Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe.
-- Dean Baker
I led with a quote from Dean Baker because he has credibility -- he saw the housing bubble for what it was in 2002 -- but it's hardly a controversial pronouncement. Any fair reading of recent history supports Baker's claim: Greenspan, Rubin, and Rubin's protege Summers deregulated banks and opposed efforts to regulate them--actions that led directly to the financial crisis. In addition to deregulation, the other tenets of the Church of Rubinism, like the Washington Consensus, have been discredited.
But the story of Rubinsism isn't just about a discredited ideology; it's also about conflict of interest, corruption, and corporate incest. And the story is ongoing.
Obama chose as his top economic advisors Summers and Tim Geithner, a protege of both Summers and Rubin whose fingerprints are also all over the crisis. That Obama did so -- and did so with little opposition -- shows the power that Wall Street sholds within the Democratic Party. We may finally be waking up to Wall Street's corrosive impact on our party, but what Robert Kuttner wrote two years ago still holds true:
A mark of Wall Street's ubiquitous power in defining the limits of the politically thinkable is that its power is hardly noticed. The personification of this power is Robert Rubin.
Given Bill Clinton's desire to move the party to the center, it was perhaps inevitable that he would align himself with Rubin. But he didn't officially team up with him during his first run for president. Indeed, during his campaign he struck populist notes and took positions that couldn't have thrilled Rubin. It was only after his winning campaign that he and Rubin joined forces.
It was in the two and a half months between winning the 1992 election and being sworn into office that Bill Clinton did a U-turn on the economy. He had campaigned promising to revise NAFTA, adding labor and environmental provisions and to invest in social programs. But two weeks before his inauguration, he met with then-Goldman Sachs chief Robert Rubin, who convinced him of the urgency of embracing austerity and more liberalization. Rubin told PBS, "President Clinton actually made the decision before he stepped into the Oval Office, during the transition, on what was a dramatic change in economic policy."
One of Clinton's goals was to end the GOP's longtime fund-raising dominance on Wall Street. The mere presence of Rubin in his administration was enough to impress Wall Street, and his policies were a surefire way to get corporate cash flowing into Democratic campaign coffers. Rubin became assistant to the president for economic policy, then Treasury Secretary. From those perches he pursued his patented form of neoliberalism, a shaky stool whose legs were deregulation of markets, budget austerity, and especially trade. He convinced Clinton to move on NAFTA before he moved on health care, but the notorious NAFTA was only part of Rubin's effort to "liberalize" trade:
Mr. Rubin pushed developing countries to open their markets to foreign competition while privatizing state-dominated economies. This approach eventually became known as the Washington consensus and gained deep traction in Latin America, East Asia and Eastern Europe, regions where Citigroup later aggressively pursued new business.
Rubin was unabashed in pushing policies that enriched his once and future employers:
Rubin tends to get a free pass on actions that, in lesser men, would be seen as plain conflicts of interest. For example, Goldman Sachs, which Rubin left to join Clinton, was a prime underwriter of Mexican bonds both before and immediately after the passage of NAFTA, as Faux points out in his book, The Global Class War. Goldman was also the investment bank that underwrote the privatization of the Mexican national phone company, Telmex, in the late 80s. After NAFTA created a gold rush of foreign money into Mexico, enriching Goldman Sachs and its clients and triggering an unsustainable speculative boom followed by a crash, Rubin promoted the bailout of Mexico that made foreign bondholders whole. A little-noticed provision of NAFTA permitted foreign banks to acquire Mexican ones. In 2001, Rubin, back in the private sector, negotiated Citigroup's $12.5 billion acquisition of Mexico's leading bank, Banamex.
Rubin's actions that most directly led to our current crisis were those involving regulation, or lack thereof. It was during Rubin's tenure that people were sounding the alarms about the dangers posed by derivatives. Rubin--along with his deputy Summers and Greenspan--opposed the effort to regulate them.
The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation-a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant-and successful-in their opposition. Nothing was done.
Rubin is known for his charm, self-deprecation, and mellow temperament--traits often credited for his success. But the effort to regulate derivatives aroused his anger.
At an April 21, 1998, meeting with Brooksley Born, the chairwoman of the commodities commission, Mr. Rubin made no secret of his feelings about her proposal. "It was controlled anger. He was very tough," Mr. Greenberger recalls. "I was at several meetings with him, and I've never seen him like that before or after."
Rubin had many critics at the time and has even more now. It's hard to find a progressive economist or even a left-leaning one who praises Rubin's trade policies, which hurt workers in the US and in developing countries. And his fetish for balanced budgets came at the expense of social programs. Joe Stiglitz, who chaired Clinton's Council of Economic Advisors, says Rubin pushed deficit reduction "too far."
Stiglitz went on to wish, with hindsight, that instead of devoting tax revenues to deficit reduction, "Clinton had used the additional funds to finance more investments in R&D, technology, infrastructure and education. & GDP in the year 2000 would have been higher, and the economy's growth potential would have been stronger."
The economic growth under Clinton, said Stiglitz, was due primarily to "the technological innovations -- the computer revolution -- and the process of globalization, changes in the economy that were proceeding before Clinton took office." Dean Baker concurs, pointing out that it was massive consumption driven by the dot-com boom-bubble that led to economic growth:
Rather than investment driving growth during the Clinton boom, the main source of demand growth was consumption. Consumption soared during the Clinton years because the stock market bubble created $10tn of wealth. Stockholders consumed based on their bubble wealth, pushing the saving rate to record lows, and the consumption share of GDP to a record high.
The growth under Clinton-Rubin was unsustainable because it rested on not just the dot-com bubble but also on Rubin's high-dollar policy, which in the short term led to cheap imports and low inflation. But, in addition to killing manufacturing jobs by putting downward pressure on wages, it contributed to a massive trade deficit, which in turn led to a decline in the value of the dollar. Baker:
Rather than handing George Bush a booming economy, Clinton handed over an economy that was propelled by an unsustainable stock bubble and distorted by a hugely over-valued dollar.
But whatever the causes, the nineties economy grew, and a guru was born. When he retired midway through Clinton's second term, the president called Rubin the greatest Treasury Secretary since Alexander Hamilton. He handed off the position to his protege Larry Summers, who picked up where Rubin left off.
A long-time target of Rubin's was the Glass-Steagall Act of 1933, which limited the kind of conflict-of-interest-tainted speculation that had contributed to the Great Depression. The law prevented speculative investment banks from joining with government-supervised and-insured commercial banks. Over the years regulatory exceptions had weakened Glass-Steagall, but the Financial Services Modernization Act killed it. The bill was concocted by Summers and Greenpsan. In his book, "The Age of Turbulence," Greenspan describes this "unsung moment of policymaking."
As it happened, October 14th was the day slated for Larry and me to have our weekly breakfast. We looked at each other and said, "We have to settle this thing."...After an hour or two we divided the pie. Treasury and the Fed came together on a single bill, and up it went to Capitol Hill, where it passed. Historians view the Financial Services Modernization Act as a milestone of business legislation, and I'll always remember it as an unsung moment of policymaking for which there ought to be a little song.
Summers's and Greenspan's bill was known in known in some circles as the "Citigroup Authorization Act" because it served so beautifully the interests of Sandy Weill's emerging behemoth. When Congress passed the bill in November 1999, Citigroup had recently announced a new hire.
Rubin had stepped down as treasury secretary that July. His new job, announced in late October, was chairman of Citi's executive committee. Rubin's initial annual compensation was around $40 million.
Fast forward some nine years to 2008. Plagued by scandal, Larry Summers was no longer president of Harvard, a job he'd gotten with the help of Rubin, one of only seven members of the Harvard Corporation. Summer had spent much of his post-Harvard life working for an elite hedge fund. Citigroup, meanwhile, was on the brink of collapse.
Citigroup's stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.
Rubin, a wise old man of the party, hadn't been much in the news in the intervening years, although he'd made news in 2001 when he tried to get an official at Treasury to convince bond-rating agencies not to downgrade the corporate debt of the infamous Enron, a debtor of Citigroup. The controversy would've harmed a lesser figure, but Rubin made it through unscathed. Also he made period pronouncements. Early in 2008, for example, as the housing bubble burst and threatened the financial system, he claimed that there was, in fact, no crisis but rather a cyclical "periodic disruption" that followed "periodic excess." He did find a scapegoat, however, the uneducated electorate:
And the economic problems that he did acknowledge were blamed on just about everyone but the major U.S. financial players.
Rubin said part of the problem is that we need a "more educated electorate" to hold politicians accountable.
Now attention focused on Rubin's role in wrecking Citigroup. During his tenure shareholders had endured losses of more than seventy percent. A devastating piece in the Times revealed what it called Rubin's "pivotal role" alongside CE Charles Prince in causing "the bank's current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits."
The story quotes a former Citigroup exec who says it was Rubin, not Prince, primarily responsible for Citibank's intense focus on the now-notorious collateralized debt obligations, or C.D.O.'s, bundles of mortgages and other forms of debt that were resold to investors. (AIG's use of C.D.O.'s helped to bring it down.)
"Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process," a former Citigroup executive said of the bank's big C.D.O. push. "Chuck was totally new to the job. He didn't know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, 'You have to take more risk if you want to earn more.' "
Federal regulators decided in the fall to give Citi $306 billion in loans and securities and a direct investment of about $20 billion. Rubin--who recently resigned from Citigroup after "earning" well over $100 million there--has denied he contributed in any way to Citi's downfall. He's clearly fighting to preserve his reputation, which should've been soiled long ago.
You might be familiar with another person who played a role in Citibank's downfall and subsequent gobbling up of taxpayer money: Rubin's protege Tim Geithner.
Geithner's tenure at the New York Fed - which bore the major responsibility for supervising Citigroup - covers a tumultuous span in which the sprawling conglomerate spiraled from the country's biggest banking company to one of its largest welfare cases.
Now under much closer government supervision - after a $52 billion rescue - Citigroup appears headed for dismantling amid a leadership shuffle that included last week's announced departure of former Treasury Secretary Robert Rubin as senior counselor and director.
So to review: Rubin protege Summers wrote a law that benefited Rubin's company and Rubin protege Geithner supervised Rubin's company (looked the other way) as it expanded and made risky moves that eventually brought about the government bailout of the company.
In his job at the New York Fed, Geithner made what the New York Times called "cataclysmic" decisions that exacerbated the financial crisis--experience that in the anti-meritocracy known as the United States qualified him for the most important position in Obama's cabinet.
As president of the Federal Reserve Bank of New York, Mr. Geithner was a key decision maker last September when the government let Lehman Brothers fail and then, two days later, bailed out the insurer American International Group for $85 billion.
Those decisions proved cataclysmic. The markets and the economy have yet to recover from Lehman's failure. The bailout of A.I.G. dealt a further blow to the Fed's credibility - and, by extension, Mr. Geithner's - because it was an abrupt reversal from the no-new-bailouts stance that had applied to Lehman and, initially, to A.I.G. Together, the decisions showed that several months into the financial crisis, officials lacked the information and the insight to correctly call the shots.
Of the three leading contenders for the Democratic nomination, Hillary Clinton was closest to Rubin and other Rubinites; John Edwards was farthest from them. Barack Obama was in the middle, although closer to close-to than far-from. They played important roles on Obama's campaign:
[Rubin's] son, Jamie Rubin, is a major Wall Street fund-raiser for Barack Obama. His former deputy chief of staff, Karen Kornbluh, is Obama's chief domestic policy adviser, and Rubin is also close to Obama's chief of staff, Steve Hildebrand, who used to hold the same position for former Senate Democratic Leader Tom Daschle, another Rubin ally.
Still, there was ambiguity in his relationship to the Wall Street wing of the party. Yes, he headlined the launch of Rubin's Hamilton Project, but he used the opportunity to distance himself from the group on trade. Yes, he got a boatload of money from Wall Street, but he got boatloads of money from small donors as well. And he struck populist fair-trade notes that surely didn't jibe with Rubinities.
After he'd won the nomination, however, things became clearer. He expressed regret for his rhetoric in opposition to NAFTA and hired a Rubinite Wal-Mart defender to head up his economic policy shop.
Senator Obama, Democrat of Illinois, hired Jason Furman, a Harvard-trained economist closely associated with Mr. Rubin, a Wall Street insider who served as President Clinton's Treasury secretary. Labor union leaders criticized the move, and said that "Rubinomics" focused too much on corporate America and not enough on workers.
Things became even clearer after he won the general election.
It is testament to former Treasury Secretary Robert E. Rubin's star power among many Democrats that as President-elect Barack Obama fills out his economic team, a virtual Rubin constellation is taking shape.
The president-elect's choices for his top economic advisers - Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director - are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin's chief of staff in the Treasury Department who followed him to Citigroup, and James S. Rubin, Mr. Rubin's son.
Steve Clemons put it succinctly:
Obama has essentially brought in the same crowd of people or ideological fellow travelers who helped hatch the Clinton era manic finance fest that the Bush administration made worse.
I can only guess why Obama cast his lot with the Rubinites. The simplest answer, that he's one of them, doesn't comport with his record or with his concerted effort to defy classification. If anything, he's presented himself as a Fourth Way Democrat, splitting the difference between Rubinism and progressivism. Even if he shares their views, you'd think could've found neoliberals who hadn't helped to create the crisis.
What's clear, though, is Obama's decision to align himself with Rubinties was fateful. They've made their presence felt, and nothing they've done is a surprise. They're only acting like themselves.
It's no surprise they've rejected nationalization on purely ideological grounds.
We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system.
It's no surprise that Geithner will try to solve the crisis by using taxpayer money to protect from risk hedge funds and other investors.
It's no surprise that Geithner believes that insolvent banks are, in fact, sound.
It's no surprise that his plan is a thinkly disguised version of the plan presented in the fall by Bush Treasury Secretary and former Goldman Sachs exec, Hank Paulson.
It's no surprise that Geithner hired a former Goldman-Sachs lobbyist to be his chief of staff, a person who in his former position fought effort to rein in executive compensation:
a Washington influence-peddler who worked against Obama's effort to limit excessive corporate pay is now a key member of the Obama administration team that is supposed to contain excessive compensation in the AIG case and in general.
It's no surprise that Geithner hired Citigroup's chief economist.
And it's no surprise that Summmers and Geithner didn't see the moral and political problems inherent in allowing the AIG bonuses to go forward.
You might be thinking that Republicans are conspicuously absent from this mini-history. That's because their complicity is well-understood. We know Wall Street tells them what to do. We know they have bailout on their hands. We know they service the rich. But Dems are supposed to be different.
And Obama is different. For example, he supports regulatory reforms that a leading Republicans would never support. But in light of Obama's toxic investment in Rubinites, the question is whether he's sufficiently different. The good news is that Obama, while clearly simpatico with Rubin and his proteges, isn't an ideologue. It's hard to believe he would allow them to sink his presidency. But he needs to throw them-- or at least their ideas --overboard. Soon.
This isn't just Obama's problem, of course. The Democratic Party won't be what it should be until it rejects Rubinism, without condition and without apology. |
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