What Is Rubin’s Legacy?

As the candidates for the next NEC chair narrow, a debate has erupted regarding the suitability of candidates either too directly related to former US Treasury Secretary Robert Rubin or Wall Street.  Mark Thoma came out first:

I still think a break from the Wall Street connected side of the Clinton administration would have political value.

Brad DeLong subsequently declared his support for Gene Sperling.  Next up was Felix Salmon, who, like Thoma, notes that the three leading candidates, Gene Sperling, Roger Altman, and Richard Levin, are all “multi-millionaires with close ties to Wall Street.”  He singles out Sperling for a particularly harsh criticism, first questioning the nature of Sperling’s ties to Wall Street:

…there’s Sperling, who in some ways is the worst of the three when it comes to grubbing money from Wall Street.

Salmon relies on Ezra Klein to paint a picture of Sperling as a low-class influence peddler, and then extends his attack to Sperling’s competence:

Noam Scheiber does his best to defend Sperling, but is far from persuasive—the general picture he paints is of a man whose heart might be in the right place but who never seems to get anything done. The last time he was at the NEC he sat quietly by while Treasury pushed through various deregulatory measures; within the Obama administration his main claim to fame seems to be the bank tax, which never actually got enacted.

Finally, he echo’s Thoma’s concerns:

More generally, Sperling has done nothing to counter the general impression that he’s one of many Rubinites in the administration, in the context of a political atmosphere where one of the few points of agreement between the right and left is that the departure of Summers can and should be taken as an opportunity to finally put as much distance between Obama and Rubin as possible.

This elicits a response from DeLong, who defines himself as a long-time Rubinite and launches into a spirited defense of Rubin:

Robert Rubin went to work for the Clinton Administration in 1993 with four goals: (1) to make the decision-making process work smoothly; (2) to match the tax revenues of the federal government to its spending commitments; (3) to make the tax and transfer system more progressive so that people like him paid more and America’s working class paid less; and (4) to make the financial system work more smoothly and transparently and so diminish the rents earned because of market position and institutional connections by people like him.

(1), (2), and (3) were big successes. (4) was a failure–the belief that financial deregulation would diminish Wall Street payouts because organizations like Goldman Sachs would face new competition from deep-pocket commercial banks–turned out to be wrong. Why it was wrong I do not understand. But it was a failure. However, it was not a catastrophic failure–it was not the repeal of Glass-Steagall that caused our current downturn, but rather other and different regulatory failures long after Rubin had left office…

DeLong does acknowledge that Citigroup shareholders have a legitimate gripe, and so do the American people:

I think that if you are an American or a citizen of the world you have a beef with Rubin for believing–as I did–in the “Greenspanist” doctrine that the Federal Reserve had the tools to put a firewall between finance and employment and should thus regard bubbles principally with benign neglect.

What I find curious is that DeLong neglects to mention what I believe was a central element of the Rubin agenda, and an element that was in fact the most disastrous in the long run – the strong Dollar policy.

The strong Dollar policy takes shape in 1995.  At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests.  This should have been more obvious at the time given that China was last named a currency manipulator was 1994, but the immensity of that decision was lost as the tech boom engulfed America.

Moreover, Rubin adds insult to injury in the Asian Financial Crisis, by using the IMF as a club to enact far reaching reforms on nations seeking aid.  The lesson learned – never, ever run a current account deficit.  Accumulating massive reserves is the absolute only way to guarantee you can always tell the nice men from the IMF and the US Treasury to get off your front porch.

In effect, Rubin encourages the US to unilaterally enact a new Plaza Accord on itself.  Michael Pettis reminds us of what the Plaza Accord meant for Japan:

Not only did Tokyo wait way too long to begin the rebalancing process, but when the rest of the world (i.e. the US) refused to absorb its huge and expanding trade surplus and forced up the value of the yen, Tokyo made things worse – it counteracted the impact of the rising yen by expanding investment, expanding credit, and lowering interest rates.  This accelerated Japan’s structural imbalances, set off a further frenzied rise in asset prices and capacity, and worsened the eventual adjustment.  This also seems to have happened after China began revaluing the RMB after July 2005.

This sounds like an eerily similar story.  To counteract the impact of the rising trade deficit, US policymakers increasingly relied on asset bubbles to support domestic demand.  It goes beyond benign neglect, which assumes you know acknowledge you have a bubble.  US policymakers didn’t even see the train wreck ahead.  They simply enjoyed the fruits of the bubble thinking it reflected sound economic policy.  Back to 2005:

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

At least Japan had the excuse that they were forced into the Plaza Accord, perhaps justifiably given their expanding current account surplus of the time.  Rubin has no such excuse – the strong dollar policy was entirely a self inflicted wound that goes far beyond simple “benign neglect” of bubbles.  To be sure, Yves Smith argues in Econned that Asian central banks were threatening to sell Dollar assets, but adds that the main motivation was supporting Japan.  Most importantly, Rubin entirely missed how Chinese policymakers would take advantage of America’s newfound love for an artificially strong currency.

But did he really miss it?  Wall Street was making money hand over foot intermediating the current account deficit, which raises the question that many of us still have:  Was Rubin working for the American people or Wall Street?  As far as I can tell, the greatest coup of the last two decades was how easily Wall Street managed to secure the support of Democrats, knowing of course they always had the support of Republicans.

And what has been the ultimate achievement then of the Rubin era?  A lost decade for jobs and industrial production and a massively unbalanced global economy.  The promised compensating  job surge in other sectors has so far been absent.  Ultimately, didn’t Rubin simply lay the foundation for today’s economy that is decried by DeLong?:

From here it does look like a two-tier, profit-driven recovery–no parking places within a quarter mile of Tiffanys and long lines at Williams and Sonoma and Sur la Table, with people buying $12 cans of almond paste, while some of my daughter’s high school classmates are now being told they cannot afford to go to college next year.

And by the way, it is not clear that we did China any favors either by the strong Dollar policy, as they are now faced with a massive internal rebalancing act – there is no guarantee anymore that China is the future, nor that China will escape the fate of Japan.

I agree with DeLong that being associated with the Wall Street, the Clinton Administration in general and Rubin in particular should not alone disqualify one from serving in the Obama Administration.  But we shouldn’t give Rubin a free pass either.  The strong dollar policy reinforced and entrenched massive and disruptive distortions to patterns of global consumption and production.  Unwinding those disruptions is proving to be very costly.  The long-term impact of the strong Dollar policy needs to be counted among Rubin’s legacies.

• Become A Funded Futures Trader