05 Nov Mister, We Could Use a Man Like Robert Rubin Again
Longtime readers may recall that one of our favorite stories about newly elected presidents and their plans for their new administration took place more than thirty years ago, when the “man from Hope” (Bill Clinton, to you youngsters) promised to “fix” George H. W. Bush’s “broken” economy, while simultaneously fulfilling longtime Baby Boomer spending fantasies. Clinton was stunned and angered when the proverbial adults in the room explained to him how things worked in reality.
Way back in 1994, The Washington Post’s Bob Woodward wrote a book about the early days of the Clinton presidency (and pre-presidency, as it turns out). Among other things, Woodward recounted the mugging that Bill received at the hands of reality in January 1993, a few weeks before assuming office. A good part of that mugging came courtesy of Robert Rubin, who had been the co-chairman of Goldman Sachs until he left the firm to work in Clinton’s administration, first as the Director of the National Economic Council and then as the Secretary of the Treasury.
The opening scene is a gathering of the soon-to-be-installed Clinton economic team at the Governor’s Mansion in Little Rock on the morning of January 7, 1993. Our hero, Rubin, whom Woodward describes as the “master of ceremonies” of the meeting, opens the discussion with some dire predictions about the coming explosion in the budget deficit. Laura Tyson, who was soon to become the chairwoman of the Council of Economic Advisors, follows with some highly gloomy remarks about prospects for economic growth.
Next to speak was Alan Blinder, Tyson’s soon-to-be-deputy and an economics professor at Princeton. Blinder introduced a theme that would haunt the early days of the Clinton administration. Or as Woodward put it:
Blinder’s forte was the large issues of taxes, spending, and budgets, so-called macroeconomics, that were traditionally the focus of the CEA chairman . . . Why were they hearing that the federal deficits needed to be reduced? Blinder asked. Why was that goal important? Lowering the deficits would help the national economy, he said. It was not just to clear the decks or because the founding fathers were Puritans . . . The worst-case scenario, Blinder continued, “is a recession no worse than George Bush enjoyed” . . . Clinton had promised to “grow the economy” and create more and better jobs. The irony was palpable. Blinder realized he was presenting Clinton with a political loser. . .
Clinton recognized that it was the exact argument that Greenspan had made to him the previous month: Deficit reduction could mean lower long-term interest rates.
“But after ten years of fiscal shenanigans,” Blinder quickly pointed out, referring to the unrealized promises of Reagan and Bush to cut the deficit, “the bond market will not likely respond.”
At the president-elect’s end of the table, Clinton’s face turned red with anger and disbelief. “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of f…ing bond traders?” he responded in a half –whisper.
Nods from his end of the table. Not a dissent.
Clinton, it seemed to Blinder, perceived at this moment how much of his fate was passing into the hands of the unelected Alan Greenspan and the bond market.
The next scene in this tale takes place in the White House’s Roosevelt Room, just three weeks after Bill’s inauguration. The Clinton team is discussing a plan to cut $140 from the budget deficit by 1997 and the positive impact that reducing this debt might have on the bond market. Included in the group this time was Howard Paster, newly chosen by the President to be his chief lobbyist to Capitol Hill. Woodward continues:
“How many votes does the f…ing bond market have?” Paster asked. “We’ve got to win votes on the Hill, not Wall Street. If it looks like Jimmy Carter’s water projects all over again, we’re dead”. . .
“Okay,” Tyson said, “I am going to say this because it’s my role in this room . . . I can’t prove to you that there is anything magical about the $140 billion. There is a point where the bond market will take your program seriously. I don’t know where that point is. Maybe it’s at $135 billion or $140 billion or wherever. I can’t tell you.” . . .
Clinton looked taken aback. The hawks pounced. Bentsen, Panetta, and Rivlin said the plan was going to be debated heavily in Congress; it would be a political debate of some intensity. Congress did not like pain, and the president’s position would certainly be trimmed back, they reiterated. Bentsen had not disclosed the sensitive fact that the $140 billion was Greenspan’s recommendation . . .
Woodward’s book is full of all sorts of great stories about how Bill Clinton learned about the realities of governance, debt, and the messes that too much debt could create. Rubin and the rest of the Wall Street crowd introduced Clinton to these truths, and, in the process, killed Bill’s Baby-Boomer dreams.
I mention all of this today for a reason – not just because it’s fun. Whoever wins the election today – and I’ve already made my prediction – he (or she…I guess…) will face an economic reckoning not unlike that faced by Bill Clinton. Both candidates have promised to ignore reality and to spend as much money as possible on whatever suits their fancies. The bond market is unlikely to cooperate.
Yesterday, our old friend (and former colleague) Ed Yardeni noted the return and the persistence of the “Bond Vigilantes” (a term, IIRC, he coined more than three decades ago, during the events noted above). He put it this way:
We aren’t (yet) calling for the 10-year Treasury yield to reach 5%, but the Bond Vigilantes seem to be threatening to take it there:
Bond Vigilantes in the driver’s seat. As noted above, the FOMC is widely expected to cut the FFR by 25bps next week. Based on the prevailing economic strength, there’s little to suggest it needs to. We suspect the latest weak ISM manufacturing PMI report and October employment report may be used to justify another rate reduction. Fed Chair Powell may also point to the real FFR becoming increasingly “tighter” as inflation falls as justification.
Investors often hear “Don’t fight the Fed,” but perhaps it’s the Fed that shouldn’t be fighting the Bond Vigilantes. The bond market could easily nullify the impacts of another rate cut. That’s because the bond market believes the Fed is cutting rates by too much, too soon, and is therefore raising long-term inflation expectations. These expectations are heightened by concerns about more fiscal excesses from the next administration.
In other words, the Bond Vigilantes are antsy and not likely to be placated easily.
One key difference between now and 1992-’93 is that the Fed Chairman back then (Greenspan) was on the Vigilantes’ side. Today, Powell is not, which means he is likely to compound the debt market’s concerns and to make the Vigilantes more vigilant.
Another difference is that the world, currently, is in a rather agitated state, which is likely to get worse before it gets better. In 1993, as the world embarked upon its “holiday from history,” the Clinton team was able to cut spending by slashing the defense budget. The next president will not have that luxury.
Indeed, the next president will not have many luxuries. He (or…she…) will have to be ready to make difficult and unpopular decisions from Day 1. May God bless him (or…her…) and the United States of America.
