powerful men could make such a claim without sounding ridiculous. Bob Rubin fostered the impression that heâd be only too happy to quit while he was ahead.
Even as Rubin was taking the helm, a financial crisis was simmering in Mexico. Beset by a falling currency and a massive debt burden, the Mexican government was about to default on some $30 billion worth of bonds. While most Americans couldnât have cared less what Mexico did with its debt, Rubin and Summers knew that a default would have disastrous consequencesâother foreign investors would hasten to pull their money out of Mexico, the value of the peso would plummet, and the country could fall into a deep recession. Since Mexico was the United Statesâ third-largest trading partner, the impact on U.S. exports would be grave, and a rise in Mexican unemployment might prompt a surge in illegal immigration. Nor would the effect be limited to Mexico and the United States: a Mexican meltdown could devastate other developing economies around the world, which would, in turn, hurt American exports even more. Strange as it seemed, Mexico might prove to be an economic domino that would tip the world into depression.
Rubin was sworn in by President Clinton on the evening of January10. When the ceremony was finished, Rubin and Summers lingered in the Oval Office to warn Clinton of the imminent storm. Rubin quickly briefed Clinton, then turned to Summers and said, âLarry, what do you think?â Whereupon Summers spoke for ten minutes on the strategy that he, Rubin, and Federal Reserve Chairman Alan Greenspan had earlier agreed upon.
Clinton immediately understood the urgency of the situation. In the next days, the administration would propose a $40 billion bailout of Mexico. The enormous size of the aid package was a critical psychological component; Treasury wanted to reassure the financial markets that the United States had no intention of letting Mexico go belly-up. In theory, calmed creditors would then stop calling in loans that the Mexican government couldnât pay. But the public and many members of the Republican-controlled Congress couldnât understand why U.S. taxpayers should lend $40 billion to a country to which they usually didnât even pay attention. Said Rubin later, âIn 1995, the notion that a poor countryâs macroeconomic miscalculations could affect the largest economy in the world simply didnât register with a lot of people.â
âWe felt that by extending a large loan to Mexicoâand imposing a set of conditions on that loanâthere was a very good chance that we could avert a financial catastrophe with very large consequences for millions of people,â Summers said. But if the policy made sense, the politics were crazy. âEighty percent of the American people were opposed to any kind of loan, and half of the rest were undecided. The Congressional leadership had positioned itself to share the credit if the loan succeeded and blame the administration if it failed.â
When it became clear that the opposition of congressional Republicans was likely to doom approval of the loan package, Rubin circumvented Congress by taking the money from a Treasury reserve account. The fine print was hammered out by Summers, who secretly flew to Mexico on an Air Force plane to meet with Mexican president Ernesto Zedillo, a Yale-educated economist. As fraught with tension as the situation was, Summers loved it. This was a high-stakes game, and Rubin trusted him enough to dispatch him on a secret mission involving billions of dollars. Summers had enjoyed teaching and research, but thisâthis was the stuff of life.
Indeed, the Mexico crisis would become a favorite chapter in Summersâ own subsequent accounts of his career. In later years he was always happy to recount the story of the dramaâhow it exposed him to the backstabbing, duplicity, and intellectual corruption of Washington. The deal
Even as Rubin was taking the helm, a financial crisis was simmering in Mexico. Beset by a falling currency and a massive debt burden, the Mexican government was about to default on some $30 billion worth of bonds. While most Americans couldnât have cared less what Mexico did with its debt, Rubin and Summers knew that a default would have disastrous consequencesâother foreign investors would hasten to pull their money out of Mexico, the value of the peso would plummet, and the country could fall into a deep recession. Since Mexico was the United Statesâ third-largest trading partner, the impact on U.S. exports would be grave, and a rise in Mexican unemployment might prompt a surge in illegal immigration. Nor would the effect be limited to Mexico and the United States: a Mexican meltdown could devastate other developing economies around the world, which would, in turn, hurt American exports even more. Strange as it seemed, Mexico might prove to be an economic domino that would tip the world into depression.
Rubin was sworn in by President Clinton on the evening of January10. When the ceremony was finished, Rubin and Summers lingered in the Oval Office to warn Clinton of the imminent storm. Rubin quickly briefed Clinton, then turned to Summers and said, âLarry, what do you think?â Whereupon Summers spoke for ten minutes on the strategy that he, Rubin, and Federal Reserve Chairman Alan Greenspan had earlier agreed upon.
Clinton immediately understood the urgency of the situation. In the next days, the administration would propose a $40 billion bailout of Mexico. The enormous size of the aid package was a critical psychological component; Treasury wanted to reassure the financial markets that the United States had no intention of letting Mexico go belly-up. In theory, calmed creditors would then stop calling in loans that the Mexican government couldnât pay. But the public and many members of the Republican-controlled Congress couldnât understand why U.S. taxpayers should lend $40 billion to a country to which they usually didnât even pay attention. Said Rubin later, âIn 1995, the notion that a poor countryâs macroeconomic miscalculations could affect the largest economy in the world simply didnât register with a lot of people.â
âWe felt that by extending a large loan to Mexicoâand imposing a set of conditions on that loanâthere was a very good chance that we could avert a financial catastrophe with very large consequences for millions of people,â Summers said. But if the policy made sense, the politics were crazy. âEighty percent of the American people were opposed to any kind of loan, and half of the rest were undecided. The Congressional leadership had positioned itself to share the credit if the loan succeeded and blame the administration if it failed.â
When it became clear that the opposition of congressional Republicans was likely to doom approval of the loan package, Rubin circumvented Congress by taking the money from a Treasury reserve account. The fine print was hammered out by Summers, who secretly flew to Mexico on an Air Force plane to meet with Mexican president Ernesto Zedillo, a Yale-educated economist. As fraught with tension as the situation was, Summers loved it. This was a high-stakes game, and Rubin trusted him enough to dispatch him on a secret mission involving billions of dollars. Summers had enjoyed teaching and research, but thisâthis was the stuff of life.
Indeed, the Mexico crisis would become a favorite chapter in Summersâ own subsequent accounts of his career. In later years he was always happy to recount the story of the dramaâhow it exposed him to the backstabbing, duplicity, and intellectual corruption of Washington. The deal
Similar Books
