One person who wasn’t troubled by Summers’ bellicosity was Robert Rubin. The treasury secretary was secure enough not to mind Summers’ oversize ego and smart enough to realize that Summers’ intellect was an enormous asset to him. “Having an extremely bright and skillful deputy secretary greatly increased Treasury’s effectiveness,” Rubin said. “I also thought it made me look good.”
“Summers was obviously smarter, more knowledgeable than Rubin about the economy, but Rubin was never intimidated by that,” said a colleague of both men. Anyway, they did have their intellectual similarities. Before making up his mind on an issue, Rubin liked to hear every point of view, sitting through hours-long meetings and filling yellow legal pads with notes. Summers explained that he and Rubin were intellectually sympatico because of their shared approach to problem-solving. While some people took data as a conclusion, the two of them saw data as an entry point for new questions; Summers and Rubin shared the approach not just to numbers but to all of life’s dilemmas.
In other ways, the two men complemented each other. The slender, elegantly tailored Rubin was the money man with the Harvard pedigree—Harvard College, that is—suave, sophisticated, mannered, charming, and at the time worth about $100 million, according to conservative estimates. Summers was a product of the MIT debate team and Harvard graduate school economics, two forums that encouraged an argumentative nature but not the development of social graces. He’d never made any real money, and he had lousy manners. He was loud, overweight, impatient, constantly late, and poorly dressed—seeing him with his tie askew and his shirt half-untucked was routine. A caricature of Summers in the New Yorker showed a man with a stubby body, a disproportionately large head, and massive, beagle-like jowls, carrying around packets of money like a stork.
But under Rubin’s tutelage, Summers began to evolve. He knew that if he wanted to become more than a deputy secretary, he’d have to conform to the Washington way of doing business, and he worked to smooth his rough edges. “Larry just got sick of being called a bull in a china shop,” one of his colleagues said. Socially, he started to move in high company. He and Victoria bought a 3,300-square-foot house in Bethesda, Maryland, the affluent suburb bordering Washington, from a Washington lobbyist. The couple started attending the Clintonite “Renaissance Weekends.” Summers played tennis with Alan Greenspan and Washington Post editor David Ignatius at the tony St. Alban’s Tennis Club. Not exactly fleet of foot, Summers wasn’t a natural player; his strength was in his strategy, the angles and diversity of his shots, his positioning on the court. “I play a lot better than you’d expect, looking at me,” he said.
Sometimes, the same rule applied to Summers’ practice of politics. Former Clinton White House adviser Dick Morris recalled an instance in which Summers felt so strongly about a policy, he went behind Rubin’s back to promote it. “In early 1996, I met with Rubin and Summers at the Treasury Department to talk about the tax cuts President Clinton was proposing as part of his long-sought budget deal with the Republicans,” Morris said. “We had a long talk during which Rubin did most of the speaking. At one point, however, he had to duck out of the office to take a call and left Summers and me alone. As soon as Rubin closed the door behind him, Summers leaned over the table and, in a conspiratorial whisper, said that one of the proposals I had been making—cutting the capital gains tax, which Rubin opposed—might be feasible if the cut were applied only to families selling their homes…. Larry told me not to tell Rubin, but he would send me the data. Rubin came back in, and Larry clammed up.”
The following day, according to Morris, Summers did indeed send him information that Morris used to make the case for the tax cut to Clinton. “That was the genesis of the current exemption of capital gains taxes on the first $250,000 of profit on home sales per person.”
Summers could never become humble, but he could at least act it. So he learned to preface his opinions, as Rubin did, with softening phrases such as, “I’m not an expert on this, but…” Or, “It’s just one man’s opinion, but…” Or, “It seems to me that…” Perhaps remembering the criticism of the Harvard CUE Guide, Summers began to speak more slowly, biting off words in groups of two or three before pausing, sometimes seeming to catch his thoughts after just a single word. But still, he couldn’t hide the effort it took to rein in his opinions. The contrast between the often dumbed-down language of politics and Summers’ intellectual impatience was too great to disappear entirely. The effect of Summers’ makeover was that “he waits till the end of the meeting to tell you your idea is idiotic, instead of interrupting in the middle of it,” said Washington pundit Mara Liasson.
Even as Summers’ personal transformation continued, his professional life was increasingly demanding. The Mexico problem, it turned out, was not the end of international financial crises but rather the beginning. Starting in Thailand in 1997, a series of financial panics would sweep Asia, and it would fall to Larry Summers, more than any other individual, to resolve them. At Harvard, few people outside the economics and government departments, the business school, and the Kennedy School were paying much attention to Summers’ work. But the deputy secretary was becoming a figure of international renown and controversy, praised as a hero in some parts of the globe, reviled as heartless in others. In fact, Summers may have been better known in Tokyo, São Paolo, and Moscow than he was in Cambridge.
Maybe Harvard wasn’t paying full attention, but Summers’ experiences with international economics and globalization would shape his attitudes toward the university in ways that the Harvard Corporation might well have understood, but certainly never discussed—not, at least, in public.
After he left the Treasury Department, Larry Summers liked to tell a story about what globalization meant to him. The anecdote reflected his optimism about the phenomenon, as well as his criteria for success in globalization’s new, ever-more-competitive world.
“In 1997, I took a trip to Africa to work on debt relief,” he said. “We visited a village three hours outside of Abidjan [in Côte d’Ivoire]. We took a kayak there, took a large kayak back. As we were coming back from that village that had just gotten its first water well, somebody stuck a cell phone in my face and said, ‘Bob Rubin has a question for you’…
“All I could think about was that we were in Africa, in the middle of nowhere, three hours from the capital city, and there was this cell phone. Only nine years before I had been in a car with a cell phone in Chicago, and that was a sufficient novelty at that time that I called my family and I called my friends to say, ‘Look, I’m in a car with a telephone.’ Nine years later, in the middle of Africa, what does it show? I think it shows a hallmark of a new economy. Globalization—the world is coming together as one. Technology—that’s what the cell phone was. And the power of markets, because it wasn’t the state-owned telephone company that had put that cell phone service there.
“It seems to me,” Summers concluded, “that the nation, the businesses, the individuals that succeed in the next century will be those that grapple effectively with these three forces of globalization, technology, and the power of markets.”
Referring to the increasing interdependence of national economies and intermingling of cultures, globalization was perhaps the most far-reaching and passionately debated phenomenon of the 1990s. Summers believed that globalization was generally a good thing, that greater connections between countries would promote economic development and higher living standards all over the world. “It seems to me,” he said, “that in the developing world, far more people are poor because of too little globalization rather than too much.”
That view was not universally shared. Skeptics suggested that globalization was code for economic and cultural imperialism—primarily by the United States. Globalization, they argued, would lead to environmental pillaging, the extinction of indigenous cultures, a McDonald’s in every village, and American-style capitalism—with American bankers and politicians pulling the strings, controlling all the world’s nations. Glob
alization was great if you were one of the haves, they pointed out, someone with the education and training to take advantage of the changes in the world economy. But the have-nots were finding their traditional ways of life uprooted with no apparent payoff.
Both proponents and critics of globalization pointed to the Asian financial crises of the late 1990s as proof of their arguments. The “Asian flu,” as those crises were known, began in Thailand in the summer of 1997 and followed a similar pattern in South Korea, Japan, Indonesia, Malaysia, and non-Asian countries such as Russia and Brazil. In a sense, the crises were a consequence of globalization: improvements in communications and computer technology, combined with changes in domestic law, led to massive influxes of foreign capital into these countries, which in turn led to investment bubbles, particularly in real estate. When the bubbles burst, the holders of the loans—often American hedge funds and investment banks—rushed to call them in, trying to get their money out of the countries before the money ran out. The resulting capital flight inevitably drained the coffers of banks and governments (the distinction between the two wasn’t always clear), forcing bank closures and threatening government solvency. As with Mexico, if just one nation defaulted on its loan payments, the aftershocks could throw the rest of the region—and possibly the world—into an economic depression. The result, especially in the developing world, would be higher rates of unemployment, greater poverty, and more disease. In sum, more human misery.
The organization designed to monitor the international economy, the International Monetary Fund, was unprepared for this string of imploding economies. Like the World Bank, the IMF was a product of the Breton Woods Conference, but its mission was slightly different. Whereas the Bank was essentially a fund for international development, the job of the IMF was to monitor the stability of the international economy. Like the Bank, the IMF is dominated by the United States, which has the largest voting percentage at the Fund and dominates IMF policymaking. The government agency that represents American interests at the IMF is the Treasury Department, and the man at the Treasury who told the IMF what to do was Larry Summers. “More than any other single person, Larry [drove] the substance of the U.S. policy response to the Asia crisis,” Rubin said.
Summers crafted solutions based on the Mexico model, but using IMF and World Bank funds instead of exclusively American money. He would proffer multibillion-dollar loans, but only with strings attached. Each country had to agree to raise its central interest rate; Summers reasoned that foreign investors could be coaxed back into a country only if they received high rates of return on their investments. Higher interest rates reduced the money supply and lowered inflation. That was bad for debtors, making it harder for them to pay off their loans, leading to economic slowdowns and higher unemployment. But creditors were repaid in currency that wasn’t constantly plummeting in value.
Summers also wanted foreign governments to open their capital markets to foreign investors, lower their trade barriers, restructure the relationships between governments and banks, and even make specific personnel appointments. According to Strobe Talbott, Summers was so deeply immersed in Russian policy, for example, that he controlled the appointments of ministers in the Russian government. “Conditionality in IMF lending was the economic equivalent of the spinach treatment,” Talbott wrote in his 2002 memoir, The Russia Hand, “and the master chef was Larry Summers.”
His opponents said that Summers was taking advantage of the situation to force countries to open their markets to American business on disadvantageous terms. Summers’ response was simple: If the IMF was to lend your country billions of dollars—money that might not get repaid—didn’t it have the right to dictate the terms? He argued that countries that agreed to the IMF’s conditions would be more likely to get their economy back on track, the most powerful means of helping poor people. Yes, IMF conditions would lead to higher unemployment in the short term, but there was no way around that. “Battlefield medicine,” Summers would argue repeatedly, “is never perfect.”
Summers’ approach, known as the “Washington Consensus,” was attacked from both the right and the left. Conservatives didn’t like the Washington Consensus because it meant using American money to intervene in the internal affairs of other nations. “If it were up to me,” said former GOP congressman Jack Kemp in 1998, when Congress was voting on the U.S. share of IMF funding, “I would not give one dime, one nickel, one cent to the IMF, which is asking our taxpayers for [billions]—until it changes its policies and top personnel, without Mr. Summers in the running to lead it.”
But perhaps the most vociferous criticism came from liberals who argued that the Washington Consensus was unduly punitive. Ensuring the payback of loans punished the world’s poor while rewarding wealthy and irresponsible investors, they said. Why should the IMF bail out Wall Street banks who’d made reckless loans or hedge funds who’d invested in a bubble? “I think it’s a mistake to blame the doctor instead of the disease,” Summers responded, and, besides, there were no perfect solutions. In the long term, the countries in question would benefit from greater “transparency” in their financial affairs and less “crony capitalism,” the dispensing of sweetheart deals to intimates of powerful people.
Perhaps the toughest criticism of Summers came from an unexpected source: the chief economist at the World Bank, an American named Joseph Stiglitz. Unlike most of the anti-globalization activists who still criticized Summers over the World Bank memo, Stiglitz had the academic credentials to take Summers on as an intellectual peer—or perhaps even from an elevated position. A graduate of Amherst who’d gotten his Ph.D. in economics at MIT, Stiglitz began his teaching career at Yale, where he received tenure at age twenty-seven—one year younger than Summers was when he received tenure at Harvard. In 1979, at the age of thirty-five, Stiglitz won the John Bates Clark Medal, the same award that Summers would win at thirty-eight. Stiglitz was a member of the Council of Economic Advisers from 1993 to 1995—the period when Summers had hoped to head the CEA—and then became its chair until 1997, when he moved to the World Bank.
Stiglitz did something that was virtually unheard of for an insider at the World Bank: he criticized it—in public. The Washington Consensus, Stiglitz argued, was a one-size-fits-all program that caused more misery than it alleviated. The Treasury was pushing policies for other countries that the Clinton administration would never tolerate at home. Neither Summers, the World Bank, nor the IMF “wanted to think that their policies were failures,” Stiglitz would later explain. “They stuck to their positions, in spite of what I viewed as overwhelming evidence of their failure.”
To Stiglitz, Treasury, the World Bank, and the IMF had all become tools of Wall Street, a means of extending American financial interests masquerading as economic benevolence. Summers, once a skeptic of the free market, had become one of its more ardent defenders, and Stiglitz believed that the former was tailoring his positions to please Wall Street, one of Treasury’s most important constituencies, so that the Street would support Summers’ eventual nomination as Treasury secretary.
Summers bristled at the criticism, but did not respond in public until after he’d left Treasury. “Given the circumstances, I think the advice that we gave…was right,” Summers said. “Stiglitz would always like there to be a larger audience for his papers, but I think it’s not serious to suggest that officials at the IMF or the U.S. Treasury were unaware of the field of microeconomics or unaware of research on credit rationing.” In other words, Summers knew that IMF conditionality would hurt the poor. But he still thought it was the best solution for dire circumstances.
There were those, including Stiglitz, who suspected that Summers had actually responded to Stiglitz’s criticisms more directly: by forcing Stiglitz out of his position as the World Bank’s chief economist. In 2000, when Stiglitz’s term was up, he was due to be reappointed by World Bank president James Wolfensohn. But Wolfensohn informed him that the appointment would come only if he promised to si
lence his criticism, a condition Stiglitz declined to meet.
Stiglitz left the Bank to teach at Columbia University and write an influential bestseller called Globalization and Its Discontents. In 2001 he would win the Nobel Prize for his work on “information asymmetries”—the idea that markets are imperfect because their participants have unequal access to information. “Even small degrees of information imperfections can have large economic consequences,” Stiglitz explained. As developed by him, it was the kind of big idea that had eluded Summers.
But the memory of his ouster still stung, and Stiglitz blamed Larry Summers. Summers couldn’t handle criticism, especially from another economist, Stiglitz thought. He didn’t believe in dissent or the public airing of conflicting opinions. Stiglitz believed with all his heart that Summers, with his power over the World Bank, had forced Wolfensohn either to neuter or to exile Stiglitz, but he’d never be able to prove that. Summers, Stiglitz would tell associates, had been careful “not to leave his fingerprints” on the episode.
For the most part, however, Summers received positive press during his Washington years. Reporters appreciated him. He had made himself an excellent source of background information for the beat reporters covering Treasury, and he had a gift for explaining complicated situations lucidly and colorfully. When he did speak on the record, he showed a well-honed flair for the sound bite, as when he compared modern capital markets to the invention of the jet. “On the one hand, it’s faster and gets you where you’re going more comfortably and more rapidly,” he said. “On the other hand, crashes are that much more spectacular.” True, Summers tended to repeat his best lines, but they were still more interesting than the usual government monotone.
Anyway, the U.S. economy was roaring along, largely unaffected by the crises abroad. The IMF remedies may have inflicted painful consequences overseas, but the reporters in Washington paid little heed to what was going on in Malaysia or Moscow, and they wrote glowingly about the Clinton economic team. The most egregious example came in February 1999, when Time put Rubin, Greenspan, and Summers on its cover, calling them the “Three Marketeers” and “the committee to save the world.” In a breathy, you-are-there style, the article’s lead portrayed a moment of crisis at which Rubin happened to be bonefishing and Greenspan playing tennis. Of Summers, Time said, “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.”
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