The decision came on May 30 in a phone call to Federal Reserve Chairman Alan Greenspan. It was time, Treasury Secretary Robert E. Rubin told him, to spring a trap on the market bears driving down the dollar. Traders were testing the Treasury chief to see if he would defend the greenback--or stay on the sidelines, as he had when the dollar swooned in April.
This time, Rubin found compelling reasons to move. With the Group of Seven economic summit just weeks away, the credibility of the U.S. with its trading partners was increasingly at stake. And Rubin's instincts--formed during 26 years on the trading floor at Goldman, Sachs & Co.--told him that a moment had come when intervention could move the market.
So on the morning of May 31, the Federal Reserve Bank of New York led a sweep through the currency exchanges. The U.S. and 11 other nations dumped up to $1 billion worth of yen and marks. Shell-shocked bears scrambled to buy dollars, fueling a 3% rally.
Chalk up another exercise in crisis management for Bob Rubin. In five months as Treasury Secretary, he has crafted two rescue plans for the Mexican economy, weathered two sharp runs on the dollar, and endured attacks on Treasury's law-enforcement agents in Oklahoma City and Washington. In the process, he received mixed reviews--from applause for his handling of Mexico's bailout to hisses in Germany and Japan for failing to bolster the dollar.
MEXICO PHOBIA. Now, his ability to manage the Clinton Administration's economic policy is facing a crucial new test. As President Clinton and leaders from other G-7 industrial nations prepare for their 21st summit, in Halifax, N.S., on June 15-17, an array of potential crises confronts them. Growth in the U.S., Europe, and Japan is slowing. The fear that "another Mexico" will trigger market chaos hangs over the financial system. To top it off, the cooperation shown in the May 31 currency intervention masks deep rifts between the U.S. and its allies--from the dispute over auto parts with Japan to anger about Rubin's earlier hands-off approach on the dollar.
Coping with these threats will require more than crisis management. Now Rubin must take a far more assertive role as the Administration's chief economic strategist. At Halifax, he'll unveil his plan for repairing the global financial system, with the U.S. taking the lead. As the world's largest economy, "the U.S. remains the only country in a position to provide real leadership," Rubin told BUSINESS WEEK. "We have to help Americans understand that their economic well-being is directly related to this country's engagement with the global economy."
It's a tough task for the 56-year-old Wall Streeter, who is more comfortable doing backroom deals than playing politics in the limelight. Around the world, Rubin's counterparts wonder whether his vision--and leadership skills--are up to the task. Rubin's agenda includes proposals for restructuring the International Monetary Fund (IMF) and avoiding intervention in the markets. But his critics worry about whether he'll take the lead if the global economy slows down and wonder if he has the innovative ideas needed to resolve disputes among the U.S., Japan, and Europe. "Being at the top of Treasury requires a certain kind of public leadership," says a French official, who misses the higher-profile image of Rubin's predecessor, Lloyd Bentsen.
Also, Rubin is blamed for failing to lead the way on what many see as the largest U.S. threat to global stability--cutting its $200 billion budget deficit. "The Administration isn't showing any prospect for long-term control of public deficits," says a German official.
HOT MONEY. Up to now, Rubin has put his efforts into finding ways to deal with financial crises. He strictly opposes interventionist measures to stop "hot money"--cross-border investments by institutions and individuals who flee at the first whiff of trouble. "You can't always distinguish which flows are hot and which aren't," says the former trader. "But even if you could paint all hot money red, restricting it is a dubious proposition."
Rubin hopes to persuade the Halifax summiteers to order the IMF to keep closer tabs on financial conditions in emerging countries and share the information with the markets. That could lead to the creation of a rating system on the health of different economies. And he wants the IMF to study ways to promote "transparency"--full and honest disclosure by governments to their creditors. With the IMF moving toward a new role as a global Securities & Exchange Commission, the markets would have better information to anticipate problems, he argues.
If crises occur, Rubin wants to tap a special fund to bail out countries rather than patching together an aid package, as he did with Mexico. So he is asking the G-7 to expand the General Agreement to Borrow, a mutual-aid society of 12 rich nations. More countries--especially the newly prosperous Asian economies--will be urged to ante up.
HAWKEYED? At the summit, the G-7 leaders will likely back Rubin's proposals on crisis machinery. But on the larger question of how well the global economy is running, Rubin may find himself out of step. Compared with his European and Japanese partners, who worry about a faltering recovery, Rubin is sanguine about world economic prospects. The Treasury chief believes that "the most likely scenario is continuation of solid growth and low inflation" in the U.S. He's pleased with the progress Mexico has made. And he says the global economy can weather Europe's slowdown.
Indeed, the only area of the world that seriously worries the Treasury chief is Japan. Rubin has long been a hawk on Tokyo, arguing that Japan's closed markets are responsible for its economic slump. Rubin believes the U.S. can best help Japan by pushing it hard to open up. So it was no surprise that Rubin overruled Treasury's traditional arguments against trade conflicts to champion Administration sanctions against Japanese luxury cars.
A major challenge to Rubin's leadership, however, may come at home. By September, the Administration will enter serious budget negotiations with Congress. If Rubin can't deliver significant budget cuts, while protecting social programs expanded by Clinton, he'll have a hard time making a case for his global leadership. In coming months, Treasury-watchers will have a chance to decide whether Rubin has what it takes to play on the world stage.
Treasury watchers will see whether he can pull it off
Reform the International Monetary Fund by expanding a special short-term fund-the General Agreement to Borrow-to deal with financial crises
Head off new financial crises by bolstering the IMF's power to monitor borrowing countries' economies and disclose information to private investors
Avoid intervention to support the dollar, except in extreme circumstances
Cut the $200 billion U.S. budget deficit gradually
Win congressional support for funding the World Bank's low-cost loans for fighting poverty in the least developed nations
Force Japan to open its auto and auto-parts market