Stress Test Read online

  I felt like a foreign correspondent, trying to figure out another new place, sending dispatches home to a distant Washington. Japan was a challenge for any outsider to grasp, and much of the economic substance of my job was new to me. One of my tasks was producing Treasury’s quarterly forecast for the Japanese economy. This was a useful education, mostly in making me skeptical of forecasting. I talked to economists and executives. I studied the data. But how on earth were we supposed to predict Japan’s growth rate over the next two years? Even the best forecasts, I learned, were just educated guesses. They could tell a story about how the economy might evolve, but they couldn’t predict the future.

  Washington seemed to appreciate my work anyway. I remember when we were trying to get the Japanese to help defray the costs of the first Gulf War, I rode in a motorcade from the Tokyo airport with a senior delegation from Washington. Hollis McLoughlin, Secretary Brady’s chief of staff, asked me what the Japanese police officers were yelling into their megaphones as they cleared our path. I didn’t know the direct translation, but I replied: “They’re saying: ‘Get the fuck out of the way!’ ” I don’t know if it was my limited Japanese or my fluent profanity that impressed him, but he told that story around the department to mark me as a young man to watch.

  ONE OF my main responsibilities in Tokyo was helping to open up Japanese markets to U.S. firms, especially U.S. financial firms. The George H. W. Bush administration, like its predecessors, was concerned about Japanese trade barriers. It was also concerned about the anti-Japanese protectionist fever growing on Capitol Hill. The hope was that if we could get Japan to provide a more level playing field, Congress might be less inclined to enact legislation that would restrict Japanese access to U.S. markets. The dominant view of the time—and I shared this view—was that freer trade would benefit both countries.

  In those days, the Japanese were seen as our main economic threat, making our camcorders and VCRs, buying Rockefeller Center. In the four years before I arrived, the Nikkei stock index tripled and Japanese real estate values tripled; Japan’s land, an area the size of California, was worth nearly four times as much as the land in the entire United States. Publishers churned out books predicting that Japanese capitalism, with its cozy relations between government bureaucrats and huge corporations, would bury the American model. Politicians vowed to stop Japan, Inc., from stealing American jobs. Hollywood movies featured Japanese corporate villains.

  But shortly before I moved to Tokyo, Japan’s stock bubble burst, followed by its real estate bubble. The tide began to recede, and as Warren Buffett says, that’s when you see who’s swimming naked. Japan, Inc., no longer looked unbeatable. I got to watch the early stages of Japan’s response to its financial crisis, which began deftly, as some failing banks were merged into stronger ones, but later became a case study in what not to do, as the government propped up weak banks and left them undercapitalized, helping to usher in a “lost decade” of stagnant growth. Inside the U.S. government, the pendulum swung back toward triumphalist demands for Japan to be more like us. I had never understood the hype about Japan’s supposedly superior economic model, but I wasn’t wild about the strains of arrogance in our reaction, either.

  I mostly agreed with the substance of our push for open access. Many of Japan’s trade practices were unproductive and unfair. Wal-Mart couldn’t build stores in Japan, and U.S. financial firms were effectively shut out of Japan’s mutual fund and pension fund markets. The specter of U.S. retaliation was also a legitimate fear. Even if it didn’t spark an all-out trade war, it would have hurt American consumers as well as American manufacturers who depended on imports of Japanese parts. And our external pressure—the Japanese call it gai-atsu—strengthened the hand of Japan’s reformers in their domestic debates, giving them an excuse (the danger of protectionist fervor on Capitol Hill) to open doors they wanted to open anyway.

  I still felt uneasy about our paternalism. I had inherited some of my father’s skepticism about Americans telling foreigners how to run their own countries, and I thought we were risking comparisons to General MacArthur ruling postwar Japan by decree. I was glad to advocate a level playing field, but the difficulties of American firms didn’t always stem from Japanese discrimination against foreign goods and services. The Japanese system was rough on any firm, foreign or domestic, that wasn’t part of its establishment. Some would say this model served Japan poorly and ultimately contributed to its lost decade, but that wasn’t really our problem to solve. There was something ridiculous about the dance of American officials pressuring Japan to restructure its economy in our image, threatening that congressional protectionists might otherwise block its access to the U.S. market.

  I played my modest part in all this. I was a civil servant responsible for executing the policies of the United States, including the ones I had mixed feelings about. And those policies ended up doing some good. We helped persuade Japan to relax some restraints on trade and investment. Congress refrained from enacting new ones in the United States. While our work didn’t make big news at home—the only major story that broke on my watch was President Bush vomiting on the Japanese prime minister—I felt like we were making a difference.

  My most enduring memory of Japan is becoming a father, although even that wonderful experience supplied a reminder that my work was taking over my life. I had promised Carole that I would learn some childbirth-related Japanese, in case there was no English-speaking obstetrician on duty when we had to go to the hospital. But I was preoccupied with work, so I started the lessons late, and had only three sessions with an embarrassed tutor before Carole’s water broke at an embassy reception three weeks before her due date. I can’t say I understood much of what the doctors and nurses said that night before they put my daughter, Elise, in my arms. Carole and I can laugh about my lousy ob-gyn Japanese now, but that wouldn’t be the last time my work got in the way of my family obligations.

  TREASURY ASKED me to return to Washington in 1992, and we moved into a small house in the same Wood Acres neighborhood of Bethesda where I had attended first grade. I took a front-office job for the assistant secretary of international affairs, reviewing and overseeing the flow of paper, trying to make the trains run on time. My boss’s secretary, the venerable Zula Peperis, told me I’d be Treasury secretary someday. That made me laugh. I was still a junior official. No career employee had ever risen to lead the department. All the senior jobs were political appointments, serving at the pleasure of the president, typically recruited from outside the government. But I was fortunate to be in that D.C. staff job after Bill Clinton defeated President Bush, because one day I was assigned to brief Larry Summers, Clinton’s nominee for undersecretary for international affairs. Larry would see more in me than I saw in myself.

  Even more than graduate school and my early Treasury years, Larry opened my eyes to the possibilities of economics as a lens for thinking about the world and a tool for improving people’s lives. Before that first meeting—which was at the World Bank, where he was chief economist—I read a paper he had written examining the appalling fact that infant mortality was higher in New York City than in Shanghai. It got me thinking in new ways about what determines whether countries are rich or poor, what governments can and can’t do. That article stuck with me. After I became secretary, when speaking about our own national debates about the safety net for the poor, I would occasionally mention that an infant in St. Louis was more likely to die before her first birthday than an infant in Sri Lanka.

  Larry had been tenured at Harvard at twenty-eight, and he had earned a reputation for brilliance, if not for concealing it. He was a former college debate star who would tell you why you were wrong, how you should have made your argument, and why your improved argument still would have been wrong. But he didn’t mind being challenged, as long as you didn’t mind being challenged back without excessive courtesy. He had an inspiring sense of possibility when it came to public policy, an assumption that evidence-based analy
sis could always produce a better way. We hit it off, and he made me his special assistant. He seemed to like that I wasn’t afraid to speak my mind with him. Years later, when the chairman of the New York Fed asked him if I was tough enough to run the place, Larry said I was always willing to tell him he was full of shit. I remember thinking that was not a particularly impressive credential. It was just what you were supposed to do when you thought your boss was wrong.

  Larry seemed to recognize that while I didn’t pretend to offer him much in the way of economics insight, I knew some things he didn’t, like how Treasury worked, how diplomacy was conducted, and how to get things done. I remember at Dulles International Airport before his first meeting with his fellow Group of Seven deputies, Larry reviewed all the positions he was going to take, and all the impeccable arguments he had on his side. I tried to explain that it’s not enough to say what you’re for, that you have to know how to achieve it. You’ve got to move others to your side, and you can’t just convince them with your superior logic; you’ve got to figure out where you have leverage over them—something they need from you or fear from you. Larry teased me sometimes—after I made a substantive comment while taking notes for him at a later G-7 deputies meeting, he dubbed me “the noisy scribe”—but he listened to me, at least occasionally. Larry once said he could envision me as the managing partner of a law firm, or running some big institution, if only my credentials weren’t so thin.

  “I just don’t know how you’d get hired in the first place,” he said.

  I planned to help Larry for only a few months; before we met I had accepted a new job elsewhere in the Treasury. But Larry wouldn’t let me leave. A year later, he decided to promote me from noisy scribe all the way to deputy assistant secretary, one of the top career jobs in the department. It was an honor, but it was a big jump for me, and I knew it would take a toll on my family. I was already working fourteen-hour days, not including late-night calls from Larry, and Carole was pregnant again. We were on a short beach vacation when I got a congratulatory fax from Larry saying Secretary Lloyd Bentsen had approved the promotion. I sent back a fax saying I had decided to stay on the beach and teach tennis instead.

  In my new job, I would help oversee our dealings with the G-7 and the International Monetary Fund, as well as any other global financial issue that arose. Once again, I felt underprepared. I was replacing a well-respected official who was retiring after working at Treasury since before I was born. I was not confident that I could live up to Larry’s expectations; there was too much about the job that was unfamiliar to me. I remember once after Haitian protesters created an international stir by turning back an American ship, Secretary Bentsen called me to ask what he should advise the President. I had no idea. I didn’t know anything about Haiti, and this wasn’t about economic policy. I wanted to ask: Why are you calling me?

  At least one of my responsibilities was familiar: managing yet another negotiation over Japan’s trade barriers in financial services. I still thought helping U.S. firms compete abroad was a legitimate objective. After one Larry-being-Larry session where he challenged a group of Wall Street CEOs seeking greater access to Japanese markets to explain what they were doing to create jobs in the United States, I told him there was no need to be so contrarian. The reforms we were pushing were sensible. Japan’s financial sector was still primarily a closed market, and the Japanese finance ministry seemed pretty captured by its financial establishment.

  But Washington could be a bit captured, too. When Hank Greenberg, the feisty chief executive of American International Group (AIG), threatened to go to war against the Clinton administration and the World Trade Organization if we didn’t extract some insurance concession, I told the Japanese we needed the concession or we would block the entire global agreement—and they conceded. I remember telling Larry that we were spending way too much time and energy on this kind of financial mercantilism, opening markets for Wall Street. I used to joke that our agenda should be more ambitious than making the world safe for hedge funds.

  I didn’t have a purist’s faith in the genius of the free market; I was seeing in Japan what could happen when financial systems fail, and when governments are too captured by the financial sector to clean up the mess. But overall, I believed in our efforts to open foreign markets to competition. And I was comfortable with the broad thrust of U.S. economic policy under President Clinton, who combined a strong commitment to fiscal responsibility and free trade with public investments in areas such as education and scientific research.

  I hadn’t planned to stay in government for more than a few years, and I felt terribly guilty about neglecting my family. That winter, I was traveling in China when our furnace failed during a blizzard in Washington; Carole, six months pregnant and alone with our two-year-old, had to climb up a ladder to our attic and lug down an electric heater. Our son, Ben, was born in April 1994, and we got to experience again all the anxiety and amazement of parenthood. I loved that stage of life, watching your kids experience the world, but I was missing a lot of it. I put too much of a burden on Carole, and too much of their lives happened without me.

  I hated being away so much, never available, always on call, but I was completely engaged by my work. I liked the constant intellectual challenge of working for Larry, who could figure out the flaw in any idea but continued to push for perfection. When the head of President Clinton’s National Economic Council, Robert Rubin, replaced Secretary Bentsen in January 1995, I liked working for him, too.

  Rubin was the former head of Goldman Sachs, but he was self-deprecating and funny, demanding without Larry’s rough edges. He believed in good process. He wanted input from all his advisers no matter where we were in the hierarchy, even if we disagreed with him—especially if we disagreed with him. He was calm, dispassionate, and almost comically deliberate, analyzing problems from every possible angle, scribbling down risks and probabilities on his yellow legal pad, gathering information and “preserving optionality” until he absolutely had to decide. He often reminded us that you can’t judge a decision by how it turns out, only by whether it made sense given the information available at the time. His decisions generally did.

  Secretary Rubin would guide the department through a series of financial crises, valuable training for the larger crisis still to come.

  ONE MEMORIAL Day weekend during college, I was driving my family’s old Boston Whaler off the Cape when I saw a sailboat capsized in the surf, with a man and a woman hanging on for dear life. I didn’t know how long the couple had been in the icy water. I anchored my boat, swam to their boat, and convinced them to swim back to my boat with me. Hypothermia seemed like a greater risk than drowning.

  Big mistake. I never should have told them to move. The current was too powerful, and they weren’t strong enough swimmers. They thrashed in the waves for a few minutes before giving up and heading back to their boat. Fortunately, they made it, and I made it to my boat, too. Eventually, the waves pushed them toward shore, and the beach patrol picked them up, so my bad advice didn’t have tragic consequences. It was a scary but relatively painless way to learn about making judgments under the pressure of a crisis, about weighing the relative merits of various choices with potentially catastrophic outcomes.

  JUST OVER a decade later, I was sitting next to Secretary Rubin in the back of his government car, returning from Capitol Hill during a different kind of crisis.

  The secretary had just testified before the House Banking Committee about the Mexican peso crisis, often described as the first financial crisis of the twenty-first century. Mexico was on the brink of defaulting on its obligations, and Rubin had made the case for a $40 billion emergency loan. The reaction was withering. With public opinion running 80–20 against a U.S. government rescue, Republicans and Democrats accused the secretary of plotting to waste tax dollars on foreigners, bail out his Wall Street pals who had speculated in Mexico, and even line his own pockets. Federal Reserve Chairman Alan Greenspan, who was usual
ly treated like the Oracle at Delphi on the Hill, received almost as rough a reception.

  It was a troubling spectacle, and I guess it showed on my face.

  “What’s wrong?” Rubin asked.

  “I’m just worried,” I said.

  There was a lot to worry about. Congressional leaders had initially promised President Clinton that they would back his loan request, but they were clearly running for the hills. We were developing an alternative plan to help Mexico unilaterally if Congress wouldn’t back us, but it was starting to look like Congress might try to block us. And if we did manage to get money to Mexico, none of us were sure we’d ever get it back. Not only would that be a political disaster for Clinton and Rubin; it could cripple America’s ability to intervene in future crises.

  These worries were Rubin’s worries, too. He always wanted us to think five moves ahead, to question our assumptions, to imagine worst-case scenarios.

  “It’s good that you’re worried,” he told me.

  Over the next few years, I would be reminded again and again that during a financial crisis, if you’re not worried, you’re not thinking carefully enough. I like to say that concern is not a strategy, but it’s a prerequisite for good strategy.