A reader emails to counter some of the pro-Rubin sentiment on the Letters Page. This argument strikes me as worth pondering:
The letter writer who defended Robert Rubin’s performance as Treasury Secretary overlooks the fact that Rubin and Greenspan together made a rising stock market the main pillar of their macroeconomic policy of the late 90’s. As the respected PIMCO bond fund manager Bill Gross said in a January 2002 column (see http://www.pimco.com) , “Prior to Robert Rubin, Secretaries of the U.S. Treasury conducted economic policy with an eye towards promoting the competitiveness of American industry, as well as services such as banking, insurance, and financial management. For the past eight years or so, the focus has been on the markets (stock and bond) as opposed to the marketplace.”
Greenspan and Rubin orchestrated the bailout of Long Term Capital Management in 1998, and in this and other ways they generally fostered the perception that Treasury and Fed policy would be aimed at supporting the stock market. [See Lowenstein, “When Genius Failed: the Rise and Fall of Long Term Capital Management” (2001); Brenner, “The Boom and the Bubble” (2002)]. By creating the impression that the government was creating a floor under which stock prices would not fall, they helped stoke the stock market bubble.
To be sure, Greenspan warned in 1996 of “irrational exuberance,” but in subsequent years when stock market valuations reached much higher levels, he dismissed concerns about the existence of a stock bubble in testimony before Congress, and bought into many of the more outlandish “New Era” claims, including the argument that high equity valuations were justified by the great productivity gains ushered in by the new economy.
Greenspan and Rubin favored a rising stock market because it: 1) made possible a strong dollar, even in the face of widening current account trade deficits, as foreigners invested their excess dollars in our bond and equity markets; 2) created wealth effects that stimulated consumer spending; 3) allowed for a stimulative monetary policy without risk of consumer goods inflation, as cheap credit went into margin purchases in the stock market, housing, and foreign goods purchases. But in the real economy, many unproductive and unsound investments in were made (e.g., the laying of billions of dollars worth of excess fiber optic cable, to name just one) whose liquidation will inevitably produce economic contraction.
The letter writer suggests that Rubin’s strong dollar policy was hardly a “horrible crime.” But if a high dollar value is achieved largely by means of a speculative stock market bubble, then the currency market for the dollar is itself a bubble — and it is a bubble that has done serious damage to our domestic industry. Moreover, the major correction of the dollar that many predict (George Soros has suggested that it may drop as much as 33% in the next two years) will inevitably lead to recessionary effects in domestic businesses that are tied to the import industry, as well as consumer goods inflation. Some analysts, like Charles Kindleberger, the author of a classic book on investment manias, believe that cheap credit (and the dramatically expanded role of the government sponsored enterprises, Freddie Mac and Fannie Mae, as purchasers of mortgage paper) may also have created a housing bubble that will eventually undergo a painful and destabilizing correction. (See 7-25-02 Wall Street Journal article, p. A-1).
The Greenspan/Rubin policies of promoting a rising equities market created a “virtuous cycle” of prosperity and low consumer goods inflation as long as the stock bubble was expanding. But, as recent events are demonstrating, the inevitable bursting of a bubble can just as quickly lead to a “vicious cycle” of destabilizing economic conditions.
The Dish 