A good editorial piece in WSJ today:
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June 9, 1999
Questions for Mr. Summers
When Lawrence Summers comes before the Senate for confirmation as the next Secretary of the Treasury, he'll bring a heap of credentials, not least his years as apprentice to departing Treasury Secretary Rubin. No doubt many Senators will be tempted to wave Mr. Summers right on through, but they should not pass up a badly needed educational opportunity.
In a perfect world, indeed, we'd like to hear testimony from about 500 million people, the citizens of the four or five nations who suffered the "global economic crisis" of 1998, not least by following what appears to have been Mr. Summers's advice. Since 1993, he has been point man at Treasury for international affairs, the big blot on the Rubin Treasury's economic management. The Summers years coincided with one bout after another of crisis and worry, of hundreds of millions of working-class people abroad beggared by a mix of Treasury-backed policies that debased their currencies.
The working assumption in Washington, both at Treasury and among its colleagues at the International Monetary Fund, has been that you really can fine-tune the vast global economy, mostly by jiggering exchange rates. As it turned out, devaluations in places like Mexico and Asia turned into economic free falls followed by monstrous inflation. From 1995 to 1999, these "rescues" entailed some $230 billion in U.S.-backed or assisted bailouts into Mexico, Thailand, Indonesia, South Korea, Russia and Brazil.
It still is not at all clear to us that Mr. Summers has figured out what went wrong here, or, in the spirit of the Clinton Administration, understands that he had any role in what happened. Now it's entirely possible that the GOP Senate also comes from the baby boomer political generation whose ethos is: stuff happens, let's move on. But assuming the constitutional responsibility of advice and consent still carries meaning, we think Treasury, U.S. interests and indeed Mr. Summers would benefit if some questions were put to him.
(1) Did you privately urge Mexico to devalue its peso in 1994, as a precondition of the $47 billion U.S.-led bailout you then helped put together?
This question, subject of heavy rumor in the markets at the time, matters even today. The Mexican crisis, and the way Mr. Summers dealt with it, turned out to be a blueprint for the more recent crises in Asia, Russia and Brazil. Often described as one of Mr. Summers's star moments, the Mexican devaluation was a disaster for tens of millions of middle-class Mexicans. It devastated their savings and livelihoods. With Mr. Summers guiding the way, Treasury bypassed Congress to put together a $47 billion bailout that chiefly helped pay back holders of dollar-denominated Mexican government bonds, knows as tesobonos. Many tesobono holders, made whole by U.S. taxpayer money, were sophisticated American (and also Mexican) investors who earned high returns for their high-flying investment.
This pattern was then repeated in Asia and Brazil, and might have been repeated in Russia had the Russians not been so swift they swiped the bailout funds before the Western investors could get to the pot.
Does Mr. Summers still think any of this is good policy?
(2) How do you plan to reduce the huge moral hazard created by your bailouts of developing economies?
The phrase "moral hazard" refers to the problem that one government bailout leads investors to make more rash bets in the expectation they may be bailed out again. With Mexico's bailout, the message Mr. Summers et al. sent the markets was that risky bets were in fact a relatively safe business. That led to the next round of crisis, in Asia. This expectation, if not reduced, will almost surely lead to further crisis.
(3) Will you start telling the public the truth about important economic information?
A report on the Mexican crisis, presented June 29, 1995, by Senator Alfonse D'Amato, charged, "The Clinton Administration knew of Mexico's deteriorating economic condition during 1994 but did not inform Congress or the American people. This behavior creates a dangerous precedent that ultimately betrays the trust of the American people." Mr. Summers worked in the thick of the efforts to provide what one 1994 internal Treasury memo called "comforting Treasury words to soothe the press." Since then, he has provided comforting words about places such as Indonesia and Russia--in each case followed by major crisis. There is a line between inveterate official optimism and giving false witness. Does Mr. Summers have a view on this responsibility to the public?
(4) Would Mr. Summers provide dates and details of the currency policies he urged on the many troubled economies that he visited during the past two years of crisis? If the markets seemed confused through this period, it is at least in part because so much of the Summers operation took place in secret, sowing confusion over goals and methods. Does he plan to continue this approach?
None of this suggests that anything is to be served, in this time and place, by refusing in the end to confirm Mr. Summers. But some rather grand policy failures took place on his watch, and surely there are some questions to be asked. He serves in an Administration that has not been big on accountability, after all, and comes before a Senate that has not been big on enforcing it |
