The Three Marketeers

The phone rings. You are on vacation in the Virgin Islands. You have been dreaming about the fishing for the better part of two months, and you are about to head out to chase the Christmastime bonefish running offshore and to spend a day on the water, with the sun leaching six months of Washington baloney from your brain. The phone rings, and because you are Secretary of the Treasury, you answer. “This is the Treasury operator,” says the voice. “Please stand by for a conference call.”

The phone rings. You are at home, but getting ready to head out to your weekly tennis game in the Virginia suburbs. You are thinking perhaps about your spin serve, a wicked slice that moves left to right so fast that you have left some of Washington’s biggest names tripping over their feet and cursing. Sure, you can leave the stock market wheezing with one word about higher interest rates, but…if only they could see what you can do to anyone foolish enough to line up inside against that serve! You are 72 years old, and your tennis game is still one of your great pleasures, and surely you have been looking forward to this match all week. But the phone is ringing, and because you are chairman of the Federal Reserve Board, you answer. “This is the Treasury operator,” says the voice. “Please stand by.”

The phone rings. “Whoopee!” you think. “The phone is ringing!” O.K., you really should calm down about this phone-ringing stuff, but you are the Deputy Secretary of the Treasury, and this past year, for all its chaos and tumult, has been about the most exciting you could imagine. It’s the holiday season, and you are eager to get to your family and all that, but boy, this holding the world economy by the hand is even better than advertised. The phone rings. Maybe it will be like this summer, when your mom picked up in your house on Cape Cod and found Fed Chairman Alan Greenspan on one line and worried Russian reformer Anatoli Chubais on the other. Oh, how she thrilled over that! The phone rings, and because you are the Deputy Secretary (and happen to be one of the few rocket-scientist economists not trying to create a black box to make deviously complex trades on Wall Street), you pick up the receiver. “This is the Treasury operator,” the woman on the line says, and though she doesn’t say it, what she could say now that she has you all connected is: “The committee to save the world is now in session.”

Does the world need saving? Just ask the folks in Russia, who saw their economy strangled last August by an outflow of confidence that was as fast as it was lethal. Ask Latin American countries, whose economies were concussed by the Russian shock waves even though the two regions have few direct economic links. Or ask the thousands of ethnic Chinese who fled Indonesia last summer after impoverished locals concluded that Chinese businessmen had magnified their misery by shipping cash out of the country in search of stability.

Although the U.S. economy has been nothing but sunshine, it has been a terrifying year in world markets: famed financier George Soros lost $2 billion in Russia last summer; a hedge fund blessed with two Nobel prizewinners blew up in an afternoon, nearly taking Wall Street with it; and Brazil’s currency, the real, sambaed and swayed and then swooned. In the past 18 months 40% of the world’s economies have been tugged from robust growth into recession or depression.

So far, the U.S. has dodged these bullets, but the danger to its economy is far from over. The tremendous appetite of American consumers for imports–an appetite whetted by stock-market wealth–has provided some support for Asia and Latin America. Yet the tiniest perturbation could send the whole economy tumbling, and there are perturbations all over the place. Brazil is just hanging on, which means so is the rest of Latin America. Europe, which suffers from high unemployment, is slowing. And Asia’s comeback is predicated on Japan’s getting its troubled economy into gear.

In late-night phone calls, in marathon meetings and over bagels, orange juice and quiche, these three men–Robert Rubin, Alan Greenspan and Larry Summers–are working to stop what has become a plague of economic panic. Their biggest shield is an astonishingly robust U.S. economy. Growth at year’s end was north of 5%–double what economists had expected–and unemployment is at a 28-year low. By fighting off one collapse after another–and defending their economic policy from political meddling–the three men have so far protected American growth, making investors deliriously, perhaps delusionally, happy in the process.

It has meant some very difficult decisions. In some of the nations devastated by the crisis, there is a growing anti-U.S. backlash, and politicians such as Malaysian Prime Minister Mahathir Mohamad complain that Rubin, Greenspan and Summers–and their henchmen at the International Monetary Fund–have turned nations like Malaysia and Russia into leper colonies by isolating them from global capital and making life hellish in order to protect U.S. growth. The three admit they’ve made hard choices–and they’ll even cop to some mistakes–but they still believe that a strong U.S. economy is the last, best hope for the world.

And awful as the Asian correction is, it was, in a sense, inevitable because those economies had trundled billions of dollars into useless real estate and industrial development. “In general,” said Summers, 44, as he sat in the Frankfurt airport last fall recovering from a hectic trip to Moscow, “we start with the idea that you can’t repeal the laws of economics. Even if they are inconvenient.” Over dinner recently someone congratulated Rubin on the booming U.S. economy and pointed out that one international magazine had been uniformly wrong in its predictions of a complete global collapse. The Secretary wasn’t biting: “Everything is probabilistic,” he said. The battle continues.

The conventional wisdom is that the economic anxiety now gripping much of the world has its roots in the collapse of Thailand’s currency, the baht, in July 1997, after investors discovered that Thailand’s economic boom was built on a base as solid as a bowl of pad Thai noodles. But the roots actually reach back further, to Black Monday, Oct. 19, 1987, when the Dow Jones industrial average shed 22.6% of its value in a single day. The market, of course, rebounded–and how. But at the time, professional investors thought U.S. stocks were due for a decade of slow-to-sluggish performance. Their eyes–and wallets–quickly alighted on the world’s so-called emerging markets. These nations, allegedly “emerging” from centuries of economic backwardness, were posting phenomenal growth rates: Malaysia grew 9.5% in one year, Thailand 13%. Investors–especially young portfolio managers entranced by Malaysian food and Thai night life–rushed to get in.

Between 1987 and 1997, half a trillion dollars flowed in from international investors. Initially the money was a godsend. It gave companies access to world-class technology and know-how. But in cities such as Jakarta or Kuala Lumpur or Bangkok, there aren’t a whole lot of world-class companies. And as share prices of those rare firms rose, investors poured money into other, less well-run companies. At the height of the boom, in 1996, office space in Bangkok was commanding First World rents; in Jakarta supermodels Claudia Schiffer and Naomi Campbell inaugurated a Fashion Cafe, and in Kuala Lumpur the world’s tallest building opened for business.

Of course it couldn’t last. In late 1996 the warp-speed growth in many of these nations began to slow–an inevitable turn in the business cycle. But the stutter was enough to panic a few investors, who headed for the exits. That set off a rapid spiral of defaults that became known as the Asian Contagion. Thailand’s problems quickly became Indonesia’s, then Korea’s, in a dangerous daisy chain that is still looping together–witness last month’s shuddering devaluation of the Brazilian real.

The initial downturn didn’t surprise the Fed or the Treasury too much. For the better part of two years, Greenspan and Rubin had been quietly fretting about the narrowing “spread”–the difference in interest rates–between U.S. bonds and emerging-market bonds. By 1996 banks were lending money to countries such as Malaysia at interest rates just a few percentage points above what the U.S. Treasuries commanded. The implication: Malaysia was not a much riskier bet than the U.S. This was nonsense, and the committee knew some correction was in order.

But the speed of the collapse, when it came, was breathtaking, and proof that world markets had entered a new and much more volatile phase. Summers has a favorite analogy: “Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular.”

The three men trying to cope with these mid-ether collisions of dollars and expectations are an unlikely team. Greenspan, the data-loving analyst with government roots sunk back into the financial and moral chaos of the Nixon Administration, and a shaman-like power over global markets. Rubin, the Goldman Sachs wonder boy who ran the firm’s complex and dangerous arbitrage operations and then led it to rocket-ship international growth. And Summers, the Harvard-trained academic who is invariably called the Kissinger of economics: a total pragmatist whose ambition sometimes grates but whose intellect never fails to dazzle.

What holds them together is a passion for thinking and an inextinguishable curiosity about a new economic order that is unfolding before them like an Alice in Wonderland world. The sheer fascination of inventing a 21st century financial system motivates them more than the usual Washington drugs of power and money. In the past six years the three men have merged into a kind of brotherhood, with an easy rapport.

Spending time with them is like sitting in on a meeting of the M.I.T. economics faculty, a kind of miniature world in which everyone has his own idiosyncrasies and idea-wrestling is the pastime. The conversation is by turns uproarious and serious. They may not finish one another’s sentences, but they clearly can finish one another’s thoughts. And there is tremendous camaraderie. “Let me tell you this about Alan’s tennis game,” jokes Summers, an occasional opponent on the court. “He is very good [pause] for his age.” Says Greenspan, with a broad grin designed to mask what is either sarcasm or a psych job: “Larry is really almost as good as a professional player.”

Greenspan has a theory about what holds them together: “In analytical people self-esteem relies on the analysis and not on the conclusions.” That must be it. The three men have a mania for analysis that has bred a rigorous, unique intellectual honesty. In the Reagan Administration economic policymaking was guided not by analysis but by conclusions–specifically a belief in so-called supply-side economics. No matter what the data showed, the results among Reagan-era economists like Arthur Laffer were always the same: tax cuts and less regulation were the solution. Rubin, Greenspan and Summers have outgrown ideology. Their faith is in the markets and in their own ability to analyze them. “It’s unusual,” Greenspan says. “In Washington usually you come to the table, and everyone meets, and no one changes their mind. But with us, you have something else.”

This pragmatism is a faith that recalls nothing so much as the objectivist philosophy of the novelist and social critic Ayn Rand (The Fountainhead, Atlas Shrugged), which Greenspan has studied intently. During long nights at Rand’s apartment and through her articles and letters, Greenspan found in objectivism a sense that markets are an expression of the deepest truths about human nature and that, as a result, they will ultimately be correct.

Greenspan jokes that Rubin, with his background in arbitrage, may be slightly more skeptical because of his experiences with market imperfections. But they all agree that trying to defy global market forces is in the end futile. That imposes a limit on how much they will permit ideology to intrude on their actions. So despite different political backgrounds, they have the ability, rare in Washington these days, to preclude partisan considerations from their discussions. In the same way that the threat of mutually assured destruction helped Kissinger replace Washington ideology with Realpolitik, the shadow of a massive economic meltdown has helped the committee sell a market-driven policy that could be labeled Realeconomik.

Yet in places like Malaysia, where one of those market imperfections led to a collapse that has impoverished millions, the intellectual beauty of Realeconomik is less appreciated. And the committee’s fire brigade, the IMF, has been harshly accused of pumping gasoline on the flames. Faced with currency runs in many nations last year, the IMF pushed governments to raise interest rates (to persuade investors to hold on to their currencies) and slash deficit spending. But the IMF now says the formula may have been too harsh. The worsening of the crisis, explains critic Jeffrey Sachs, from Harvard’s Institute for International Development, was “a predictable consequence of draconian measures that increase panic rather than reduce panic.”

The IMF has taken particular heat because even as these nations suffer, the U.S. and Europe continue to grow. The committee believes that the IMF remains a key international tool, especially as it works to clean up the abuses that led to the current mess and makes it easier for investors to get back into those developing markets.

That means trying to reduce volatility where possible. Many countries are at the mercy of international lenders who can decide, if they feel nervous, to jerk billions of dollars from country to country. This would be like having your bank pull your mortgage because your banker heard you’d had a bad day. The solution to the problem, the men believe, is more honesty on the part of borrowers–so banks know what they are getting into–and more caution on the part of banks. While some economic thinkers–notably Soros and Malaysia’s Mahathir–have lobbied for more dramatic controls, Rubin warns that simply locking capital in place can often become a substitute for much needed reform, delaying an inevitable correction. As for the impact of speculators, who have been torched by politicians around the world, Rubin says they are a part of the crisis but a much less important factor than the real economic problems of the countries they hit.

To operate effectively in this new world, Rubin has remade the Treasury into an organization that is “more like an investment bank,” says Tim Geithner, the 37-year-old Under Secretary for International Affairs. Unlike past Secretaries, who wanted decisions presented as thumbs-up, thumbs-down recommendations, Rubin wants debate. “He is a master at eliciting opinions,” says David Lipton, a former Treasury official. The emblematic Treasury encounter is what Rubin calls a “rolling meeting,” which cruises from one corner of the globe to the other as aides sprint in and out of the room. Says Lipton: “Often in meetings Rubin will cut right through the hierarchy, reach down to one of the youngsters at the table and ask what that person thinks. It creates a whole lot of energy–and an awful lot of fresh thinking.”

And fresh thinking has been crucial in the new economic order. One legacy of 1998 has been the destruction of some of academe’s and Wall Street’s most cherished models of the world. More data and faster markets, says Greenspan, mean more opportunities to make money. They also mean more chances to lose your shirt, something he calls “the increased productivity of mistakes.” Computers make it possible to push a button and destroy a billion dollars of wealth. The chairman was warning about the problem long before Long-Term Capital Management vaporized $4 billion, but that debacle silenced any skeptics of the new risks.

Summers, who was the youngest tenured professor in Harvard history, was every bit as much a rocket scientist as the economists at LTCM. But Greenspan says one of the keys to Summers’ success in Washington is his ability to unlearn much of what he once taught. “Larry has one overriding virtue: he is very smart,” Greenspan explained one afternoon last week, as a springlike day cooled into night outside his Washington office. “And unlike people who are smart and believe they are smart, he is open to the recognition that a lot of what he thinks is true is not. That is a very rare characteristic. The academic model is far too simplistic a structure to explain how this whole thing works. Larry had the intelligence to very rapidly grasp that.”

In private, Greenspan is full of insights like this. He is as much an observer of people as of markets. Rubin, among others, says the joy of working with Greenspan lies in both the power of his intellect and the sweetness of his soul. Though the world has come to know him through his opaque congressional testimony, friends know him as the Juilliard-trained saxophone player who spent two years touring with a swing band before taking up economics. The quiet romance of the man has always been present if you looked hard enough. Ayn Rand told friends, “What I like about A.G. is that basically he has his feet on the ground. I love his love for life on earth. He really is a passionate person in his own quiet way.” Greenspan, who ran his own consulting firm on Wall Street for nearly 30 years, could have returned to the private sector and racked up a fortune. But his interest is elsewhere. Says Rubin: “Like all of us, Alan just has a driving interest to see how this will develop.”

Rubin has had his star turns as well. In late 1997 he probably single-handedly stopped a panic about Korean debt from avalanching into a U.S. market crash by working the phones, convincing international bankers that they should cut Korea a break. It was not a welcome pitch. “This is a hell of a Christmas present,” one banker moaned to Rubin on Christmas Eve. But Rubin’s scheme saved the banks billions because if Korea had crashed, the banks could have lost everything. “It was Bob who actually got the banks to see how it worked to their benefit,” Greenspan explains. Was there any element of a threat in the calls, a suggestion that if the banks didn’t play, perhaps Treasury would let Korea blow up to set an example? “There was no stick,” Rubin says. “It was kind of a carrot,” Summers explains with a giggle. “A variable carrot.”

But why did these three men need a carrot at all? If markets work so well, why were they burning their vacations on the phone trying to convince central bankers 10,000 miles away that the world depended on a little self-restraint? The problem, the men say, is that the markets are encumbered by all kinds of imperfections. Even tiny flaws create problems. A Thai banker who breaks the rules by passing $100,000 to his brother-in-law puts the whole system at risk.

To help resolve the riddle of imperfect markets, the committee has spent six years working on an experiment. It’s called the U.S. economy. The current boom is as much a part of the committee’s legacy as is its battle to stem global turmoil. It was Rubin–via the 1993 deficit-reduction plan–who navigated the Clinton Administration into budgetary agreements that helped create the first surplus in 29 years. This fiscal responsibility helped lower interest rates, which kicked off a surge in business spending. Greenspan, who dovetailed his own monetary policy with those goals, let the economy build up its present head of steam. The men don’t get all the credit for the boom–they’re the first to say all they did was let the markets work–but on both Wall Street and Pennsylvania Avenue, they get the bulk of it.

Their success has turned them into a kind of free-market Politburo on economic matters. Clinton relies on the men to a level that drives other Cabinet members nuts. One weekend this summer, when both Summers and Rubin were on vacation, Clinton began to panic about Russia’s weakness. “Where’s Bob?” the President kept asking nervously in a morning meeting. Turning to White House staff members, he told them to pull together a plan. The team spent a weekend crashing a strategy, only to be shut out again when Rubin arrived back in town. An aide to Secretary of State Madeleine Albright regularly worked the phones during last summer’s Russian collapse, insisting that reporters were missing the story–Albright’s involvement in economic policy. No one spent an ounce of ink on it. But other Administration officials say they are comfortable with the power balance. Says Gene Sperling, head of the National Economic Council: “You are often in a situation where other people far less experienced are coming in with very simple solutions, sure things that are going to work. And here are Rubin and Greenspan and Summers, with all their knowledge and expertise, showing the most humility. That is very reassuring.”

Clinton doesn’t bestow his trust blindly. He has immersed himself in economic details over the past six years. Rubin recalls a fishing vacation he took last summer as the President was trying to formulate his response to the Russian crisis. As Rubin stood streamside near Homer, Alaska, his Secret Service agent’s phone rang with call after call from the White House. Rod in hand, Rubin helped Clinton develop a clear understanding of the options. “He doesn’t just sit by and sign off on policy,” Rubin explains. And, Rubin says, Clinton has been willing to make politically tough decisions when necessary to assure U.S. growth–bailing out Mexico in 1995, for instance. “I really don’t know what would have happened with this global climate if we hadn’t had a President who had within him the framework to do what was best for the global economy,” Rubin says.

Clinton’s grasp of Realeconomik includes the tenet that short-term political gains are never worth long-term economic risks. Even though this year he had plenty of incentives to pump up his role in Asia and Russia, he has remained mum. In particular, that meant resisting the temptation to “talk up” the dollar or the stock market or bash the Fed for interest-rate moves. And Clinton has, in typical style, been an aggressive autodidact. Aides recall the time last fall when, nursing an aching back, Clinton spent an afternoon stretched out on a White House couch with one eye on the TV and the other on George Soros’ complex new book on the risks of capitalism. He finished it in a day and quickly passed the underlined, dog-eared copy to his aides as required reading.

The White House has also played a role in averting crises before they appeared on the radar screens. There were times in the past year when countries including Egypt, South Africa and Ukraine were possibly just days away from becoming the next victims of Asian Contagion. But patient and highly secret intervention by Vice President Al Gore helped change policy and avert collapses that would surely have shaken global confidence again.

The contagion has been a kind of object lesson in the risks of the new economics, and many developing nations are paying more attention to their policies. Says a Treasury official: “It was awfully hard to tell the Thais they had something to worry about when they were growing at 8% a year. They’re a lot more attentive now.” Greenspan and Rubin hope they can turn that attention into the kind of reforms that will make these emerging markets closer to ideal. Among the top priorities: cleaner international banking systems, transparent lending practices and more open markets. As soon as they can ram those changes through, they expect growth to pick up again–possibly just in time to help a flagging U.S. economy.

There are many challenges to face between now and then. Japan, which, as a banker and buyer, is crucial to any plans for a recovery in Asia, continues to struggle with economic reform. And in the U.S., growth is more dependent than ever on the stock market–which has been powered to new highs on the back of Greenspan’s interest-rate cuts during the fall. The link between the Dow and the GDP means that a major correction in the stock market could send the trio’s fondest hopes into the dustbin. “They have done a masterful job so far,” says Stephen Roach, a Morgan Stanley economist. “Unfortunately, in financial markets you are only as good as your last move. If Greenspan’s legacy is a stock-market bubble, he will not be treated kindly by history.”

None of the three men will talk about life after government, though Rubin says of Summers, “Larry is one of the few people smart enough to be either chairman of the Federal Reserve or Secretary of the Treasury.” Few who know Summers doubt that he will someday hold one of those jobs.

But the men don’t seem in a rush to move anywhere. Partly this is their engagement in the process. It is also something else. When the three talk about their “special” relationship, they are hinting at how fortunate it is that they can work together instead of apart. Says Robert Hormats, vice chairman of Goldman Sachs International: “There have been moments in the past year when it has been, as Churchill said, a very near thing. These guys kept a near thing from becoming a disaster.” That has happened because the men feel that being at the right place at the right time also means doing the right thing, putting their egos aside and, in an almost antique sense of civic duty, answering the phone when it rings.