncertain World: Tough Choices from Wall Street to Washington.
Robert Rubin was secretary of the treasury from 1995 to 1999. He presided over the largest expansion of the US economy in history. Rubin’s best known for being fiscally conservative and setting the US economy on course to turn annual deficits into surpluses.
Rubin’s new book is part memoir part policy. The books main intellectual focus is on recognizing and dealing with uncertainty in policy making. He looks back at his time with Goldman Sachs, starting and heading President Clinton’s National Economic Council, Secretary of the Treasury from 95 to 99, and finally as Director of Citi Group.
The heart of this book is recognizing and treating uncertainty when formulating policy. Rubin explains how he uses “probabilistic decision making”, assigning likelihoods to various potential outcomes. This is largely the TPP mantra, and this book does an eloquent job of explaining this viewpoint, and gives vivid examples from dealing with the financial crises to balancing the federal budget.
Asian Financial Crisis
Rubin’s biggest challenges were dealing with multiple financial crises in emerging economies. Within 30 minutes of being sworn in as Treasury Secretary in 1995, Rubin was dealing with a looming Mexican bond default. In 1997, crisis struck again in Thailand, followed by Indonesia, Russia, Brazil, along with other Asian nations.
At the heart of these crises were nations with a fixed (and usually over valued) exchange rate, poor fiscal health, and high level’s of short term debt coming due. International creditors would begin to get worried about default, and refuse to lend money to roll over these debts. This short term panic pushed exchange rates lower and interest rates sky high (creditor’s demanding extremely high return’s on their investment to cover country risk) which drained government reserves and stopped economic growth.
Rubin believed that with some reforms, these countries economies were basically sound – and needed a credit guarantee in the near term to roll over debts and resume growth.
In deciding whether to risk our tax dollars, they didn’t know before hand if the money would be sufficient to keep the nations solvent or if the level of private financial flows was so large as to make our credit guarantees worthless and lose our money.
There was also the issue of moral hazard. Investor’s during the booming 90s had invested heavily in developing countries because of the pressure to find new markets, and the high growth rates they promised. Investors were disregarding the risk inherent in developing country investments. Bailing them out would reward their disregard for risk, instead of teaching markets a lesson by reminding them that high growth comes with high risk. After carefully weighing these issues, Treasury decided that the potential for financial contagion and global recession outweighed the moral hazard argument.
Federal Budget and Deficits
Rubin’s second big act in office was to work on reducing our federal deficit. President Clinton was committed to reducing our deficit from the high spending, low tax years of the Regan, Bush I presidencies. All of Clinton’s close advisors believed in reducing the deficit, but there were different opinions on how quickly to do it. There was a serious political risk that the public would not understand the importance to the US economy of reducing the deficit, especially when compared to easily grasped programs such as healthcare and education.
No one knew how important reducing the federal deficit would be to the strong economy of the late 90s. If interest rates didn’t drop, the economy kick-start, or foreign investment pour in, the political cost to Clinton could have been huge. The aggressive defecit reduction plan they embarked on was based on a thoroughly investigated debate where all sides had their point of view heard.