I do think Rubin deserves criticism for not pushing his entirely accurate view of the danger of the derivatives harder. By the time the collapse of the massive hedge fund LTCM put a spotlight on the issue in 1998, he had built up tremendous political capital. Had he been more vocal about his worries, he might have a least made people more aware of the problem, even if no legislation passed. But Rubin was not wrong about the risk of unregulated derivatives, nor was he opposed to regulating them. To the contrary, he was prophetic about the risk and correct in his prescription.
Rubin took these views back to the private sector with him. Many a Citi executive sat in his corner office listening to the same apprehensions I heard so often about the mispricing of risk, the excesses in the credit market, and the danger of relying on mathematical models. But Rubin did not make decisions at Citigroup. His role was as a representative to clients and foreign officials and as a strategic adviser to CEO Sandy Weill and to Weill's successor Chuck Prince. After his service in government, Rubin wanted a position that would allow him to stay abreast of what was happening in the financial world while remaining involved in the public policy issues that animated him. He wanted to be able to take public positions at odds with his firm's interests and the views of other executives. He did not want management authority and had no one reporting to him.
Here again, there is a valid criticism that is far different from the one most often made. Rubin's problem wasn't power without accountability—it was accountability without power. I'm not sure he fully appreciated the risk, evident in hindsight, that he would be blamed if things went badly wrong, as they might have in any number of possible ways, at the world's largest financial institution. But even if he'd had a more conventional kind of authority, it's unrealistic to think Rubin could have prevented the mistakes that necessitated a government bailout. The assumption that the rating agencies knew their business, a key enabler of the subprime meltdown, is analogous to the view before the Iraq war that Saddam Hussein had WMD. There are a lot of people now who scoff about what an obvious fallacy that was and not many who can point to doubts expressed at the time. But even if Rubin had better understood the risks Citi traders were taking and been in a position to do something about it, he almost certainly would not have said, "sell the AAA-rated CDOs." Nor would anyone else have.
While Rubin bears no meaningful responsibility for the financial collapse, he has had, as Business Week noted in a recent article, significant impact on the recovery. The Obama administration's response has been led by a series of his disciples—Summers, Timothy Geithner, Peter Orszag—who have dealt with the crisis using the tools and lessons they learned responding to the Mexican and Asian crises of 1994 and 1997. In those instances, the problem of moral hazard had to take at temporary backseat to stopping financial contagion. Once markets were stabilized, they could take on systemic issues. That describes the current moment as well, with the Obama team pivoting from what has been their highly effective crisis response to longer-term issues of fiscal balance, future crisis prevention, and establishing the conditions for long-term growth. For a second time, Rubinomics seems to be working.
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