FINANCE MINISTER OF THE YEAR 1996 - Rubin: quietly getting things done

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Robert Rubin, secretary of the US treasury, has faced tough situations and made tough decisions. In a remarkably short time, he dealt with the Mexico crisis and put the dollar back on course, demonstrating a rare grasp of both domestic politics and global markets. By Katharine Morton

FINANCE MINISTER OF THE YEAR

When Robert Rubin became treasury secretary in January 1995 he faced his first real test immediately: the escalating Mexico crisis.

"It was a major thing to be confronted with, and it took a great deal of guts to react as quickly as he did under the gun," says a former colleague from Rubin's days on Wall Street. Rubin was at Goldman Sachs for 26 years before leaving in 1992 to become Bill Clinton's chief economic adviser, directing the National Economic Council.

As the localized risk of Mexico's defaulting snowballed into a potential global crisis for all emerging markets, Rubin played a leading role in arranging the $40 billion rescue plan, $12 billion of which came from the US.

But there had been many who had turned up their noses at the idea of having a Wall Street man in the treasury. The question on many lips was: would he look after his own kind?

"Unequivocally, the last thing he would do would be to bail out his former chums on Wall Street," comments the former colleague. "The criticisms levelled at him after the Mexico affair were unfair."

Nonetheless, Wall Street and the business community should be glad that he is there. Indeed, with hindsight, the price the US paid to bail out Mexico was cheap compared with the damage that could have been done had it been allowed to default.

The Mexico crisis characterized Rubin's modus operandi: frequently working in the background, fixing, negotiating, broking, and quietly getting things done. But it is not the only example where his mix of financial acumen and low-profile action have produced results.

One of Rubin's most impressive achievements was to turn around the fortunes of the dollar in the summer of 1995. His predecessor at the treasury, Lloyd Bentsen, was an advocate of a weaker dollar to help US exporters. But when it became clear that it was time to raise the dollar from its post-World War II lows against the yen, the market proved resistant to government intervention. Rubin changed that. His strategy successfully broke the link between the issue of trade and the value of the dollar, and eventually persuaded the market to believe that the US currency would no longer be used as a trade tool.

This was backed by very clever intervention tactics. "He has an instinctive feel for when to intervene," says an international economist. The Fed became more discerning about when and how to intervene, catching the right trigger levels, coordinating with other central banks, and eventually persuading the market that it could be caught short if it bet against the dollar. This approach was in marked contrast to the Bank of Japan, which hammered the market daily with yen sales, costing itself a fortune.

Before joining Clinton's team, Rubin, educated at Harvard, Yale and the London School of Economics, was the head of the fixed-income department at Goldman Sachs and spent two years as co-senior partner and co-chairman.

"What's unusual about Goldman Sachs is that we have developed a teamwork culture and encouraged a cross-disciplinary approach," says a former colleague from the investment bank. "A great enemy in Washington is turf orientation. It is fascinating and sad that Bob's qualities are considered such a rarity."

Open-door policy

The 58-year-old Rubin has an open-door and relaxed managerial style. "I get the people who contribute most to a discussion, sit them at a table, forget how senior or junior they are and try to thrash something out," he says. "Obviously you have to combine that with the willingness to bring it to a close and make a decision ­ it doesn't do any good simply to have a talk-fest."

According to his colleagues, Rubin has deeply held political views, but is not an ideologue and is very pragmatic about what is workable. Away from his desk, the treasury secretary is an ardent fisherman. A former colleague quips that he "knows some of the fish in South Florida by their first names".

Rubin is convinced that Clinton, if re-elected, will be committed to a dynamic second term. "I know the president quite well," he adds, "and I know he cares enormously about what he accomplishes subsequently. He's got a lot done in the four years he's been here and I think there's a real opportunity to get [more] done."

But Rubin is circumspect about his own future. If Clinton wins, does he hope to be reappointed? "If [the president] so wishes, I assume I would be. There's a question whether I so wish," Rubin adds. "I've got a lot left to do over the next few months and that's what I'll focus on. Then, come the end of the year, the president has to make his decision and I've got to sort out what I'm going to do."

But some in Washington speculate that Rubin is destined for an even higher post, perhaps secretary of state.

Rubin: "Solid growth and low inflation"

Your policy this time last year to push the dollar up against the yen looks right for the Japanese economy. But isn't Japan still in a bad state?

Japan was doing better, and it's maybe softening somewhat.

If you go back four or five years the rest of the world was rightly saying that the US fiscal position was not under control and that we needed to get our deficit down. That view probably did have some effect on the dollar. The consensus here was that it needed to be done, and the president came along and provided the leadership to get it done.

Similarly, the world has an interest in the ability of the second-largest economy to be prosperous. The Japanese monetary authorities need to monitor what's happening and provide whatever mix of monetary and fiscal policy is necessary in order for Japan to have sustained growth.

Were you trying to help Japan with your calls for a strong dollar?

No. We were acting [solely] with respect to the dollar. We were doing so in furtherance of the view that it's in our interest to have a strong dollar. A strong dollar helps us fight inflation and keep interest rates lower. That was what drove us, not an effort to help Japan.

The market got mixed up on the difference between your calls for a "stronger" dollar and calls for a "strong" dollar. Which is it?

As far as I can recollect we have always said a strong dollar. There may be some time, if you say it often enough, that you said stronger when you meant strong. The concept, though, has always been exactly the same, which is a strong dollar.

Does that imply you're happy with current levels?

No. Nor does it imply that I'm not. It really means what I say ­ that a strong dollar is in our interests. I never comment on particular levels, though I guess I did when the dollar was very low when there were imbalances.

Is the US economy going to slow in the second half?

I don't ever try and make projections on quarters or halves, largely because having spent 26 years on Wall Street I became convinced that trying to predict particular numbers for particular quarters ­ while it consumes very large numbers of people ­ is not an enormously fruitful exercise. What is [fruitful] is trying to keep an eye on what is happening over time. The economy is very well positioned right now to continue growing; one quarter may be better, the next may be worse. I don't know what the second half will be like, and nobody else does either, but we are well positioned to have sustained growth and low inflation, assuming we do the right things, don't make major policy mistakes, and that we always allow for the effects of unpredictable exogenous events.

Republican presidential candidate Bob Dole has been saying the economy can grow faster ­ at 4% a year ­ without accelerating inflation. What's your view?

We inherited an economic mess. The seminal event was the deficit reduction measures of 1993. We have taken the right policy steps and have had a very good economy as a consequence. Over time, we can increase the full capacity rate of growth of the economy, but that is done by staying on a fiscally responsible path. That was the threshold issue of 1993. Doing the kind of things the president is talking about ­ [improving] education and training ­ we can increase the full capacity rate of growth.

What will be the economic reforms of a second Clinton term?

Education is very central. And not just in the traditional sense: you come back to how you equip your people over a lifetime to keep up with changes and be productive and therefore competitive.

Dole has come out with $548 billion in tax-cut proposals. How do you defeat that?

The problem is he has no way to pay for it. If such a plan were ever put into action, it would have two effects. One would be severe cuts in the areas he has left on the table. Since that would include education, environmental protection and other areas that are important to our economic future, it would be adverse to the economy. Second, even after doing that, there would still be a vast gap that would substantially increase the deficit. That would increase interest rates and undermine confidence in the economy. The American people understand there is no free lunch in economic policy. There has been a maturing of understanding. While everybody would like to have large tax cuts, large tax cuts that aren't paid for carry with them enormous costs.

Should inflation be brought down further to create price stability?

I don't want to say I think one rate of inflation is okay and another is not, but what you need to do is have solid growth and low inflation. We have that solid growth and low inflation.

Has your Wall Street experience helped you second-guess the markets?

I don't believe in second-guessing the markets. My Wall Street experience has been enormously helpful, as has my two years at the White House and my two years here. Global financial markets are a large part of what determines interest rates. It's very important in a modern finance ministry to have a real understanding of how global markets work.

You were opposed to inflation-indexed bonds. Why did you change your mind?

Because you need to keep an open mind. I became persuaded that they would be a very useful savings vehicle for middle-income people. Once I became convinced of that, everything else fell into place because then I could see this as having potentially a very large market and enabling the government to finance more cheaply. When it was originally described to me, I thought it would be limited to certain kinds of institutions.

The markets were disappointed that you weren't going to issue all along the yield curve.

We are going to, in time. I don't think initially we want to issue all along the yield curve because if we do that it will reduce the liquidity of each of issue. The object over time is to have issues ­ not all across the yield curve because it is already an adjustable mechanism ­ but we need some number of maturities. At least initially [we] will start at 10-year or 30-year.

Are you going to allow them to be stripped? Some people have said you won't.

That's not true ­ it was [just] what someone reported. Our present thought is they should be strippable from the very beginning.

Do you believe they could be a useful tool to help the Fed ­ for example to see what the market predicts for inflation?

That could be a side benefit, but it's not a reason for doing it.

In retrospect, the policy of helping Mexico financially looks the right one.

It was right whether it worked or didn't work. We had an enormous self-interest in seeing that Mexico didn't go out of control and the only way we could pursue that interest was through that support programme. I would say that today just as surely if it hadn't worked. [But] it is working. Mexico's got a lot to do, obviously, but we've got most of our money back.

How many countries around the world would a similar factor apply to?

Mexico was close to unique.

Would Russia come into the same boat?

I'd say unique, or close to unique. One of the clear lessons of the Mexican situation was that in a global economy there has to be some way of dealing with these kinds of situations. The president had a lot of guts to take that on. It was unpopular then and it's still unpopular, even though we've got 75% of our money back.

I went in to see him that Monday night at the Oval office and said, "Mr President, we're within a few days of default and it would have these consequences in our view, including an effect on other countries" ­ even though some people were sceptical about that. I said to him it was not popular in the polls, but that it would be the right thing to do for the country. He said, "Let's go ahead and do it."

The president's political courage saved the world a major problem, but what we have learned out of this is we must have some enhanced multilateral capability.