In an Uncertain World (33 page)

Some in George H. W. Bush's administration had taken umbrage when Japan had chided us about the U.S. budget deficit in the late 1980s and early 1990s. My view had been that the Japanese had every right to raise the issue because of those deficits' effect on global economic conditions, just as we now had every right to point out the difficulty that Japan's problems were causing others. In 1997–98, the other G-7 countries often found themselves wishing they had more of a lever to get Japan to deal with its economic problems. It's the familiar conflict between national sovereignty and transnational issues in an interdependent international community. The United States would like to be able to pressure countries whose unsound policies have consequences beyond their borders. At the same time, we would not countenance outside intervention in our own policy decisions. And of course, the question of which policy choices make the most sense in any specific situation is often hotly debated.

We looked for ways to try to influence Japan by focusing attention on its economic problems, both publicly and privately. Privately, we stressed the need for action in our bilateral talks with Japan, coordinating our message at all levels of government, including, on occasion, presidential involvement. In multilateral sessions, especially of the G-7, other countries and the IMF could also weigh in. In the midst of the Asian crisis, I remember a G-7 meeting in London where Alan Greenspan was very effective in getting the highly respected German central bank president, Hans Tietmeyer, to join with us in expressing these concerns to Japan.

Publicly, I spoke rather bluntly about the problems in Japan. Such comments always raised touchy diplomatic issues. Japan was our close ally and tended to be acutely sensitive to criticism. But as time went on, I thought that the effort to make an impact through public comment was more and more appropriate because the country's political leadership seemed to be in a state of denial and Japan's economic recovery was increasingly important to the entire global economy. I recognized this kind of paralysis from my Goldman Sachs days. The attitude of much of Japan's political establishment seemed to be that of a trader praying over his weakening positions, when what he needed to do was to reevaluate them unsentimentally and make whatever changes made sense.

Inside the administration, we had many debates about what to do. Like almost everyone else on Clinton's team, I was something of a policy hawk on Japan, but Al Gore was even more so. We had one meeting in the Cabinet Room where we were talking about how to get through to the Japanese about fixing their economy. The Vice President, who was sitting across from Clinton, got very emphatic. He said to the President, “We've got to find some way to get their attention, to exert some pressure on them.” Gore proposed a comprehensive strategy to influence broader attitudes in Japan that would involve flying American opinion leaders to Tokyo to speak publicly about the importance of the country getting back on track. Gore may have been trying to make more of a point than a serious suggestion, but it illustrated the frustration we felt when a First World ally's poor economic policies threatened to harm all of us.

One episode that remains vivid in my mind dates from April 1997, when Ryutaro Hashimoto came to Washington to meet with President Clinton for the first time as Prime Minister. Larry and I briefed the President for the meeting and reminded him how important it was for Japan to face its problems. I don't think Clinton particularly relished the prospect of hectoring the Japanese Prime Minister. But he understood the importance of pushing, and he pushed. Hashimoto had anticipated having to face this issue with Clinton. When the President brought up the economy, the Prime Minister took out charts he had brought with him that purportedly showed that Japan was on the verge of turning itself around. He said that it was going to start growing again. Hashimoto complained that “Rubin and Summers”—both of whom were sitting there in the meeting—were saying all these things publicly, but they were entirely wrong.

The world did eventually work its way through the global economic crisis without Japan recovering. But I still think we were correct that Japan's weakness made recovery more difficult and increased the risk of further instability in Asia. And Japan's weakness contrasted with China's role in contributing to stability. Had China made different choices at a moment when Japan's economy was so weak, the combined effect of the two on the region could have been very damaging. At that time, China was neither the leading export market nor a major lender to the rest of the region. It was, however, a competitor in exports, and some in the Chinese government seemed to feel that devaluing the renminbi would serve China's interests by making its exports cheaper. But doing so could have set off a new round of competitive devaluations throughout the region. Several times, in meetings with President Clinton, with others in the administration, or with me, President Jiang Zemin and Premier Zhu Rongji underscored the firmness of their commitment not to devalue the Chinese currency. And they never did.

Those meetings left me with some impressions about China that have continued to inform my view. Its leaders were tough, independent-minded, and unresponsive to pressure. Rightly or wrongly, I also had the sense that Chinese officials took a great deal of satisfaction in being seen by the United States and the world as playing a constructive role in contrast to Japan. But while China's nationalistic pride seems to me to have contributed to a constructive economic stance during the Asian financial crisis, I don't think international pressure would have been effective had the country's leaders been differently inclined. Early on in the administration, Clinton argued that instead of trying to pressure China by linking access to U.S. markets to its human rights progress, we should instead have a strategy of engaging China in the international economy through trade policy. The President supported his argument by citing the historic example of the Sino-Soviet split. China had refused Russia's demands when China was weak, Clinton said, and would be even less likely to respond to American pressure now that it was much stronger.

I saw that tough side of the Chinese government time and again in our discussions—for example, when we urged China to ease the Asian crisis by investing and importing more instead of increasing its large foreign currency reserves. I saw it again later, when we negotiated with China on lowering its trade barriers as a precondition to joining the World Trade Organization. As the increasing number of Americans attempting to do business in China are discovering, the Chinese may move, but not in direct response to demands or on someone else's timetable. In the twenty-first century, China will be a formidable and staunchly independent force. It is greatly to the benefit of both our countries to have an effective relationship. There undoubtedly will be frictions in our relationship—trade, for example, is likely to be contentious at times—but I think our common interest should motivate us to work through these.

   

WE HADN'T THOUGHT of South Korea as a country where trouble would develop. The South Korean economy was the eleventh largest in the world, the beneficiary of extraordinary growth during the previous several decades. It had graduated from being among the developing countries that borrow from the World Bank and, in 1996, had followed Mexico to become the second emerging-market nation to join the Organization for Economic Cooperation and Development (OECD).

But no sooner had agreement been reached on the loan package for Indonesia, on Halloween Day 1997, than market attention—and our concern—shifted to South Korea. At first, it was hard to believe that South Korea's finances could go the way that Indonesia's or Thailand's had. Even as the market pressures built, we did not expect the government to come for an IMF loan, especially since it faced presidential elections at the end of the year. What we did not realize—and neither did the IMF or South Korea's bank creditors—was that the country was already almost out of reserves. In late November, with an IMF team beginning to pore over the books, South Korean officials broke the news that what on paper were around $30 billion in government foreign reserves were basically gone. All but a few billion had been deposited in South Korean banks, which were now on the brink of insolvency. This sudden revelation ushered in a period of grave danger for the world economy.

Our concerns came to a head the day before Thanksgiving. Larry had called an emergency meeting of his G-7 colleagues in New York to talk about how to manage the deepening crisis. Alan Greenspan had been alerted to how desperate the situation was and how that also affected South Korean banks in the United States, and he came straight over to my office to tell me about it.

Our Asia team gathered in my office, with Larry coming in over the squawk box. As I looked around the room, I saw an extraordinarily capable group of public officials. Larry's presence had served as a prime draw for some extraordinarily well qualified figures in the field of international economics at just the time when the U.S. government had an immense need for them. Some called it a “dream team” of international economic crisis response. That was so not only because of the distinction of the individual résumés. It was the way we all worked together at both conceptual and operational levels. Our group would sit around for hours and intensely debate the merits of this or that policy option the way people might in an academic seminar—me with my shoes off, Larry with his tie loosened. Differences and disagreements were treated with a sense of mutual respect and collective good humor. But this easygoing group was also a formidable apparatus for making dauntingly complicated decisions with potentially vast real-world consequences.

In addition to Larry and Alan, the core group included remaining veterans of our Mexico team. Ted Truman, who had been at the Fed since before the Latin debt crisis of the early 1980s, was legendary in the field and a repository of the history of past rescue efforts. He once again became a de facto part of our team while still at the Fed—and later an official part when he moved over to Treasury. Dan Zelikow, who had done extensive work in Mexico, also remained. Dan was skeptical and hard-nosed about the terms of support in IMF or bilateral programs, always focused on the danger that the fine points of a loan agreement might undermine the larger effort. Another alumnus of the Mexico crisis was Tim Geithner, who had been a career official when Larry had spotted him and begun promoting him, all the way—eventually—to Larry's old job of undersecretary. Geithner knew a great deal about Asia. He had grown up in Thailand and India and in his Treasury career had worked in the Financial Section of the U.S. Embassy in Tokyo. Tim also had a natural talent for working with other people, terrific common sense, and instinctive political judgment.

Other familiar faces were playing new roles. There was Mike Froman, who prior to becoming my chief of staff had worked on economic reform issues in the Middle East and Eastern Europe, including a stint living in Albania. David Lipton, who had replaced Jeff Shafer as our top international official when Jeff had left for the private sector, had developed a considerable reputation among economists as a “country doctor.” After getting his Ph.D. in economics from Harvard, where he had played tennis and argued a lot with Larry, David had spent eight years at the IMF, developing a specialty in dealing with countries in extreme financial distress. After that he had worked with Jeffrey Sachs, another Harvard colleague, as an adviser to countries with distressed economies, many of them in Eastern Europe. David had helped to engineer the transition to a free market in Poland, among other places, and had made an enormous contribution to the Bosnian peace settlement negotiated in Dayton, Ohio. (Warren Christopher had called me while still deeply embroiled in negotiating the agreement just to say that David was one of the most extraordinary people he'd ever worked with, which said a lot about both David and Christopher.) David's attitude was typical of our group. He was deeply committed to what he did and took it seriously—but he didn't take himself too seriously.

We were also joined by Caroline Atkinson, deputy assistant secretary for international monetary and financial policy—Tim's old job. Caroline, who had grown up in England, was a former official at the IMF and the Bank of England. She brought to the table a sharp mind and incisive analysis as well as experience in negotiating with troubled debtors. Where Larry and David were often intent on developing a plan, Caroline tended to join Dan Zelikow in reinforcing my own skepticism about what could work.

The group all felt great worry and concern that day. South Korea in crisis signaled something truly new, both geopolitically and economically. South Korea was a crucial military ally, with thirty-seven thousand U.S. troops stationed near the North Korean border. One fear was that instability would create an opportunity for North Korea to do something provocative. But what I think troubled us most was a different kind of unknown, namely the potential risk to the world's financial system. South Korea, much more than Thailand or Indonesia, was a mainstream economy with deep links to the rest of the world, both credit relationships and sizable Korean banks in the United States and Korean-owned factories in industrialized countries such as Great Britain.

The problem inside South Korea combined elements of what had happened in Mexico and Thailand. A fixed-exchange-rate regime had led gradually to a serious overvaluation of the South Korean won. At the same time, South Korea's banks had made a practice of borrowing money short term from foreign banks and lending it longer term to the domestic conglomerates known as
chaebol
s. The
chaebol
s, which became hugely indebted in foreign currency, had earnings mostly in local currency. With a sense of panic spreading, foreign banks were refusing to roll over their short-term loans, imperiling the survival of South Korea's banks, and capital now started to flee in earnest. The South Korean won plunged even as the government burned through billions in reserves trying to defend it.