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  I was getting a remarkable education from talented colleagues—such as Rubin and Greenspan, celebrated in those days as the magicians behind the U.S. economic boom; Larry, who was our leading international economic strategist and now deputy secretary; David Lipton, a former IMF economist and experienced “country doctor” who had Larry’s old undersecretary job; and Truman, the veteran Fed crisis-fighter who traveled with me around Asia. President Clinton supported our strategy, and we didn’t feel constrained by politics. If anything, we took a perverse pride in the unpopularity of our work. We just focused on finding the best option among a mix of bad choices, debating and arguing and brainstorming at rolling meetings that never seemed to end. I dubbed them “clusterfucks,” which became standard Treasury lingo, to the point that Larry would announce we needed a CF on Thailand.

  We were feeling our way, refining and relitigating our strategy, painfully aware of our inadequate information and the limits of the tools at hand. We always felt a few steps behind the crisis. We kept rushing to catch up, hoping that each moment of calm we purchased would mark the turning point, the end of the cascade of interconnected problems. Those hopes were usually betrayed.

  INDONESIA WAS the next domino to fall.

  Its currency was collapsing, its banks were overextended, and its corrupt government—led by the aging dictator Suharto—seemed helpless to respond. By early November, Suharto had reluctantly signed a $23 billion IMF loan agreement, but it wasn’t clear that he was committed to the program or that his government would be able to restore confidence. The day after the IMF board approved the loan, Truman and I met with Indonesia’s top economic officials in Jakarta. The finance minister entered the room and asked the central bank governor what was happening with interest rates. The central banker cheerfully said they were up. The finance minister responded: “I thought you told me the program would bring them down!”

  Truman and I shot each other looks that said: This isn’t going to work.

  Indonesian execution was a problem, but the IMF made mistakes, too. The most damaging may have been forcing Suharto to shut down troubled banks—including one owned by his son—with a very limited deposit insurance system in place. That triggered a run on deposits in the rest of the banking system, as depositors feared these bank closures were the first of many and understandably concluded that if their money wasn’t safe with favored insiders, it wasn’t safe anywhere. And Suharto’s son simply bought a new bank a few weeks later, shifted many of the same assets into it, put it in the same location, and gave it a new name—a stunning signal to potential investors that reform hadn’t arrived in Indonesia.

  In any financial rescue, many of the toughest decisions involve how to set conditions, the policy changes required in exchange for financial support: what kind of medicine will help, what’s the right dose, what might kill the patient. In Thailand, for example, the IMF demanded sharp increases in interest rates, to try to stop the fall of the currency and keep capital in the country, as well as some modest budget cuts to cover the costs of the repair of the banking system. That was a standard IMF prescription for an economy caught in a mess like Thailand’s, designed to assure investors that the country was creditworthy and wouldn’t simply squander its financial aid. But Thailand’s fiscal deficits were already low, and painful measures such as tax hikes and spending cuts would further weaken its economy during a downturn. The IMF later reversed course on fiscal austerity in Thailand after new data showed that the economy was in recession, the first of many revisions to the program.

  The IMF imposed more sweeping conditions on Indonesia—not only the conventional fiscal austerity and interest rate increases, but a comprehensive dismantling of the economic privileges that Suharto had granted to favored elites. We didn’t design these conditions—they mostly came from the IMF, the World Bank, and reformers within the Indonesian government—but we had some sympathy for them. It would have been hard to justify risking billions of dollars to support the kleptocratic status quo, and we thought foreigners would be reluctant to invest in Indonesia as long as Suharto and his inner circle controlled major industries.

  But these conditions went too far. It wasn’t clear how ending the cashew and clove monopolies would be vital to restoring confidence. Corruption wasn’t the root cause of the crisis, and there was no way we could plausibly eliminate it while the crisis was still raging. Expressing concern about the scope of the conditions during our internal debates, I joked that Lipton was playing General MacArthur, trying to reshape the Indonesian economy. But I didn’t present a credible alternative. My concern was not a strategy.

  In any case, the program was a mess. The rupiah lost over 80 percent of its value in a couple months. Suharto repeatedly committed to reforms he had no intention of implementing, and probably no ability to implement. The crisis broke the political system that had held Indonesia together for decades, and the IMF’s money couldn’t repair the damage.

  THE FIRE spread next to South Korea, a significant economic power and a vital geopolitical ally. We feared that if South Korea burned, investors would conclude that no emerging-market investments were safe. We didn’t even want to imagine how totalitarian North Korea might try to exploit a collapse of its democratic neighbor.

  Like the other Asian tigers, Korea had enjoyed years of impressive growth. Like Mexico, it had recently joined the Organization for Economic Cooperation and Development. But its banks had taken out big short-term loans in foreign currency, while making big long-term loans in Korean won to sprawling, state-subsidized conglomerates called chaebols. Now chaebols were in trouble, banks were facing runs, and the government was draining its foreign exchange reserves to prop up the won. When Truman and I arrived in Seoul in mid-November, Korea’s lame-duck president had replaced his finance minister merely for proposing to seek IMF help, exhibiting the same kind of denial we had seen in Thailand and Indonesia. And Korea’s central bank governor told us the situation was again even worse than it seemed; almost all the country’s reserves were gone. I asked him why the new finance minister had even agreed to take the job.

  “Because he hasn’t seen the books,” the central banker told us.

  A few days later, Korea agreed to seek IMF help.

  This time, we were determined to put enough money in the window to stop a run. We wanted to contain the contagion before it infected the world; I remember telling Rubin we simply couldn’t stand by and let Korea burn. He didn’t respond well to assertions of imperative or appeals to necessity. If we couldn’t devise a plan with a plausible chance of success, he said, then standing by and letting Korea burn would be a perfectly appropriate response. He liked to remind us that just because there was a problem didn’t mean there was a solution. But as I liked to point out, the absence of a perfect solution didn’t mean there wasn’t a problem. Korea had a bigger economy than Thailand and Indonesia combined. The stakes were getting higher. Korean banks had creditors banging on their doors, and Korean businesses and individuals had substantial savings in the banks that could rush for the exits at any time.

  “Everything can run,” I said to Rubin.

  With the crisis escalating, and the D’Amato restrictions expired, we took a much more direct role in shaping the international response to Korea. We helped the IMF put together an unprecedented $55 billion rescue package, including a $20 billion “second line of defense” from the U.S. Treasury and other countries in case the IMF’s portion was fully drawn down. Mexico had received almost seven times its IMF quota, uncharted territory at the time. Korea got nineteen times its quota. This was Larry’s inspiration. He basically changed the rules in the middle of the game, convincing the IMF to lend much more and much faster. In the early months of the Asian crisis, the United States had been unable to commit our own resources and deferential to the preferences of the IMF. In Korea, Larry put the Powell Doctrine into action.

  But even this commitment of what we thought was overwhelming force didn’t stop the run. The markets w
eren’t sure the commitment was credible, or large enough to cover all the bad debts that South Korean banks were hiding. The IMF’s initial payments quickly flowed out of the country as the foreign creditors of Korea’s banks rushed for the exits. The won depreciated 40 percent in three weeks, and the government essentially ran out of foreign currency. We were starting to doubt that we could save the country; we seemed to have no good options. Frustrated and exhausted during one late-night conference call, I suggested we could buy some time by simply accelerating payments to Korea from the next tranche of the IMF loan. Larry scoffed that I was suggesting a Vietnam War strategy, a recipe for defeat.

  “Gradual escalation isn’t going to work,” he said.

  Part of Korea’s challenge was a collective action problem. Creditors were refusing to renew short-term loans to Korean banks they thought were at risk of default. But by demanding repayment as these loans matured, they were making default more likely. Because Korea’s government had plenty of resources and its economy was very productive, the best outcome for the creditors would be if they all kept financing the Korean banks to avoid a more chaotic collapse. But they all worried that if they didn’t take their money and run, other creditors would, so they were all trying to beat one another out the door. This is a common dynamic in crises, where rational individual decisions can create disastrous collective outcomes. We had to break the cycle if the broader package was to have any chance to work.

  Truman and I came up with a relatively simple idea to address this critical part of the run. We proposed to try to persuade Korea’s major private creditors—a group of American, Japanese, and European financial institutions—to extend the maturity of their loans to Korea’s banks. We couldn’t force the creditors to agree, but we thought we could convince them that a voluntary “standstill” would be in their mutual interest, since we could credibly say the likely alternative was a government default that would produce deep losses. We convened all the CEOs of the major global banks on a series of conference calls with their finance ministers, where they were all given the same message: If you all agree to convert short-term loans into longer-term loans, we will accelerate the IMF’s payments to Korea, and you’ll all have a good chance of getting paid back in full. But if you won’t come together to stabilize the situation, we can’t be sure the IMF will continue to lend, and you’ll all face much greater losses.

  The banks were a bit stunned at first, but Rubin made a compelling case, and they came around, agreeing first to a temporary standstill, and later to a broader debt refinancing. The panic subsided. And South Korea’s new president, a lifelong democracy activist named Kim Dae-jung, made it clear that he was committed, as President Zedillo had been in Mexico, to doing whatever was necessary to restore confidence in his country. Korea’s economy contracted severely over the next year, but by 1999 it was growing again at an impressive 11 percent rate.

  It took Thailand longer to reverse its slide, but after a new prime minister showed a real commitment to reform, its economy rebounded as well. Indonesia was a harder case. Its gross domestic product fell 13 percent in 1998, one of the worst drops anywhere since the Great Depression. There were riots over rapid price increases, and physical attacks on ethnic Chinese businessmen blamed for Indonesian hardships. Suharto was forced to resign after thirty years in power, creating new uncertainty without ending his country’s battles with the IMF. Indonesia’s loan had to be renegotiated twenty-three times. Eventually, though, the economy began a slow recovery. Indonesia’s government has had several peaceful democratic transitions, and the country has enjoyed a long run of healthy growth.

  The IMF, despite its weaknesses, was a vital institution, designed to be as detached as possible from the politics of its member nations. And while we didn’t control it, as some claimed, we cared a lot about its ability to defuse crises around the world. So even in the midst of the financial firefighting, I encouraged opposition to the Japanese proposal for an Asian Monetary Fund. This wasn’t a difficult feat of diplomacy, given the ambivalence in China and other Asian nations about a more assertive Japan. We made the case that a regional fund would leave Asia worse off, because the rest of the world would have less of an incentive to respond to a future crisis on the continent, and the regional political influence over loan conditions would make the Asian fund’s programs less credible in the eyes of investors. Of course, we didn’t want the United States to be excluded from future crisis responses, and neither did many Asian countries that still viewed the U.S. security presence as an important part of regional stability.

  We thought these were pretty compelling arguments. But ultimately, Japan’s weakening economy doomed its plan for the Asian fund, forcing its finance ministry officials to withdraw their proposal. It was a humiliating episode for them. We took no pleasure in Japan’s economic struggles, which hurt the United States and the global economy by reducing growth in Asia and exacerbating the crisis. But we were pleased to protect the IMF’s role as the sole international lender of last resort.

  When I left Treasury at the end of the Clinton administration, my colleagues put together tongue-in-cheek recommendations for my next job; for instance, Rubin suggested I could be Larry’s biographer. Greenspan proposed “first assistant to the deputy to the managing director of the Asian Monetary Fund,” his wry way of celebrating its nonexistence.

  THERE WAS a lull in the crisis in the spring of 1998. After almost a year of running on adrenaline, I started getting migraines; I began competing in triathlons to compensate for the sharp decline in stress. But financial crises can have an unpredictable rhythm. The Asian crisis was slowly spreading beyond Asia. By the summer, Russia, Ukraine, Brazil, and Turkey were all at risk of default.

  Russia was in the most dire straits, and its leaders were threatening not to pay back the IMF or their other creditors. I had little involvement in our earlier efforts to support reforms in Russia, but Rubin did ask what I thought of a rescue plan that Larry and David Lipton were discussing with the IMF as a last-ditch effort to prevent default. I was usually on the aggressive side of our team when it came to intervention—and the permissive side when it came to conditionality—but I thought it would be crazy to throw good money after bad. Russia looked hopeless then, financially and politically. Rubin agreed. As hard as the United States had worked to encourage Russia’s transition to a market economy, and as worried as we were about instability in a nuclear-armed state, default seemed inevitable, and additional loans felt like they would be a waste of cash and credibility.

  But when the financial world is in a fragile place, defaults can have damaging and unanticipated consequences. The shock waves from Russia’s default prompted investors to pull back from risk, triggering declines in the prices of financial securities around the world. And these dynamics helped bring the overleveraged U.S. hedge fund Long-Term Capital Management to the brink of failure, raising fears of broader damage to its Wall Street creditors and other institutions with similar risks. Bill McDonough, the head of the New York Fed, helped arrange a private-sector solution even neater than the one we had arranged in Korea. The major Wall Street institutions—with the notable exception of the investment bank Bear Stearns—agreed to inject cash into LTCM until its trades could be safely unwound. We would revisit the LTCM solution when a much more severe crisis hit the United States a decade later.

  The collapse of a giant hedge fund with a risk management strategy engineered by two Nobel laureate economists illustrated the dangers of finance in the interconnected modern era. We got yet another reminder in the fall, when the aftershocks from Russia drove Brazil into crisis. After an initial program withered, we helped the IMF assemble another huge wall of money. And once an initial attempt to maintain the real’s peg to the dollar was abandoned, superb economic leadership from Brazil helped turn things around within months.

  By 1999, the global financial system had calmed down enough that Time magazine featured Rubin, Summers, and Greenspan on its cover as “The Commi
ttee to Save the World.” I was now undersecretary for international affairs, Larry’s original job at Treasury, and I was part of a group featured inside the magazine as “The Subcommittee to Save the World.” It was a welcome affirmation of our work, but it was over-the-top. We had made lots of mistakes. Our interventions didn’t always work wonders. Even Mexico, Korea, and Brazil, the clearest successes, had suffered devastating economic contractions, because deleveraging after a credit bubble is always painful. And I knew the triumphalist tone would offend our colleagues around the world. The money we helped deploy to countries in crisis was critical, but money can’t compensate for the absence of political will. The choices we made in Washington were important, but they worked only when we dealt with competent and credible leaders in the affected countries. Brazil’s central banker, Arminio Fraga, who also has U.S. citizenship, was so impressive that I later mentioned him to President Obama as a potential Fed chair.

  As the “Committee to Save the World” article pointed out, the “astonishingly robust U.S. economy” was making all of us look smart. Even though I had nothing to do with our domestic successes, I saw how our economic strength at home enhanced our influence abroad. When other countries thought we were managing our economy well, they were more inclined to listen to us.