Larry Summers: From Prodigy To Punching BagDean Foust and Douglas Harbrecht
As a boy-wonder economist at Harvard University and the World Bank, Lawrence H. Summers was in great de- mand on Capitol Hill, where his testimony was eagerly sought on economic issues ranging from inflation to savings incentives. Now chief international strategist for the Treasury Dept., Summers is a hot commodity with Congress again, but it's not his counsel lawmakers want--it's his hide.
With the dollar in a free fall and the Clinton Administration's $20 billion rescue plan for Mexico's economy under attack, the 40-year-old Treasury Under Secretary is being forced to fend off critics on two fronts. At a Mar. 7 hearing, his first before the Republican-controlled House, Summers was grilled for not anticipating the peso crisis--which now appears to be helping drag the dollar down against the Japanese yen and German mark. International markets are "giving the American people a message--and that is, your leaders have put you in jeopardy," says Rep. Dana Rohrabacher (R-Cal.).
SCAPEGOAT? Summers' fans at Treasury maintain he's a ready target for Republicans angry at Treasury Secretary Robert E. Rubin and President Clinton for end-running Congress on Jan. 31 with a Mexican aid plan. And the GOP blames the dollar's plunge on the loan package, which they claim has chained the greenback to the peso. "Larry's being made the scapegoat," grouses one Clintonite.
Being placed on the defensive is rare for Summers, a policy wonk described by colleagues as both brilliant and arrogant. It was Summers who miffed other Administration officials--particularly the trade team--by demanding he be the sole dollar maven. Now his grab for turf is coming back to haunt him. "He's so big in personality that he got to handle the account alone," concedes one White House insider.
Early in his Presidency, Clinton pursued a weak-dollar policy aimed at prodding Japan to narrow its trade surplus by opening its domestic market to U.S. goods and services. After an initial plunge by the greenback in 1993, the Administration insisted it did not want to see the dollar fall. But currency traders were convinced the U.S. still secretly favored a cheaper dollar. That became a self-fulfilling prophecy, thanks to Washington's tepid support for the greenback and stingy Federal Reserve interventions to prop up the currency.
Within the Administration, officials say, Summers increasingly expressed worry about the dollar's periodic collapses and sought a policy of currency stability. One of his biggest clashes came last year, when U.S.-Japan trade talks broke down and the dollar slide resumed. After U.S. Trade Representative Mickey Kantor and Commerce Secretary Ronald H. Brown mused publicly that a weaker dollar might not be so bad, Summers assailed them in a closed-door meeting. Relations got so bad that Kantor had aides compile a graph that showed his remarks did not trigger the greenback's plunge.
Summers even riled Rubin, then head of the White House National Economic Council--and now Summers' boss. As the Under Secretary warned that a trade rupture with Japan would panic currency markets, Rubin, former co-chairman of Goldman, Sachs & Co., shot back: "I've been a trader, and I can tell you nobody can predict how traders will behave."
BETWEEN JOBS. Summers ultimately convinced the Administration that stabilizing the dollar was more important than a hard line on trade. But traders keep pushing the dollar down, persuaded that the U.S. won't close its trade deficit, reduce its budget gap, or prop up the currency.
As Congress links the dollar's dive to Mexico, Rubin has managed to duck some of the bullets because he was between jobs when a bungled peso devaluation set off the crisis on Dec. 20. That has left Summers, who was in charge, on the hot seat.
U.S. authorities say Summers warned Mexican officials last year to raise interest rates or devalue the peso to counter their yawning current-account deficit. Mexico was warned "repeatedly and with increasing urgency" as the year went on, Summers insists. Retorts a Mexican official who has dealt directly with Summers: "He is convinced that the main reason behind this crisis was the Bank of Mexico's bad monetary management. It really irritates everyone here."
Indeed, U.S. officials say the Mexicans, on the eve of devaluing, ignored advice to couple devaluation with economic reforms. "They stuck us with a fait accompli," says one official.
Nor, for that matter, can Summers and Rubin persuade traders to bid up the dollar without a dramatic change in the U.S. economic policy. For a wunderkind who wanted the challenge of running U.S. dollar policy, it's a humbling lesson.