Back in June, Bill Clinton's political instinct told him it was time for the U.S. to take action in solving the spreading global economic crisis. His chief economic adviser, Treasury Secretary Robert Rubin, disagreed, arguing that it would be risky to take the lead before a credible plan could be prepared.
Rubin may have been right. But by the time Clinton took to the podium at the Council on Foreign Relations on Sept. 14 to announce his plan for a coordinated assault on the global economic disease, the world had changed. The contagion had spread from Asia, to Russia, and finally to Latin America--leaving in its wake bankrupt companies, exasperated investors, and decimated stock markets. And the Bill Clinton who unveiled a seven-point plan at the Council on Foreign Relations was scrambling to restart a Presidency crippled by scandal.
Is it too late for Clinton to lead the Group of Seven industrialized nations' effort to meet what he called "the biggest financial challenge facing the world in a half-century"? And is the plan he prescribes workable?
Global markets, yearning for some leadership in dealing with the crisis, halted their free fall, at least temporarily, in the afterglow of Clinton's speech. Brazilian President Fernando Henrique Cardoso and Mexican President Ernesto Zedillo Ponce de Leon phoned Clinton to thank him. Zedillo's message: "We felt all alone. It's great to know the G-7 is focusing on us."
Indeed, in that respect, the speech is a milestone: the first time any of the world's top leaders has acknowledged the enormity of the task ahead and offered a blueprint of what must be done. Notes Robert D. Hormats, vice-chairman of Goldman Sachs International: "Details are less important than the fact that leadership was reasserted."
Most of the details are still to be worked out, probably when G-7 ministers meet prior to the annual International Monetary Fund conference in early October. And it will be critical for Clinton to show some progress before then. But, says a French Finance Ministry official: "It gives directions and we all agree with those directions."
The first task will be to rally the world's rich nations behind rate cuts that will keep growth going and give the emerging economies breathing room. Further out, Clinton acknowledges the need for a new post-IMF global financial architecture, which many in Europe and Asia have called for. Says the French official: "The whole architecture needs to be reviewed."
While none of the big countries will endorse currency and capital controls, they are likely to focus on stricter supervision of short-term bank deposits. Eventually, this would mean establishing some sort of global Federal Reserve--a watchdog for the banks and a deterrent to the kinds of capital controls that countries like Russia and Malaysia have recently implemented.
To keep the contagion from spreading to America's doorstep, Clinton wants to build a firewall around Latin America. Behind the scenes, the U.S. and the cash-strapped IMF are trying to cobble together emergency funds for Brazil if its markets collapse.
Clinton's plan calls for the G-7 to restructure the debts of troubled Asian companies and a rollover of Russia's long-term debt. Clinton also wants the World Bank to double its poverty relief aid to the crisis countries. Meanwhile, the State Dept. is considering sending food to Russia before the snow falls. And the ExIm Bank is negotiating $4.25 billion in loan guarantees to Korea, Thailand, and Indonesia so their companies can buy U.S. raw materials and equipment needed to keep their factories running. ExIm Chairman James A. Harmon is headed for Latin America to cut similar deals.
That adds up to the first comprehensive fix-it plan for the global economy. The G-7 nations issued a joint statement in support of Clinton's proposals on Sept. 14. But getting the G-7 to work together to carry it out won't be easy. For example, even after a week of furious negotiations among finance ministers and central bankers from the G-7 nations before Clinton's speech, there was no agreement on a coordinated rate cut. German Bundesbank President Hans Tietmeyer bristled at the notion. And Bank of England Governor Eddie George warned that a coordinated rate cut would be "going too far." On Sept. 16, Fed Reserve Chairman AlanGreenspan told Congress: "At the moment, there is no endeaVor to coordinate interest rates."
That's a bad sign. The rate cut itself may not be the most important step, but it is the easiest--and a powerful signal to financial markets that global cooperation is possible.
Greenspan and European central bankers face substantial domestic obstacles to pulling off a simultaneous rate cut. In the U.S., labor markets remain tight and real wages are rising. European bankers are leery of attempting a cut when they're trying to coordinate rates in advance of the euro. That includes a plan for Germany to raise rather than lower. White House officials hope that Greenspan's prestige will ultimately persuade European central banks to match any Fed easing. "A lot of us here think it wouldn't be so bad if European [monetary] policy wasn't quite so tight," says one Clinton adviser.
Clinton's domestic problems won't help. Some Republicans are already attacking the Sept. 14 initiative as simply a convenient way to change the topic from Monica. "It's one thing to give a speech. It's another thing to act," says Senator Robert F. Bennett (R-Utah).
Republican cooperation will be essential. Even before the Starr report landed, Republicans were resisting Clinton's pleas for $18 billion in emergency funding for the IMF. Privately, Republican leaders opposed to further IMF funding concede that the money will likely be approved--but only at the last moment before Congress adjourns in October. If Congress doesn't come around, the setback to his plan could be fatal. "If Clinton gives a speech but can't get money from Congress for the IMF, it will leave a very hollow feeling--almost worse than doing nothing," says Hormats. "The IMF money is a proxy for America's leadership in the world economy."
Another hurdle is Japan. It has resisted calls for an overhaul of its ailing banking system and tax cuts to stimulate its economy. But there are signs of progress: Prime Minister Keizo Obuchi, set to meet Clinton on Sept. 22, recently signalled a readiness to consider nationalizing Japan's troubled Long Term Credit Bank.
Latin America may be the most pressing concern for the U.S. The IMF has just $25 billion in resources. But some analysts believe Brazil alone would require more than the $50 billion the Treasury Dept. and IMF provided a smaller Mexican economy three years ago.
In Asia, the Administration's primary goal is debt relief--an arduous and politically delicate process. The Asian debts are held by thousands of private companies, not by a handful of governments. Without debt relief, the Administration fears that nations that have faithfully followed the IMF austerity prescriptions will follow Malaysia, which has resorted to strict controls to protect its currency.
For now, Clinton is mobilizing his Administration to finally tackle a crisis he once dismissed as "a glitch in the road." His aides have a long way to go to put flesh on the bones of a new bailout plan. But at least the U.S. is finally showing the leadership that the world has been seeking.