Why Everybody Thinks Rubin Is Crying Wolf

In the battle over the federal debt ceiling, rhetoric fogs reality. Take the GOP attacks on Treasury Secretary Robert E. Rubin, the Clinton Administration's chief strategist for heading off a default. On Oct. 30, Senate Majority Leader Bob Dole (R-Kan.) assailed Rubin for being "so political that he doesn't have a lot of credibility." But the next day, Dole called the White House for a meeting on the issue--and insisted Rubin attend. "That's just the way Washington works," says a bemused Rubin aide.

The danger now is that Washington won't work the way it always has. The showdown pits untested players: Rubin, a Wall Street millionaire with little experience in rough-and-tumble politics, against Republicans who insist a few missed debt payments are a small price to pay to force President Clinton to accept their balanced budget. Rubin's inexperience and GOP stubbornness have brought the crisis to the brink: Without a hike in the debt ceiling, the Treasury will run out of cash on Nov. 15, and perhaps miss $102 billion in payments, plunging the markets into the unknown.

MIXED SIGNALS. Many on Wall Street are still betting on Rubin, the former co-chairman of Goldman, Sachs & Co., to sidestep disaster. They discounted default threats and bid up U.S. securities until Nov. 6, when the Treasury postponed the sale of $31.5 billion in notes, rattling traders. "Thanks to Rubin, this Treasury is more attuned to the vibes in Wall Street," says David C. Munro of High Frequency Economics, an investment consultant. "There's pretty high confidence that he can head off the crisis."

But Rubin's handling of the politics of default hasn't inspired the same confidence. Since July, he has lobbied the Hill to extend the debt limit but has failed to communicate his sense of urgency. At a late-October meeting, recalls Representative L.F. Payne (D-Va.), Rubin's dispassionate argument was that "the risk/reward ratio of default is way out of whack." Rubin admits to a "measured" tone--until Nov. 8, when he dispatched aides to charge that "simply outrageous" GOP maneuvers are "greasing the skids for a default."

GOP hard-liners haven't shown similar restraint. Many of the party's 73 House freshmen swore they would never vote for any hike in the debt ceiling, even though their budget plan creates $1.8 trillion in new red ink for Treasury to finance. "Some of them still don't understand that," sighs a GOP staffer. The Republicans trotted out a panel of respected Wall Streeters to argue that bond buyers would ignore a short break in Treasury's payments if the reward was a balanced budget by 2002. Some argued that a brief default would even lead to a decline in interest rates, as bondholders take heart that Washington is serious about balancing the budget.

BACKUP HELP. At crucial moments, Rubin has gotten a credibility transfusion from Alan Greenspan. The Fed chairman stressed the dangers of default in Hill testimony and in private talks with Republicans. And he backed the Treasury's estimates on when the well will run dry in a key meeting with Dole and House Speaker Newt Gingrich (R-Ga.). Still, some Rubin fans fret that the Fed chief hasn't been public enough.

The showdown is fast approaching. The House was set to vote on Nov. 9 to raise the debt ceiling until mid-December. But the measure also restricts Rubin's ability to tap $1.2 trillion in trust funds--cash Wall Street is counting on to ensure bondholders get paid even if Congress limits borrowing.

Rubin says he'll advise Clinton to veto any debt-ceiling hike with strings attached. Then, he says: "The choice is up to them: either separate the debt limit from the budget debate, or put the country in a very dangerous financial situation." Maybe, but until Wall Street shows some real concern, Rubin has a hard sell.

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