The scene was emblematic of what was transpiring inside the Clinton administration at the time—a White House raring for action, and a Treasury Department trying to play it cool. The president was growing extremely frustrated watching the global crisis worsen, and he wanted to get more personally involved in trying to alleviate it. Gene Sperling, his top aide on economic issues, received numerous notes from Clinton about the crisis during this period, especially after the publication of op-ed articles by economists urging radical measures of one sort or another, which would prompt the president to demand: “Are we considering this?”
Clinton had been suggesting for some time that he ought to deliver a major speech on the crisis. He had a political motive, of course, because the Lewinsky scandal was threatening to overwhelm his presidency, and he wanted to dispel the impression that he was less than fully devoted to matters of state. But he put his case in substantive terms: The markets would take heart knowing that the leader of the largest and richest economy on the planet was closely following the mounting economic strains and was prepared to take all necessary countermeasures. He was particularly enamored of a proposal to convene a global summit of world leaders, an idea he chatted about frequently on the phone with his political soulmate, British Prime Minister Tony Blair. But Rubin was trying to keep Clinton’s instinctive activism in check. It was not that the Treasury secretary was trying to hog responsibility and claim the crisis issue as his department’s exclusive purview; rather, he fretted that dramatic statements by the president might backfire by raising unrealistic expectations and spreading more alarm than comfort.
Still, Clinton was determined to do something—the only question was what. On the evening of September 7, 1998, Labor Day, he summoned his top advisers for a two-hour meeting in the Yellow Oval Room in the residential quarters of the White House. After a few introductory remarks by Rubin, Summers weighed in with an analysis that the rhetoric in Greenspan’s Berkeley speech the previous Friday evening had already “galvanized” the markets. But the president wanted more. Although he put enormous faith in Rubin’s Judgment, he was chafing at the caution of the Treasury team, and he raised the idea of the world leader summit. In a sign of the tension pervading the meeting, Sperling stepped in to knock down his boss’s proposal, since he happened to oppose this one himself, and he knew the Treasury chieftains feared losing their credibility with the president if they played the role of naysayers too much. The world summit idea, Sperling argued, was “dangerous for two reasons.” First was the expectations problem: If the summit proved unable to produce a meaningful result, the consequences could be extremely damaging to market sentiment; even if a “deliverable” were formulated in advance, it would probably leak, diminishing any positive impact. Second, the summit would be a logistical nightmare, requiring weeks of planning—and who knew what sort of shape the world would be in by the time the leaders met?
Clinton relented. “You don’t want to exchange something that will give you two weeks of good feeling for two years of pain,” he admitted. “We don’t need to do something that will raise grandiose expectations.” But he was determined to give a speech, and a suitable venue was soon arranged—the Council on Foreign Relations in New York, on the following Monday, September 14.
The nub of the speech, its most crucial passage, would include a phrase that the Treasury had concocted: “Clearly the balance of risks has now shifted.” Specifically, the president would observe that “for most of the last thirty years, the United States and the rest of the world has been preoccupied by inflation,” but “the industrial world’s chief priority today plainly is to spur growth.” To make sure the markets got the message, the Treasury hatched a plan for the G-7 finance ministers and central bank governors to issue a communiqué containing similar words the night before Clinton’s speech, so he could hail their action. This would show the world that the governments of the major industrial powers were united in fighting the crisis—a display of resolve that it was hoped would reverse the erosion in market confidence.
To the untrained eye, the proposition that “the balance of risks has now shifted” might seem innocuous, or perhaps even blindingly obvious in light of the events materializing at the time. But the phrase represented a daring statement, mainly because it held potentially major implications for monetary policy. It suggested, albeit obliquely, that the Fed—and other independent central banks around the world—should make absolutely certain they were avoiding excessively tight credit stances and should tilt toward lowering interest rates to ensure that their economies did not slump.
The Clinton administration had faithfully refrained from commenting on Fed policy ever since coming to power, an approach that had paid handsome dividends, because markets sensed that Greenspan held a free hand to do what he thought best. Historically, occupants of the White House and the Treasury have Jousted in public with the Fed, especially when they felt it was holding interest rates too high, but Rubin and Summers firmly believed in keeping any differences with Greenspan over monetary issues strictly confined to their private conversations, lest public feuding brew disquiet among investors that could inflict even worse damage on the economy. Determined to avoid any step that might ruin their reputation for respecting the Fed’s independence, Rubin and Summers consulted closely with Greenspan on the “balance of risks” terminology and secured his blessing (indeed, the Fed chairman used similar words himself about the U.S. economy in his Berkeley speech). The phrase, after all, did not formally commit the Fed or other central banks to do anything in particular; they were free to decide according to their own perceptions whether they were appropriately weighing the dangers.
But G-7 unity proved to be a questionable proposition. When the “balance of risks” phrase was sprung on the European central bankers over the weekend immediately prior to Clinton’s speech scheduled for Monday, September 14, they rebelled—in a move that threatened to undercut the U.S. administration’s plans.
The clash materialized on the top floor of an eighteen-story round building in Basel, Switzerland, the headquarters of the Bank for International Settlements (BIS), where the chief stewards of the world’s money supply gather almost every month of the year for a Sunday evening dinner and Monday afternoon meeting. Stimulated by fine wine, haute cuisine, and a view over the Rhine River, the dozen or so principal attendees conduct conversation in the strictest of privacy, with the press kept at bay, as is true of meetings of the G-7 deputies—whose conclaves these rival in their capacity for shaping the course of the global economy.
Unlike the G-7 deputies, who hail from finance ministries, the diners at the BIS monthly meetings belong to the priesthood of central banking and might be called its College of Cardinals. They include the chairman of the Fed (or, if he can’t attend, the vice chairman), the governor of the Bank of England, the president of the German Bundesbank, the governor of the Bank of Japan, and their counterparts from France, Italy, Canada, the Netherlands, Belgium, Sweden, and Switzerland. The president of the New York Fed also has a seat at the table (giving the United States the privilege of being the only country with two representatives), and so does the BIS general manager, a former Bank of England official named Andrew Crockett. With no formal agenda for the dinner meetings, the participants are free to bring up whatever subjects they like. (Topics may include the BIS itself, an institution established in the 1930s to handle German reparations from World War I that now serves as a clearinghouse for bank regulators and holds hard-currency reserves for a number of member central banks.) To enhance candor, the dinners exclude even the top central bank staffers who have accompanied their bosses to Basel; the only interlopers are special invited guests such as the IMF managing director. The most valuable feature of the parleys, participants widely agree, is the camaraderie and bonds of personal trust that develop. These are people who need to know each other well, since they can never be sure when they may have to communicate over long distances to prevent financial calamities from getting out
of hand.
By the time of the Sunday dinner on September 13, 1998, a few of the central bank governors in Basel were dimly aware of the proposal for the G-7 to issue the communiqué about the shift in the balance of risks. But most were still in the dark. Greenspan wasn’t there—Vice Chairman Rivlin attended in his stead—and the task of presenting a draft of the communiqué to the governors fell to Ted Truman, the Fed’s top bureaucrat on international matters. Gingerly, for the governors were savoring brandy after the meal, Truman entered the sanctuary on the eighteenth floor—a breach of etiquette for a staffer, though it mattered little in this case, since Truman had announced he was retiring from the Fed to Join the Treasury as assistant secretary for international affairs, and this was his last BIS meeting.
The Bundesbank’s Hans Tietmeyer said flatly that he would not sign the communiqué, and other Europeans, notably Britain’s Eddie George and France’s Jean-Claude Trichet, resisted as well. Tietmeyer simply didn’t agree that the crisis menaced the world economy, and the worst thing economic policymakers could do, he argued, was to aggravate the uproar in the markets by issuing rhetoric that smacked of official trepidation. He also opposed any moves that might put pressure on European central banks to ease credit, because the continent’s growth indicators were reasonably healthy, and an overly lax interest-rate policy could undermine market confidence in Europe at a time when it was preparing to launch the euro and the new European central bank on January 1, 1999. Finally, as another participant at the meeting put it: “When one says ‘there is a change in the balance of risks,’ it means something in terms of monetary policy, and there was certainly among some of us some uneasiness about the executive branch going into territory that was not the territory of the executive branch.”
At that point, Washington’s original timetable—according to which the G-7 would release its communiqué Sunday night, followed by Clinton’s New York speech Monday—was shot to hell. Now the question was whether the U.S. initiative might turn into a divisive fiasco, with the press getting wind of the discord in Basel and trumpeting stories about fissures in the G-7 ranks.
The U.S. side was poorly prepared for this turn of events. Rivlin had not even been briefed on the communiqué before going to Basel; Greenspan knew it was in the works but didn’t expect such a flap to erupt. After dinner, the U.S. representatives—Rivlin, Truman, and New York Fed President Bill McDonough—called Treasury in Washington to find out what was going on and reached Tim Geithner, who filled them in and said Summers was on his way to Dulles airport to attend a G-7 deputies meeting in London. A Treasury operator broke in to ask if she should intercept Summers at Dulles. “No, I’ve been with Mr. Summers at Dulles,” Rivlin replied drily. “If you intercept him, he’ll miss his plane.”
At the next afternoon’s meetings at BIS headquarters, with the hour drawing close for Clinton to begin speaking in New York, the U.S. side proposed alternative language for the communiqué, but Tietmeyer still balked at signing. The Bank of England’s George, evidently concerned about the potential for a damaging rupture in the G-7’s public facade, suggested to U.S. officials that there was only one way to resolve the impasse: Greenspan must call Tietmeyer. That is what happened—and although nobody will reveal what Greenspan and Tietmeyer said to each other, it did the trick, with Tietmeyer agreeing to sign the communiqué even while continuing to grumble about it. To the immense relief of Clinton administration officials, the communiqué hit the newswires a few minutes after the president’s speech—not the timing they had hoped for but close enough to appear well-orchestrated.
Again, in a pattern similar to that following Greenspan’s Berkeley speech, markets rallied—at first—with the Dow closing up 150 points and London stocks rising by a like amount. Press and market commentary about the G-7 communiqué was full of speculation that the industrial powers were preparing to cut interest rates in coordinated fashion, as they had occasionally done during the 1980s. The G-7 finance ministers and central bank governors, after all, not only agreed in their communiqué that “the balance of risks in the world economy had shifted,” but they “emphasized their commitment to preserve or create conditions” for growth and “noted the importance of close cooperation among them at this Juncture.”
But the air started leaking from the coordinated-rate-cut balloon the day after the Clinton speech, when Tietmeyer made it clear he had agreed to no such thing. “It would be wrong to see [the communiqué] as favoring a general lowering of interest rates,” he told reporters. “In Europe, no reason can be seen to relax monetary policy.” Likewise, Greenspan told a congressional questioner late on September 16 that “there is no endeavor to coordinate interest rate cuts,” and the following day, a rout was under way in the markets, with the Dow closing down 216 points, the Nikkei skidding to a twelve-and-a-half-year low, and French, German, and Brazilian stocks dropping about 5 percent.
The High Command was surely Justified in acknowledging that the balance of risks had shifted, and doing so in a high-profile venue made sense as a signal that its leaders were not oblivious to the need for possible action. But the effort offered some useful lessons in the pitfalls of trying to impress the Electronic Herd with verbiage. “The [G-7] statement was intended to calm things down, but I think it raised expectations,” said one Fed official. “It wasn’t intended to signal a coordinated rate cut. I think they were trying to sound warm and fuzzy, and in the process, they may have had the effect of appearing to promise something they had no intention of delivering.”
The balance of risks would soon shift even further.
A fairly long list of good-sized countries looked as if they might need IMF help in late summer 1998. A July 30 memo from Assistant Treasury Secretary Tim Geithner to Rubin and Summers enumerated the likely recipients: Ukraine was “almost certain” to require $2.3 billion to $2.5 billion. Turkey, South Africa, and Malaysia were “quite possible” candidates for Fund programs, with needs ranging from $1 billion to $5.5 billion each. Brazil and Nigeria had “some possibility” of requiring aid, with a Brazilian rescue, it if came, “likely to be much more” than the $8.7 billion the country would be allowed to borrow under normal IMF rules.
But where would the money come from? That question helped wrack the nerves of the High Command at a time when worrisome developments were already popping up all over the globe. After having approved so many large loans for Thailand, South Korea, Indonesia, and Russia, the IMF was running low on hard currency; the Fund estimated the amount available for new lending at somewhere between $3 billion and $8 billion. Meanwhile, the U.S. Congress was balking at legislation that would enable the IMF to replenish its coffers. The Senate had passed legislation that would provide the $14.5 billion U.S. portion of a major increase in Fund quotas, plus a $3.4 billion U.S. contribution toward a new credit line for the Fund. But the bill faced powerful resistance in the House of Representatives. So the time had come to think about unorthodox ways of bankrolling the Fund—or, as Geithner wrote, “we need to consider options for dealing with requests for Fund support that might exceed current projections, taking into account the possibility that funding by Congress turns out to be inadequate, significantly delayed, or not forthcoming at all.”
The IMF’s quotas—the contributions from members—were worth, on paper, about $200 billion. But much of that was in the form of currencies not readily used in international transactions, and of the hard-currency portion, much had been disbursed or committed to the programs in Asia and Russia. That left about $38 billion, which would seem ample except that it included a substantial sum the IMF was obliged to keep on hand. The IMF, after all, works like a credit union, with member countries entitled to withdraw their contributions almost at will. Accordingly, Fund officials feel they must maintain a cushion—they put it at a minimum of $30 billion to $35 billion in mid-1998—in case one of its rich members exercises its right to take some or all of its quota out (as the United States did in 1978 during a dollar crisis).
Th
at arithmetic produced the estimate of $3 billion to $8 billion being available for new lending. To be sure, the IMF’s financial status wasn’t quite as dire as those numbers suggest. In a pinch, the Fund could draw on a special credit line, called the General Arrangements to Borrow (GAB), which is furnished by the world’s richest countries (the G-7 plus a handful of others, such as Switzerland and the Netherlands). But about a third of the GAB had already been used for the Russian rescue, leaving $14.3 billion, and as Geithner wrote in his memo, that might not be enough to cover all the possible demands on the Fund. Furthermore, few of the countries on his list of trouble spots would qualify for loans financed by the GAB, which was established to deal with threats to the stability of the global financial system.
No amount of cajoling and table-thumping by Clinton, Rubin, and Greenspan had succeeded in persuading the House that the failure to approve the IMF funding bill was endangering the world economy. “Cutting off the water to the fire department when the city is burning down” was one of their favorite analogies for the congressional impasse, but that argument failed to impress some members who had taken note of the results in places like Moscow and Jakarta.
Strange bedfellows comprising House opponents included Bernie Sanders, a Vermont independent who calls himself a “democratic socialist” and boasts a 100 percent rating from the Americans for Democratic Action, and Ron Paul, a Texas Republican who favored shutting down the Federal Reserve and the Internal Revenue Service. Left-wingers like Sanders were critical of the IMF for failing to demand that borrowing countries improve their treatment of workers, the environment, and human rights. Right-wingers like Paul accused the Fund of interfering in markets and creating moral hazard.
The administration encountered particular difficulty with the GOP conservatives opposing the bill, since among their number were influential members such as the House Majority Leader, Dick Armey of Texas; the Majority whip, Tom DeLay, also from Texas; and James Saxton of New Jersey, chairman of the Joint Economic Committee. They derided the Treasury’s contentions about the urgency of getting cash to the IMF, noting among other things that the Fund held $32 billion worth of gold. “The bottom line,” Saxton declared, “is that the IMF is not destitute.”
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