"Rubinomics" Is Back

Financial markets are built upon trust. Financial securities are just information, in effect, they are just zeros and ones. 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.

A recent article in the New York Times 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.” I think that his argument 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.

We must listen to the markets!

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!

Comments

[Mike, DC:]

Writer must be a Democrat. I sure hope he can keep his party in line, although I doubt it.

2008 Jun 13 08:42 AM

[Joyful Alte...:]

I wish somebody would have kept the Republicans in line. This must be the most fiscally irresponsible administration ever. I wish Rubinomics the best (as long as there are no more NAFTAs), but I can't see how the finances of the U.S. government can be straightened out in my lifetime.

2008 Jun 13 09:12 AM

[Boar:]

It is important to remember that this article is one persons opinion! Many contrary arguments could be made, but save one they are all irrelevant; socialism of the democrats can only lead to weakness of the state.

2008 Jun 13 10:14 AM

[Thrift Maven:]

The Democrats will straighten things out again, and bring back more of the "level playing field" which working people love....only to have
the nation shafted and sucked dry again when Republicans gain power down the road.

Our nation was founded as a republic - and is marketed as a democracy when the need for soldiers arises.

2008 Jun 13 10:28 AM

[Thrift Maven:]

in Street folks.

2008 Jun 13 10:39 AM

[little marty:]

Robert Rubin made s speech, a few years ago,at an economic
forum,at which he stated that our . economy was unsustainable .
He did not agree with Bush/Greenspan "easy money" philosophy
and their criminal decision to burden many young people with easy loans that were obviously not going to be repaid. How was a young couple going to repay those balloon payments when they did not even know what a baloon payment was? As long as the bankers and investment houses kept getting their interest payments and settlement charges what did they care? I cannot imagine that the investment community was that naive that they thought the party would last forever? I am not a financial guru,but just a guy who has lived through the depression and had some very rough years so that my perspective is very realistic and my head is not in the clouds.As I said to my investment counsellor,in the famous words of Al Jolson "Baby,you aint seen nothin yet" Caveat Emptor

2008 Jun 13 10:42 AM

[Skjellifetti:]

Excellent article. I especially liked this paragraph:

"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."

It succinctly describes how adults govern. We must have an open discussion of goals coupled with an honest discussion of constraints. Those who would whine that the "socialism of the democrats can only lead to weakness of the state" would do well to remember that it was a Republican President coupled with a Republican Congress that got us into the fine mess we are in today precisely because they refused to honestly discuss their goals and would not acknowledge any legal or financial constraints on their behavior.

2008 Jun 13 11:03 AM

[bill d:]

Answer me this grasshoppers- IMINSKY writes:
"The Democrats will straighten things out again, and bring back more of the "level playing field" which working people love....only to have
the nation shafted and sucked dry again when Republicans gain power down the road."
If things are always so great under the Dems - then why the hell do the Reps regain power ?
Think about it and then look at the Dem congress today and you will be able to predict what will happen 4 years from now.

2008 Jun 13 12:23 PM

[Skjellifetti:]

"If things are always so great under the Dems - then why the hell do the Reps regain power?"

Because they are better liars than the Dems.

As I have gotten older, I start to understand why Mark Twain's writing became so dark and pessimistic in his later years.

2008 Jun 13 01:32 PM

[Lewis Whoke...:]

Robert Rubin, after leaving the Clinton Administration, accepted a lucrative position as VP of Enron. He pleaded with the Bush Administration not to look at Enron's books.

If Al Gore had won in 2000 and listened to Robert Rubin, how much worse would the Enron debacle have been if they were allowed to cook the books for a few more years?

Equating Robert Rubin with trust is like nominating Machine Gun Kelly as head of the Banking Commision.

2008 Jun 13 02:42 PM

[User 109765:]

It is amazing to see that some commentators are not capable to understand till today how the US has been more and more isolated and has lost credibility over the past years. Though it has been the world leader till 2000 it has managed through one presidency to loose the world leadership in Africa, South East Asia and Russia. Europe except the Poms are in disbelieve and disarray and the Chinese, the next bullies around the block just pray that the US may follow its selfdistructing route on a more consistent way that it is not going to end in a bust. The English won the WW II and lost the empire, the US won the Cold War and are loosing their friends, the economic leadership. There is still hope since the US hasn't lost the scientific leadership for the next generation technologies and that is still the best foundation; let's hope that this time greedy CEOs are not exporting the technology to China in a short lived manufacturing/profit/c... boom and a long lived industrial espionage blow out.

2008 Jun 13 03:12 PM

[truthbetold:]

Absolutely ridiculus article. The bias of the author blinds him to reality. America is and continues to be the shining city on the hill. Travel abroad and you'll see what I mean. The opportunities for rags to riches and/or to increase your standard of living through hard work is better here than anywhere in the world. The only thing that can dim America's light is if we move more towards socialism. I do give Robert Rubin some credit because he did recognize that government programs don't work. He knew the best way to fight poverty in depressed city areas was to foster business investment in the area, not put more people on the government dole. However, what he did in trying to prop up Enron and Ameriquest financial was not only grossly unethical, it was borderline criminal. Also, he's been a director of Citigroup and is currently. He hasn't done much good there judging from the stock price. His actions helped to increase this subprime mess we find ourselves in with the repeal of Glass-Steagal while he was still with the Clinton Administration (very much in Citi's interest btw). All in all he has demonstrated that he is a man of poor character as ethics go out the window when his personal self interest is involved.

2008 Jun 14 02:36 AM

[truthinvesting:]

Both parties are full of power hungry ego driven people with no real track record inhaving any fiscal or business sense

2008 Jun 14 10:56 AM

[thku4grace:]

Interesting how the author didn't mention the double-digit inflation and stagnant growth Reagan inherited from Carter. Must have slipped his mind. Reagan actually left the economy in great shape. Clinton was headed down the same path as Carter with the Dems holding the house and senate, but with the upheaval of the Dems in 1994, Clinton realized he didn't want his legacy being that of not getting anything done. He wasn't a new Democrat until the contract with America bulldozed him. He still fought tooth and nail which brought back to back to back budget impasses every year. What did that bring us? Slower growth of government. It surely wasn't by his design. Then into his second term he saw the light and accepted the Republican proposal to lower capital gains taxes which brought in a load of new government revenue. Who remembers this differently? Read up on history. Yet today, Democrats take all the credit. Go figure!

2008 Jun 17 10:01 AM

[tramp:]

thku4grace.. i totally agree.. Newt gingrich and John Kasich were the sole source of fiscal responsibility during the 90's and somehow it is now all attributed to Clinton;.. in 1995 Clinton said 1 million american babies would die if he signed the welfare reform act.. in 1996, to remain president, he signed it in the most marketed signing ceremony in the history of the presidency.. today he takes sole credit for the reform.. i guess the murder of 1 million american babies is irrelevant if its done for a democrat to remain president.. (it's quite entertaining to do a google search and read some of the attacks from democrats on that particular piece of legislation).. that every democrat in america now takes credit for the work of Gingrich and Kasich is truly the height of irony, as those same people crucified them while they were working to give us a balanced budget; and now today i discover that it was Rubin & Clinton who did it.. AMAZING

2008 Jun 17 03:47 PM