TRANSCRIPT: RUBIN ON U.S. RESPONSE TO ASIAN FINANCIAL CRISIS
USIA
USIS Washington File
22 January 1998
TRANSCRIPT: RUBIN ON U.S. RESPONSE TO ASIAN FINANCIAL CRISIS
(Q & A on Asia financial crisis following 1/21 speech)(3210)
Washington -- Treasury Secretary Robert Rubin says the new
"architecture" for the international financial system, which will help
avoid situations such as the current Asian crisis, is still under
construction and its final form is not yet clear.
"I can't tell you what the ultimate resolutions may be. And it may
even be an idea that people haven't yet broached for analysis," said
Rubin, responding to questions following a January 21 speech on the
Asian crisis at Georgetown University. He cited the ongoing
discussions among officials in Treasury and the Federal Reserve and
with their counterparts in other major industrial countries. "These
days these are the kinds of matters we spend most of our time on," he
said.
"The mechanisms that we can develop and devise and then get an
international agreement on, which is yet another aspect of this, are,
I think, still a matter for the future to tell," he said.
Following is a transcript of question and answer session edited to
remove extraneous comments:
(begin transcript)
ROBERT GALLUCCI (Dean, Georgetown University School of International
Studies): Ladies and gentlemen, Secretary Rubin has agreed to stand
for some questions.
RUBIN: Yes, sir?
QUESTION: Mr. Secretary, is there not a danger that present attempts
to create a bailout of the financial system, which, as it develops,
seems to become greater and greater -- the cost of this bailout --
that there is a danger that this could lead to a hyperinflationary
explosion, especially if the crisis in Asia is combined with the
outbreak of crisis in Brazil, in Russia, or other places?
And secondly, in the light of this crisis, there have been proposals
from a wide variety of different places about returning to a Bretton
Woods-like style of system, with fixed exchange rates backed up by
gold. How do you deem the feasibility of doing something like that as
an alternative to the present situation?
RUBIN: Was your first question hyperinflation or hyperdeflation?
Q: Hyperinflationary -- printing money --
RUBIN: Yeah. No, no, I understand the problem.
Look, you've raised a very serious question, which we have been
extraordinarily -- which we've been very strongly focused on. That is
the question if you create a lot -- I assume this is what you're
driving at -- if you create a lot of additional money in the system
and you don't, so to speak, sterilize it, isn't there a risk of
creating inflation? I must say there is an acute sensitivity to that
problem, and I don't think that there is a risk -- any risk, for that
matter -- of these programs being operated in that fashion, if for no
other reason because there is such focus on the issue.
The greater -- I shouldn't say "the greater risk" -- but the problem
that many people are now focusing on is: Will this create a deflation?
And my instinct is that that is a very, very low-probability event.
On the question of Bretton Woods, with fixed exchange rates -- look,
fixed exchange rates are a very complicated and very important
subject. The problem with fixed exchange rate regimes, as you know, is
that if you're going to make them work, you then have to have to have
monetary and fiscal regimes that will support them. And while this is
a debate we could all have, I don't think -- we could all have, it
seems to me, at least, in the context of a stable and healthy economy
-- my own view, for whatever it's worth, is that we're better off with
a fluctuating exchange rate than a fixed exchange rate, because when
you start to have a weak economy, what you don't want to have to do is
to raise interest rates to keep your currency up.
But leaving that debate aside, if you try to establish a fixed
exchange rate in a context of a crisis which is such as we have now, I
think what you almost surely would have to do, particularly if you're
talking about trying to fix the exchange rate substantially above
where it is today, is to raise interest rates to levels that these
weak financial systems couldn't sustain.
Q: I have a two-part question. When you spoke about a new architecture
for international capital markets and the need that this is going to
take time, does this mean to imply or to hint that the idea of a Tobin
tax is on the table for active consideration? And the second question
I had goes to a statement that Mr. Sweeney made, perhaps within the
last day or two, with regard to these countries exporting their ways
out of their problems at our expense. And I didn't catch all of what
he had to say, but it certainly didn't sound good in terms of the U.S.
lending its support to get the money we need out of the Congress for
the IMF effort. Could you comment on these two, please?
RUBIN: Yeah, let me comment briefly on both.
In terms of the so called Tobin tax, an idea that's been around for a
long time. I remember not liking it when I was in the private sector.
I don't think it's much better now. But in any event, let me say that
we are very open to all ideas, and we will be analyzing and looking
very carefully at whatever thoughts come along.
I think an awful lot of ideas that sound kind of interesting -- I
think I said this in my remarks, actually -- that sound kind of
interesting when you first look at them, when you subject them to the
kind of very rigorous analysis you need to determine whether they can
actually work in this extremely complex global financial system we
have today, I think you develop far greater reservations.
Actually, I was being a little bit flippant about the Tobin tax. The
Tobin tax has an interesting underlying intellectual rationale which
some people seem to find convincing. But I doubt if that's the
direction in which we'd be heading, although we'll be certainly
looking at everything.
In terms of John Sweeney, head of AFL-CIO's comments, I didn't see the
comments, but I've spoken to John Sweeney, and we've had, I must say,
a very thoughtful and very constructive discussion. I think that he is
very focused on the adverse impact that these currency depreciations
in the face of financial instability can have on American workers as
we are focused and also focused on the potential for reversing that
situation in terms of the interests of American workers by
strengthening these economies and having currencies recover.
Q: My question concerns the banks. You just mentioned Citibank, J.P.
Morgan and Chase. Are you talking about real life losses from
proprietary trading or loans, or are you talking about book losses
which might be offset by extra gain from those methods or steps taken
right now? And so maybe we'll see better results and the shareholders
of those companies will be very happy down the road.
RUBIN: I think those are probably questions you should address to the
shareholder -- in all seriousness -- the shareholder relations
departments of the banks. But based on what I read about it, and all I
did was read the newspapers today, which you'll see the -- but it
sounded to me like -- I'm just now reporting what was in the papers --
that there were substantial swap positions and that, in the context of
those swap positions, there were losses as well in derivatives
trading.
Let me add in saying to the gentleman who asked the prior question, we
would very much agree with John Sweeney. It is not in anybody's
interest, including our interest, for these countries to have to, on a
sustained basis, export their way out of the difficulties they're in,
though clearly our trade imbalances are going to deteriorate for a
while, and clearly it is very important that these countries have
healthy export sectors. But the key to avoiding that, the key to
avoiding that is to restore economic health in these countries so they
once again become good markets for our goods and so their currencies
strengthen, which then becomes less of a threat, or has less of an
adverse impact on our goods and services worldwide.
Q: What impact will the possible devaluation of the Chinese won have
on the Asian currency crisis and the export industries in Asia? And
how will the U.S. government deal with that potential threat?
RUBIN: Of China devaluing its currency?
Q: Yes.
RUBIN: Well, our deputy secretary, Larry Summers, was in China
sometime I guess it was last week, and he met with Deputy Prime
Minister Zhu Rongji. Aside from the fact they had a very good hour and
a half conversation about the economic policies in China, either out
of that meeting or just -- I've forgotten now exactly when it was, but
either out of that meeting or just before or just after that meeting,
the deputy prime minister stated once again his commitment to not
depreciating the currency. And I think that's a very constructive
position for China to be in in the context of the problems in Asia.
Q: Sir, What would this new architecture look like?
RUBIN: That's a good question, to which I do not the answer know. The
only thing I can tell you is that we have spent a lot of time,
Chairman Greenspan and Larry Summers, our extremely capable
undersecretary David Lipton, our extremely capable assistant secretary
Tim Geithner, and Ted Truman from the Fed, at a dinner about, oh,
maybe three weeks ago or something. I've forgotten exactly -- four
weeks ago. And we spent the whole dinner pretty much talking about
these kinds of things, and we meet with Chairman Greenspan every week
to discuss various matters. And obviously, these days these are the
kinds of matters we spend most of our time on. Our undersecretary
David Lipton spent two hours the other day -- well, he spent more than
that, but two hours of a meeting in London with his counterparts of
the G-7 were spent discussing these issues. I can't tell you what the
ultimate resolutions may be. And it may even be an idea that people
haven't yet broached for analysis. The only thing I can say is what
I've said in my remarks. These are enormously intellectually complex
issues. And I think the objectives are clear which I've stated. The
mechanisms that we can develop and devise and then get an
international agreement on, which is yet another aspect of this, are,
I think, still a matter for the future to tell. And how close we can
get to meeting our objectives.
Q: Could I just follow up with one -- isn't there a fundamental
problem with the sovereignty of individual countries in establishing
this sort of architecture?
RUBIN: There's not a lot we can do about that.
The sovereignty of -- interesting the way you put the question. The
sovereignty of individual countries obvious creates a substantial
issue or challenge with respect to creating mechanisms that you could
create in a single jurisdiction. Now, there may be ways to deal with
that through treaties. But on the other hand -- and this gives you
some sense of how complex all that could get. You'd have to get
treaties amongst all the relevant countries, and the treaties would
have to relate in some sense of a way to the internal legal structures
and systems of those countries. And it is a very -- yes, I think one
of the great complexities of dealing with this is the fact that you,
as you correctly say, you have very large numbers of sovereign nations
with different legal systems. And somehow or other, for many, though
not all, or at least for some but not all of the possible approaches
you have to find a way of transcending that.
I don't think -- my -- incidentally, for whatever it's worth, my guess
is, my hope is that after an extended period of analysis and work we
can come up with some significant advances with respect to the
international architecture. But there's not going to be some solution
in that sense. We are in a new era. Those of you who are students, I
suspect the world is going to be enormously different 10 years from
now than it is today, just as it is very different today than it was
10 years ago in terms of global financial markets. And I think what
you're seeing is a process the president started in Naples four years
ago. We now need to take another major step forward. And I think for
many, many, many years to come, there will be focus on how do we
continue to move this process forward.
Q: My question is regarding the fact that this crisis has turned
investors' and other observers' attentions into becoming more strict
critics, more scrutinizing observers of political events in these
regions. Given this, the focus of my question is the country of
Indonesia.
Suharto has confirmed that he will stand for reelection, that he will
seek another five-year term. And, given examples such as Indonesia,
what kind of initiatives has the United States taken in addressing the
more strict criticism or more harsh scrutiny of political events in
this region?
RUBIN: Well, I think the question breaks into several pieces. Let me
say with respect to Indonesia, as you know, the president entered into
a new agreement with the IMF a few weeks ago. The absolute key in
Indonesia, as in all these countries, but I think it's particularly
critical at the present moment in Indonesia, though it's equally true
in all these countries, is continued and sustained adherence to the
program and doing the kinds of things -- actually implementing, taking
steps, implementing the reforms that will, number one, help prepare
the system, and number two, create the confidence that's necessary if
you're going to have stable flows of capital.
Clearly, the willingness to do that is in a sense a political event,
not an economic event. I think one of the things that -- well, I think
-- one of the things I used to say about Mexico when we were talking
about Mexico is the remarkable political commitment of President
Zedillo and Minister Ortiz and the others to taking extremely
difficult steps and to sustaining those, to sustaining that program
through a very difficult initial period before the reforms started to
take hold, the confidence started returning, and capital started to
flow. And that's the challenge that lies ahead for Indonesia. And it's
a very tough challenge. But that's the challenge, at least in my
judgment, that they must meet if they're going to persuade the
international financial markets to restore confidence and therefore
stable flows of capital.
Q: During the crisis there was an effort to create an Asian Monetary
Fund which would have increased the role of Japan in dealing with the
crisis. This would have obviously also reduced the influence of the
IMF and the U.S. in terms of conditionality and advice in terms of
their appropriate economic policies. In your opinion, what would have
been the consequences if such an initiative had been successful?
RUBIN: As you correctly say, there was a proposal -- I don't know if
it was actually a proposal, but there was at least some thought, and I
guess it did take the form of a proposal -- to set up an Asian
Monetary Fund. It was a matter that Chairman Greenspan and I discussed
with the finance ministers and central bank governors who went to Hong
Kong.
I think the problem and the thing that so troubled us about that idea
was that if you had a separate fund, even if it worked closely with
the IMF, which this was intended to do, even if it worked closely with
the IMF there was the concern on our part that if you had a separate
fund it almost provided an opportunity for reform shopping. And that,
we felt, would make it more difficult for the IMF to work through the
rigorous kinds of reform programs that we think are absolutely
indispensable to reestablish stability. So it was our view that
probably was not the right way to go.
The Japanese government actually in time decided not to pursue that,
in any event. And it led instead to the Manila agreement, which as you
know is an agreement amongst the United States and a whole group of
Asian and other countries to provide so-called second line of defense
money, which is the contingent agreement that we have now to provide
funds for these -- for certain of these countries in certain
situations, if needed.
Q: Given the high levels of external debt that these Asian countries
have, for some of us the debt crisis of the 1980s may come to mind --
in Latin America. Could you foresee closer coordination between the
Treasury Department, the Federal Reserve and, yes, Wall Street banks
on Wall Street to restructure these loans that are outstanding? This
seems to have worked -- or be working very well in South Korea, and I
was wondering if you could see closer coordination between the three
parties?
RUBIN: Let me say that you've asked a very complicated question. The
Latin American debt crisis of the '80s was, I think, a very different
kind of situation. In very brief, the Latin American countries at that
time had vastly greater external debt as a percentage of their
economies than these East Asian countries have. And as you know, the
sad result of that was a debt structuring process that sort of worked
its way through the '80s. And those countries basically had almost 10
years of terrible economic duress. It's called "the lost decade" now
in Latin America. That's precisely what we want to avoid here.
These countries, fortunately, have lower percentages of external debt
to their economies. Their problem is they have a lot of short-term
debt, and they also have the weaknesses and problems that I described
before. And what we're trying to do is work through a refinancing
mechanism so they can spread that debt out, try to deal with their
problems and get back on a growth path again.
In Korea, we worked with the banks on three continents and discussed
with them the extreme importance of everybody working together. They
voluntarily decided to do that, and they're now negotiating with the
Korean government. In fact, they're meeting today with a
representative of the Korean government to try to negotiate out a
refinancing arrangement. I think that kind of model, as I think I may
have mentioned in my remarks, may very well be something that will be
employed. I don't know if we employed it in this crisis, that I cannot
tell you. But I suspect that it could very well be part of the future
architecture for the global financial markets.
Thank you all very much, and it's very nice being with you. Thank you.
(end transcript)