Rubin, 56, is a money-world mensch: Miami Beach by way of Harvard and Yale Law, restless energy concealed in a laid-back consensus-maker. With self-effacing charm, he tried to reassure anxious finance ministers around the world that the rescue plan he had designed for Mexico would pay off, even as currency markets were punishing both the peso and the dollar with a sell-off that threatened economies all through Latin America. Tipping so far back in his chair that his aides feared he would fall over, he composed bland statements (“We believe a strong dollar is in America’s national interest”) designed to calm the roiled markets. Then he got up and, beneath the large oil portrait of his distant predecessor, Alexander Hamilton, paced some more.
Sometimes, in currency markets as in everything else, nothing is the right thing to do. As a Wall Street CEO, Rubin earned as much as $25 million a year by not panicking, by trusting the markets and not fighting them. His cool hand seemed like the right touch last week as well. By Friday, Mexico had announced an austerity plan to right its economy, and at the same time the dollar was beginning to recover against the mark and yen. It was not clear whether the boost signaled a true recovery or a brief reprieve, but the news justified Rubin’s patience.
Nonetheless, Washington is not Wall Street, and it is still not certain that Rubin has the right qualities for the peculiar demands of his job. In the post-cold-war era, Treasury has become a cabinet hot seat. While the superpower rivalry was alive, the action was more often at State and Defense. But now the contest is measured by the balance of trade, not missile throw-weights. At the same time, Treasury secretaries have less reliable tools. When the dollar was backed by nuclear weapons, a simple declaration of American confidence was enough to shape up a wobbly market. Today, the task requires careful stage management as well as stage presence. Rubin has yet to show that he is a master of either.
Rubin must operate in a world where American predominance is no longer ensured. The dollar is still a safe haven, especially in the developing world, where the inflation-wary keep billions of greenbacks stuffed under their mattresses. Almost two thirds of the world’s currency reserves are in dollars. But the denominations of Germany and Japan, backed by tight-money policies and offering higher interest rates, have become increasingly beckoning. In the last decade the dollar has lost half its value against the mark and the ven. Since Mexico devalued the peso in December-and America tied its own fortunes to its wobbly neighbor with a bail-out plan - the dollar has dipped an additional 10 percent.
The drop is not necessarily calamitous (following stories). while the dollar has dropped against the mark and the yen, it has held its own against other currencies. A massive flight from the dollar could wreck the world currency system and with it world trade, but such a scenario is remote.
The more serious problem facing the secretary of the Treasury, at least in the short term. is not the dollar but investor confidence in world trade. There is growing interest in the United States and abroad in investing in the developing world, in Asia and more recently in Latin America. But investors want to rest assured that if local currencies collapse, the United States and its main economic allies, the so-called G-7. will ride to the rescue. The United States must play the lead role in guaranteeing stability. It is not it all certain, for instance, that Mexico will recover from its nose? dive. Without serious reforms by its southern neighbor, the United States risks being drawn into the fiscal equivalent of Vietnam.
The administration’s performance so far during the Mexican crisis hasn’t inspired confidence. In December, when the peso was first devalued, Washington was apparently caught by surprise despite numerous warning signs. Rubin’s first attempt at a rescue package-$40 billion in loan guarantees-was so unpopular in congress that Clinton gave up without putting lawmakers to a vote. Rubin and Co. hastened to cobble together loan guarantees from the United States’ own currency-stabilization fund and from the International Monetary Fund. But America’s allies were furious: the finance ministers of the other G-7 countries were told of Rubin’s plan to commit $17.8 billion of IMF funds to Mexico only an hour before the plan went into effect. Rubin did not even make all the phone calls; his deputy, Larry Summers, helped.
It is not likely that America’s G-7 partners will be eager to join in future salvage operations. The risk to the global economy could be seen last week: Brazil had to prop up its currency as an investor confidence continued to slip in Latin America. Slashing its budget, hiking its interest rates, Argentina last week saw 6 percent annual growth turn into the prospect of recession. Rubin will have to spend hours in congressional testimony explaining why the administration did not move faster on Mexico. In part it was a victim of had luck and bad timing. Last year Mexico hid its woes to get through its own presidential elections. When the crisis hit in December, Washington was between Treasury secretaries. LLoyd Bentsen had retired, while Rubin was bonefishing in the Caribbean awaiting his confirmation hearings.
Rubin will be soothing and patient with his interrogators. He has always practiced mild-mannered collegiality. At Goldman, Sachs he embodied the firm ethos, says a former associate: “Never be ostentatious. Live modestly. And keep a closed mouth.” As the director of Clinton’s national economic council in 1993-94, Rubin was so selfeffacing he routinely relinquished valuable “face time” with the president if he had nothing particularly pressing to discuss.
His reticence has often been wise. Rubin and Federal Reserve chairman Alan Greenspan are natural allies and like-minded in their low-keyness. Together, Rubin and Greenspan were a healthy restraining force when the administration wrote its first budget in 1993. Rubin managed to persuade Clinton to keep a lid on spending and focus instead on deficit reduction. The president’s political advisers accused Rubin of being a closet Republican-consultant James Carville called him “Nick,” after Bush’s Treasury secretary, Nick Brady but Clinton was later able to boast that he had at least stemmed the flow of red ink.
Lately, Clinton has backed off on deficit reduction, and Rubin hasn’t pressed him. He lacks the lobbying clout of Bentsen, a former chairman of the Senate Finance Committee, or the manipulative skills of Reagan’s Treasury secretary, James A. Baker. who formed strategic alliances with foreign ministers abroad. Rubin has been admonished about his modesty by former New York governor Mario Cuomo; “You’re in government now,” Cuomo told Rubin. Rubin’s failure to be “more aggressive about projecting” himself “puts us at a disadvantage,” Cuomo says. The former governor says that he counseled Rubin to “start shouting.” Shouting will never be Rubin’s style. He is philosophical about the transition from Wall Street to Washington. “You have to adjust to it rather than make it adjust to you,” he says. But part of that adjustment is knowing when to stop pacing and start pushing.
In 1985, your dollar could buy more than 260 Japanese yen. At the end of last week, the same dollar would have fetched just over 90 yen. That’s a few ticks above the dollar’s 50 year low.
The leaders of the five industrial nations agree to push down the value of the dollar against the yen and the mark.
The price of oil falls below $7 a barrel.
The Iran-Contra affair is revealed.
Alan Greenspan replaces Federal Reserve chief Paul Volcker.
The Dow Jones industrial average crashes, dropping 508 points-the biggest plunge in the stock market’s history.
George Bush is elected president.
The Berlin wall comes down.
The U.S. economy is in a recession. In August, Iraq invades Kuwait.
Another scare for the Dow. From a high of 2999.75 in July the index drops 21 percent.
The Gulf war begins.
The Fed cuts the discount rate a full point to 3.5 percent.
Bill Clinton is elected president.
The Fed raises short-term interest rates.
The Mexican Financial crisis begins after the peso is devalued.
MOST AMERICANS NOW take the dollar’s value more or less for granted. Prices are rising as slowly as at any time in 30 years. But over the last two months, the nightly news has erupted with frightening stories about the collapse of the dollar on foreign exchange markets. The greenback, has lost 10 percent of its value against the German mark and Japanese yen since December. Here’s what it all means:
It hasn’t. The first surprise is that the dollar is weak only against two other big currencies, the yen and the mark. It’s holding its own against gold. and it is steady or rising against 150 other currencies.
If the decline stops soon, probably not much. Most Americans will see the impact only in rising prices of cars, televisions, VCRs, cameras and the hundreds of other imported products that are supplied by Germany and Japan.
Big currency movements like this can get out of hand. Domestic U.S. firms might join the importers’ price-raising spree. To combat this general inflation. the Federal Reserve Board would raise interest rates, causing a recession. Worse still, in every dollar crisis sleeps the threat of world depression.
The dollar isn’t just another currency. It is used by people and governments all over the world. More than $1 trillion worth of U.S. Treasury bonds, dollar bank accounts and cash greenbacks are actually held by foreigners as investments offshore. It’s the whole world’s nest egg. At the same time, the dollar has been sinking against the yen and mark now for an entire decade. Japanese and German bonds and bank accounts have risen with their currencies against the dollar, making them far more profitable to hold. If even a quarter of all foreigners now holding dollar assets suddenly decided to dump them for marks and yen, exchange markets would plunge into chaos, and the world economy could collapse.
Government purchases of sagging currencies just don’t prop them up for long.
Private pools of capital in the foreign-exchange markets are huge: if the markets think the dollar should go down, it’s going down. The top 10 governments together might marshal $40 billion or even $70 billion to buy a weak dollar. But private trades involving the dollar alone now total an astounding $1 trillion each day-that’s more than $220 trillion a year.
Because Germany and Japan tend to run big export surpluses that earn them surplus dollars year after year. United States trade deficits, unfortunately, supply those dollars. Next, German and Japanese exporters sell these surplus dollars in the exchange markets for the marks and yen that they need to pay their bills at home. This creates a classic imbalance in supply and demand: too many dollars in the market, which drives the dollar down, versus too few marks and yen, which drives them up. Over the last decade, the dollar had lost half its value against marks and yen even before the peso crisis hit in December.
Mexico lost control of its finances last year and ran out of dollars last December. The peso collapsed. The Clinton administration decided to help Mexico through the shock of bankruptcy by guaranteeing up to $26 billion in emergency Mexican borrowing. Exchange markets were already worried because the United States ran a record $166 billion trade deficit last year. The dollar propping up the peso looked like the lame helping Lazarus; both currencies have been dumped.
The worst may be over, at least for now. The Mexican government late last week finally announced a program for financial recovery. Both the dollar and the peso rallied. Besides, the dollar remains stronger than any other major currency in the world besides the Big Two. It’s not chopped liver yet.
