Thursday, June 12, 2008


Financial markets are built upon trust. Financial securities are just information, in effect just 0’s and 1’s. The only way that markets in these financial assets can function is if there is sufficient trust in the markets to warrant individuals and institutions buying and selling these assets.

“Rubinomics” is based upon the building up of market trust. The figure behind “Rubinomics”, Robert Rubin, spent twenty-six years at Goldman Sachs, beginning in the arbitrage department and rising to the position of co-senior partner, before he got involved with the Federal Government. His training and experience is working in these markets and observing the role that trust plays in their operation.

Rubin also was a market participant during the age, the 1980s, in which international financial markets effectively became the controlling factor on the undisciplined fiscal management of sovereign nations. Time and again during this period the financial markets would react against the debt of a nation that was felt to be conducting economic policies that were inflationary. Participants in financial markets had gotten burned in the 1970s as inflation became a worldwide problem with inflationary expectations dominating the movement in interest rates. As the interest rates rose, bond holders took some substantial capital losses due to the falling market prices of the debt issues. With this experience firmly in mind, these market players were not going to get burned again in the 1980s. (For a good history of this period see the book by Steven Solomon titled “The Confidence Game: How Unelected Central Bankers are Governing the Changed World Economy, 1995.)

This experience was brought to Washington, D. C. as Rubin moved to become Director of the White House National Economic Council and then to assume the position of Treasury Secretary. In my mind, the basis of everything that he did in these positions was to restore trust in the economic policy making of the United States government and to restore trust in the financial management of that government. This is why the government’s fiscal deficit had to be brought under control. But, it was also why Rubin felt that the United States had to be a partner in the world community and not the ‘big bully’ of the world’s only super power who could go-it-alone whenever it felt like it was in the country’s best interest.

In the recent article in the New York Times ( it is reported that several leaders of labor unions have been critical of the Rubin program arguing that it is too slanted toward corporations and too open to free trade. Rubin has apparently countered this reaction with the response that “We need today a multiyear path to a sound fiscal position, but in that context you need to make room for critical public investment.” His argument I think can be put another way: if the United States does not work to achieve a sound fiscal position and re-establish trust within the international market place, it will not be able to produce the critical public investment that is needed. In other words, the markets must be listened to.

Here are the facts, as I see them. The United States, although it is the lone super power in the world, is still a partner in a very intertrelated world. In the last seven years or so, the United States has thumbed its nose at the rest of the world and acted unilaterally. As a consequence, the world has split into several different configurations of “them” versus “us” and things have fallen apart. The worst scenario is for the dollar to continue to fall against the Euro and other major currencies which will force the United States government to respond with a real austerity program. This we don’t want and such a program would be especially hard on the union leaders and their troops.

The markets must be listened to! ! !

What Rubin is advocating and what, I think, is vitally important for the construction of an economic program for the new President is a realistic effort designed to get ourselves out of the hole that the present administration has dug for the American people and create an environment where the new Administration can then focus on the “critical public investment” that is being advocated.

Certainly, the present administration has made it very difficult for any new President to enact a program that provides a “new direction” for the country. I have written before about the political effort an administration can make to “tie-up” a succeeding administration. This theory has been applied to the Regan-Bush(41) administrations and their “leavings” which caused the Clinton team to postpone the social programs it wanted to introduce until it straightened out the mess it was left with. Here we could accuse the Bush(43) team for doing exactly the same thing…if one could give them credit for doing anything in a competent way. Whatever, the mess that Bush(43) is leaving for the new administration is going to take some time to unwind before any “change” can be forthcoming.

But, there is a wider issue that must be discussed within the context of the debate between “Rubinomics” and the position taken by the union leaders. Both sides of the discussion need to be listened to. An Obama Administration cannot just rush off with a program of new “critical public investment” without considering the implications such a policy would have on international financial markets. And, those in favor of “Rubinomics” cannot enforce fiscal discipline without policy goals and objectives related to the social issues that need to be dealt with. The Democratic Party is a community and needs to hear from its different constituencies and sub groups, their positions and arguments. The diversity of the party is one of its strengths. This diversity allows for many, many voices to be heard and incorporated into the change that needs to take place.

That is what a democracy is all about. And, the Democratic Party needs idealists just as it needs realists. In this sense, the idealists need the realists in order to achieve something that will be not only feasible, but also sustainable. What good is implementing something if it cannot last?

So, “Rubinomics” is back. It is good to have some advice being given to one of the candidates that bears some relationship to how the world works. The world needs to come to trust the United States again. The world needs to see that the United States as its partner and not as its adversary. Then the world can see how the United States acts as a democracy to respond to the will of the people!

1 comment:

Robert said...

of reality either to favor money power or to be unmindful of the reaction of financial markets is a recipe for disaster. It takes an experienced and skillful leader to understand these structures and not be bullied by the pretense of wealth and power emanating from finance or the feel good bluster of people unaware of the financial reactions of a global system that has been badly bruised by U.S. unilateral myopia in recent years.