Rubin: We’re Facing “Most Uncertain Environment in Lifetime”
10/10/2014 New York
As the global economy starts to recover from the financial crisis, focus is shifting to how we can move forward constructively. This was the question addressed at the October 9th IESE Global Leadership Forum in New York City.
Robert E. Rubin, Co-Chairman, Council on Foreign Relations, and Former Secretary of the U.S. Treasury was invited to share his perspective as a veteran of industry and government in an exclusive interview with Dr. Bill Baker, IESE’s Distinguished Professor of Media Management.
An uncertain present and on-going risks
As the 70th Secretary of the Treasury and first Director of the National Economic Council in the Clinton Administration, Mr. Rubin has tackled enormous challenges including a ballooning budget deficit, the Mexican currency crisis of 1995, and the Asian financial crisis of 1997. And yet he believes that investors and policy makers today are facing "the most complicated and uncertain environment in my lifetime." He attributes this in part to the "downside" of our financial system that was exposed by the recession.
Regarding the Obama administration’s "too big to fail" approach to saving the U.S. economy by bailing out individual institutions, Rubin believes it likely prevented the financial system from "going over the abyss." The Dodd–Frank Wall Street Reform and Consumer Protection Act has addressed some risks, although Rubin says he remains concerned about derivatives and other risks that can bring negative feedback loops with far-reaching consequences.
The recent global recession – a perfect storm of powerful forces
Many of Rubin’s U.S. critics have cited the dismantling of the Glass-Steagall Act as key actor in the crisis, questioning the wisdom of abolishing provisions that limited bank securities activities and affiliations. Rubin, however, dismisses Glass-Steagall as a factor, attributing his critics’ view to a basic "misunderstanding" of the Act and insisting that the Fed had already neutralized Glass-Steagall before it was rescinded. Instead he points to a "whole array of powerful forces acting at the same time that then created negative feedback loops that fed on each other." He went on to talk of the tension between policy makers and regulators, warning that "regulators say more capital, policy makers say you have to lend more…there are and will always be risks."
Debt still choking the U.S. economy
Rubin paints a disquieting picture of the current U.S. fiscal environment, which is still struggling to meet the debts of "two unpaid wars, two large tax cuts and Medicare Part D." The lack of a constructive fiscal policy in the U.S., he says, can be attributed to a "totally dysfunctional government that resists compromise." The current environment makes it impossible to stimulate the economy and deal with debt. Although our current debt-to-GDP ratio is stabilized at 74 percent, this number is double that before the crisis. With a 2039 debt-to-GDP projection of 106 percent, Rubin senses a looming problem.
The outlook for Europe and the global economy
Europe’s financial slump calls for a far-reaching reform, says Rubin. He spoke of European Central Bank President, Mario Draghi, whose critics have, in his view, overestimated the ECB’s limits and placed an excessive emphasis on rates. Europe’s political leaders should focus instead on structural reform to find a fiscal balance that creates "confidence in markets and the business community that leaves room for growth."
Although Rubin mentioned reform in Spain, he criticized Italy for inaction and France for regressive moves. "The prospects for Europe muddling along with zero growth and increasing risk should be taken seriously because this is a tail risk for the whole global economy with real geopolitical consequences."
Climate change – the existential issue of our age
Rubin unequivocally condemns the lack of urgency and global political resistance to action on climate change, describing it as the "existential issue of our age." It is imperative, he says, to do something before it is too late and he warns doubters that we can’t risk the potential catastrophic effects of inaction. "What we do today will affect us for hundreds of years," he said.
Decisive leadership to construct the future
Rubin thinks a leader must weigh options, balance the costs, and then have the courage to act, citing co-Chairman of the Council on Foreign Relations, Stephen Friedman, as a good example of "bold decision-making."
In addition, Rubin urges leaders to believe in their work, institution, and mission, and then "get others to believe in it." He promotes the maxim to "surround yourself with people who are smarter and stronger," and says insecurity keeps many leaders from following that advice.
IESE Global Leadership Forum features in-depth interviews with world leaders on some of the most relevant issues facing global business today.