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Rubin: ‘Complexity, Uncertainty’ Shade Economic Issues

March 21, 2008 at 6:15 PM EDT
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Robert Rubin, who served as treasury secretary during the Clinton administration and is currently the chairman of the board of directors at Citigroup, evaluates the state of the U.S. economy and the role of government intervention in recent economic troubles.
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JIM LEHRER: And now, staying on the economy story, our interview with former Treasury Secretary Robert Rubin. Rubin is a Democrat who served in the Clinton administration and now supports Senator Hillary Clinton. He’s chairman of the board of directors of Citigroup, one of the world’s largest financial institutions.

Judy Woodruff talked with him earlier today in Washington.

JUDY WOODRUFF: Mr. Rubin, thank you very much for talking with us.

ROBERT RUBIN, Former U.S. Treasury Secretary: Very good to be with you, Judy.

JUDY WOODRUFF: How bad off is the U.S. economy?

ROBERT RUBIN: You know, I think it’s very hard to judge, Judy. I’ve been around these things for a long, long time. And I think this is an extraordinarily, even by past standards, extraordinarily uncertain and complex.

But I think, in a very broad sense, there are three schools of thought. One of them is that there’s a serious risk of a long and extended and quite serious recession.

A second view is that we’re highly likely to have a recession, but it’s likely to be brief, sort of a U-shaped recession.

And a third view that — is I say the less-held view than the other two — is that we’re going to have a significant slowdown, but it will avoid recession.

My own view is that it’s hard. I don’t think there’s a basis for making a probabilistic judgment amongst the three, so the way I think about it is to think of a one-third chance of each. But if you take that view, it takes you to two conclusions, at least in my view.

Number one, as an investor, which I am, I would be weighing those risks in a very cautious kind of way. And, number two, I believe that policymakers should be highly proactive and seek and do everything they can that’s sensible, that’s sensible to reduce this risk to the economy.

This time, crash begins at home

Robert Rubin
Former Clinton Treasury Secretary
Nobody has the resources to deal with a problem the size of the United States. So I think this has a complexity and uncertainty that, in many respects, is greater than the crises we dealt with.

JUDY WOODRUFF: How much more weakness is there out there that we don't even know about right now?

ROBERT RUBIN: Well, it's a very good question, Judy, and I don't know the answer to that. But I was just talking with somebody today about European banks, for example.

I have no idea what the conditions of European banks, but there have been relatively few announcements other than UBS and a couple of others with respect to losses that relate to the kind of very difficult conditions we're having in the credit markets in the United States.

Maybe they don't exist, but maybe they do exist. And if they exist there, they could feed back into this country, as well. So I think the answer is we don't really know. Nobody really knows.

JUDY WOODRUFF: Let me ask it this way. How does this compare, this current situation, to the financial crises you dealt with as secretary of the treasury, Asia, Mexico, and so forth?

ROBERT RUBIN: I think that -- we dealt with in 1995, with the Mexican financial crisis, and in 1997-'98 we had the so-called Asian financial crisis, which is really far more broadly encompassing, and those were very complex, but in many ways they were much easier to deal with.

I don't mean they were easy to deal with. They're very difficult to deal with. But you had the IMF; you had the Treasury Department. And between the two of them, they had a lot of resources to use for countries that were relatively small compared to the resources that we had or at least the resources that we had were adequate to try to deal with those problems.

Now the problem is the United States. Nobody has the resources to deal with a problem the size of the United States. So I think this has a complexity and uncertainty that, in many respects, is greater than the crises we dealt with.

And I actually think, in some ways -- Alan Greenspan said this the other day, I believe, in an op-ed -- it's greater than anything we've seen in the post-World War II period.

Somebody else the other day referred to the condition in the credit market as something approaching a perfect storm, and that may be right. Now, that doesn't mean that we're not near the end of it. I have no idea whether we're near the end or whether there's still a long way to go.

But I do think the risks are substantial enough to take us back to a moment ago, to be cautious if you're an investor and to be highly proactive if you're a policymaker.

Regulation needs some tweaks

Robert Rubin
Former Clinton Treasury Secretary
I do think we need regulatory change, and I do think the one area in which the uncertainty was, at least in my judgment, an inadequate amount of regulation was in the practices in the mortgage business.

JUDY WOODRUFF: Do you agree with those who blame a lot of this on a lack of regulation and a lack of supervision of financial institutions?

ROBERT RUBIN: No, I do not. I think what you had was a really quite extraordinary confluence of different factors. You had the seemingly inevitable and inherent aspect of financial markets, which is a tendency to go to excess, and then to adjust and have disruption.

But then on top of that, you had low interest rates that led to a reaching for yield; you had tremendous use of complex financial instruments; and other kinds of factors. They all came together to produce what I think is really an extraordinary situation.

I don't think this is -- no, I do not think this is any fair measure a regulatory failure.

JUDY WOODRUFF: So you don't think we need more regulation, more...

ROBERT RUBIN: Well, let me say, no, I do think we need regulatory change, and I do think the one area in which the uncertainty was, at least in my judgment, an inadequate amount of regulation was in the practices in the mortgage business.

JUDY WOODRUFF: And what needs to be done about that?

ROBERT RUBIN: I think there are two sets of changes that should come out of this, but then I want to mention one very important caveat. Number one, in terms of consumer protection in the mortgage area, there certainly seemed to me -- and this is not an area I'm an expert in, but I know a little bit about -- there certainly seem to me to be practices that probably should not be allowed.

And I think there also needs to be found some way to make far more transparent to the people who are taking out mortgages what they're undertaking. And that is much harder than it seems, because it's a very complex subject for people who're not financially sophisticated.

On the financial market perspective, I think there are aspects of risks to our financial system that ought to be addressed going forward in the regulatory process, particularly around the derivatives and other kinds of complex instruments of financial engineering.

But in all of this, I think the key is to find the optimal balance between increased protection on the one hand and not smothering our free-market financial system.

Fed's 'bailout' very measured

Robert Rubin
Former Clinton Treasury Secretary
Bear Stearns is so interconnected with the rest of our financial system that it could have created enormous problems.

JUDY WOODRUFF: Well, and I want to get to that. First, is what the Federal Reserve did, in essentially guaranteeing Bear Stearns, the buyout by JPMorgan Chase, is that a bailout?

ROBERT RUBIN: Well, it's an interesting question, actually, the way you say it. I think, number one, it was conceptually the right thing to do, because if Bear Stearns had gone under, Bear Stearns is so interconnected with the rest of our financial system that it could have created enormous problems, and that would have affected the vast -- it would affect not just people involved in the financial system, but jobs and standards of living across America. So I think it was the right thing to do.

It actually was not a bailout for the stockholders, because the stockholders are getting very little. What it did do was to create a tremendous amount of value by virtue of the back-up facility from the Federal Reserve Board, the guarantee, if you will, from the Federal Reserve Board. And that great, tremendous amount of value was transferred to the buying institution.

I think an interesting question is whether that could have been done in some way that the stockholders -- I'm sorry, that the taxpayers could have reaped the benefit of the value that was created by the use of taxpayer money.

On the other hand, the Federal Reserve and the Treasury had to move in a very short period of time. And I think they did a very good job in pulling this together. And conceptually, I think they did the right thing.

I'm sure there will be many debates about whether this could have been done some other way to realize the objective I just mentioned, but I think it is important to recognize how difficult that would have been to do in a very short period of time.

JUDY WOODRUFF: I asked, because people look at that and they say, "Well, all right, if the Federal Reserve is doing this for this huge financial institution, for Wall Street, shouldn't they be doing something of equal magnitude for the homeowners and others who are suffering?"

ROBERT RUBIN: Well, but what the Fed did for Bear Stearns actually didn't benefit the Bear Stearns shareholders. They were basically wiped out. As you know, they only got $2 a share for stock that two days before the collapse was trading at $60 a share. So they didn't receive the benefit of this.

And what the Fed did for Bear Stearns was highly relevant to the interests of all Americans, because if Bear Stearns had gone under, that could have trigger a tremendous set of problems in the financial system that would have affected standard of living, jobs, our entire economy. I do think...

JUDY WOODRUFF: So we shouldn't look at it as just a Wall Street rescue?

ROBERT RUBIN: I don't think that policymakers should have spent one nickel to rescue people on Wall Street. And I have an impression that that was not at all what the policymakers had in mind. I think the Fed and the Treasury were very much focused on the effect this could have on the broader American economy.

Complexity needs greater regulation

Robert Rubin
Former Clinton Treasury Secretary
I think every citizen in the United States should be actively engaged in trying to urge the people who represent them to engage with these issues in a very constructive way.

JUDY WOODRUFF: I think you said in an interview with Fortune magazine, was it just in November, that as recently as last summer you didn't know what some of those very complex financial instruments even were, I think the CDOs, collateralized debt obligations. But without getting into all that, has it gotten too complex?

ROBERT RUBIN: Yes, that's not actually -- what I said was there was a particular instrument they asked me about and it was a footnote in a balance sheet that had about $2.5 trillion of assets that I said, "No, in a $2.5 trillion balance sheet, where this instrument was referred to in a footnote, I was not aware of the footnote of the balance sheet." That you'd only have been aware of if you were really the risk manager for the institution.

JUDY WOODRUFF: Setting that aside...

ROBERT RUBIN: Have they gotten too complex?

JUDY WOODRUFF: Yes.

ROBERT RUBIN: Yes, what I think has happened, Judy, is that -- not I think. It has. It's factual. There's been exponential increase in the complexity and the quantity of these very complex derivatives and other kinds of financial engineering instruments outstanding.

And I think that most people who deal with these instruments probably do not fully understand all the risks that are embedded in those instruments that can materialize under unusual circumstances.

And I think the answer to that is to very seriously consider some sorts of regulatory measures that would probably constrain their use. I, at least, think that we should seriously consider margin requirements and capital requirements, considerably enhanced margin requirements and capital requirements for these kinds of instruments.

And I think that would very much increase awareness of risk, create greater cushion, and so forth. Now, there are a whole host of arguments against doing that. And I think this needs to be weighed out and balanced out in some legislative process.

JUDY WOODRUFF: And, finally -- and this really gets back to what you were saying at the outset -- a word to the wise, the ordinary American who's concerned about his or her retirement account and where the economy is headed.

ROBERT RUBIN: I think that for -- all of us are affected by what the economy does. And I think a sensible way to think about it -- and it's the way I think about it -- is that it may be that we're through all this, that we're really going to now come back out the other end very quickly.

But there's also a real possibility this is going to go on for a much more extended period and remain difficult. And I think that for most people -- and it's certainly true for me -- in those circumstances, in terms of investing, looking after your retirement funds, whatever it may be, it is wise to be cautious.

It's always possible that you'll miss the opportunity that could come if, in fact, we emerge from this very quickly. But I think far the wiser course is to be relatively cautious.

And if you are going to be opportunistic, try to be opportunistic because so many markets have come down, do it in a very carefully paced way, and only risk as much as you can psychologically and financially afford to risk in the event that conditions remain difficult.

And from a policy point of view, I think every citizen in the United States should be actively engaged in trying to urge the people who represent them to engage with these issues in a very constructive way, to try to take whatever measures can be sensibly taken to reduce the risk, and then to look to the long term to see what we need to do with respect to economic policy in this country.

JUDY WOODRUFF: Robert Rubin, thank you very much. We appreciate it.

ROBERT RUBIN: Nice to be with you, Judy.

JIM LEHRER: We've invited the current treasury secretary, Henry Paulson, for an interview next week.