I should not be surprised to see that Robert Rubin, having been one of the single most destructive forces over the last two decades (Greenspan gets more heat because he was more visible, but Rubin has long had enormous sway) continues to have influence, not simply through his large network of well placed proteges (Larry Summers and Timothy Geithner as the most visible examples), but his ability to command attention (an article by him in Newsweek as the latest example).
Marshall Auerback, an investment manager and strategist and longstanding Rubin watcher/critic, below takes on the latest bit of Rubin self congratulation masquerading as wisdom (cross posted from Ed Harrison’s blog). Marshall has tastefully omitted some of his spurious arguments to focus on the central flaw of the piece, but let me give you one example:
The question of which economic model works best was recently subjected to rigorous analysis by a task force called the Commission on Growth and Development, established by the World Bank and other sponsors in April 2006….While the specifics differed from country to country, the commission concluded that these highly successful economies shared a set of common characteristics: sustained movement toward market-based economics; governments that effectively provided sound fiscal and monetary policy, substantial public investment, and increasing integration with the global economy; high savings and investment rates; political stability and the rule of law; and considerable focus on widening the distribution of income. The commission also found that no economy anywhere in the world had been successful with largely state-directed activities and high walls against global integration.
Yves here. First, China is on the list. So is Japan. China liberalized its markets, but retained substantial state direction. Anyone attempt to indicate otherwise is a gross distortion. Ditto Japan. I’d need to read the report, but this smacks of a hugely biased reading of the data. Both countries pursued openly mercantialist policies, with substantial barriers against imports, which raises serious questions about the practical meaning of “global integration.” When the Plaza Accord nearly doubled the price of the yen in dollar terms, Japanese imports of US goods barely budget. Japan was found to have “structural” barriers, a combination of consumer attitudes but also very cleverly designed trade impediments (trust me, the Japanese are masters of this, I can bore you with details). And China has has a substantially undervalued currency for the last, what, at least six years? An undervalued currency is tantamount to a massive export subsidy. To suggest these countries are operating with a neoliberal, largely open market model is utter bunk.
Now to Auerback:
As we all know, during his tenure as Treasury Secretary, Robert Rubin laid the groundwork for today’s crisis through his aggressive championing of financial deregulation. Had he at least acknowledged some remorse or recognition of error, he would be more appropriately suited for an advisory role on how to fix the global economy, much as a reformed criminal often has useful insights on penal. No such luck here. This neo-liberal zealot reiterates the usual self-serving nonsense how ‘NOBODY’ could have possibly foreseen the magnitude of the problem. Being one of the worst Treasury Secretary’s of the 20th century was clearly not enough.
Post the Clinton Administration, Rubin was a senior advisor of Citigroup after he quit the Treasury. He left just before its near collapse amidst criticism of his performance. In 2001, he got hold of Peter Fisher in the US Treasury Department to try to put pressure on the bond-rating agencies to avoid downgrading Enron’s debt which was a debtor of Citigroup.
In January 2009, he was named by MarketWatch as one of the “10 most unethical people in business”.
Letting him publicly expound on getting the global economy back on track is akin to providing Kim Il Jong-il a public platform on human rights. Unlike Greenspan, who at least has had the decency to admit mistakes, Rubin still expects to be taken seriously as a policy maker. This is truly disgusting considering the millions of Americans who are without work now and heading south into poverty, not to mention the millions of workers around the world that have lost their jobs and savings and more largely thanks to the policies championed by this misguided deficit warrior.
And the article clearly establishes that the man is a deficit terrorist who understands nothing about reserve accounting and bonds. This is a classic illustration of the idiocy:
The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries.
Bonds don’t “fund” anything and certainly don’t create competition for “funding requirements” on the basis of a silly “crowding out” theory.
Here Rubin assumes that government deficits increase the claim on saving and reduce the “loanable funds” available for investors. Does the competition for saving push up the interest rates?
Yves here. The “loanable funds” theory was discredited back in the thirties, which is why Auerback slips in the reference. Back to him:
No, for two reasons: First, budget deficits build productive infrastructure which exerts a positive influence on economic growth.
Second, budget deficits typically help stimulate investment because they keep aggregate demand from plummeting.
Bond sales do play an important role in managing aggregate bank reserves and in the administration of overnight interbank interest rates, but Rubin clearly does not understand this, despite years on Wall Street. When government spends, recipients of Treasury checks deposit them into banks, which adds reserves to the banking system. In effect, government spending actually lowers interest rates.
By contrast, budget surpluses are not even remotely like private saving. They actually destroy liquidity in the non-government sector (by destroying net financial assets held by that sector). They squeeze the capacity of the non-government sector to spend and save. If there are no other behavioural changes in the economy to accompany the pursuit of budget surpluses, then the private sector is forced to increase its private debt levels to sustain demand and then when this option is exhausted, aggregate demand falls and consequently wipes out non-government saving.
Pro-active fiscal policy will allow the private sector to have healthier finances by providing spending stimulus over time to generate income growth (and private saving) when it is targeted toward creating full employment, not bank bailouts. Bad fiscal policy, by contrast, simply reflects a collapse in private spending and correspondingly lower tax revenues, and the concomitant failure of governments to act so as to prevent increased social welfare payments (such as unemployment insurance or food stamps) from coming into play as a result of this declining economic activity.
It is clear that if resources are fully utilised then choices have to be made on appropriate use. These choices will be political in nature. That is the only constraint which exists. Rubin clearly doesn’t understand this, so he is in no way suited to offer any kind of advice (other than how to blow up an economy via reckless banking practices).
These people are never shamed by their actions. Fortunately, society was spared their advice for several months – but now they are back, akin to the bad aftertaste of greasy pizza that one belches out after a particularly gruesome serving. I’m just waiting for the day when Bernie Madoff will be writing an article for Newsweek, expounding on how we can improve financial regulation.
Also see my related post at New Deal 2.0 “Deficit Hawking: A New Year Opens with the Same Bad Old Ideas.”