In an Uncertain World (53 page)

In early February 2001, at Tom Daschle's invitation, I went, along with Laura Tyson, to an issues conference at the Library of Congress that the Senate Democrats were holding to prepare for the budget process. The following day I joined Leon Panetta at the House Democratic Caucus retreat in Farmington, Pennsylvania. I went to the House caucus meeting thinking that I would say what I thought and the members would be pleased that I agreed with them in opposing the size and distribution of the Bush tax cut—more or less what had happened at the Senate discussion. Instead, I was actually attacked. Members responded to my comments by castigating me for not speaking out and providing more of a public voice on their side of the issue. I remember Barney Frank saying, “What you're doing is terrible.” He was really angry about it.

“First of all, you're the politicians—I'm not,” I responded. That was true. It seemed appropriate to comment about policy issues I cared about, but I didn't think I should have to be a public spokesman. Nevertheless, the complaint bothered me, and in the days afterward I thought about what more I could do. Traveling to a Ford board meeting in Detroit, I sketched out a long op-ed article laying out my reasons for opposing the administration's tax cut. I began by saying that I had not intended to get involved in the public debate on fiscal policy at that point, but I felt strongly that a tax cut of the magnitude Bush had proposed was a serious error in economic policy. The piece appeared in the Sunday
New York Times
on February 11, 2001. Afterward, there was about a two-week stretch during which eight or ten senators called me. I had never had a period at the Treasury Department when that many senators had called on their own initiative to discuss a policy issue.

Of course, the majority of Democrats who opposed the tax cut didn't win their fight. The tax cut was highly inefficient as a short-term stimulus—too much went to high-income groups who would spend less of what they received, and most of the cut occurred in later years, which helps little if at all in the short term and damages our long-term fiscal position. The tax cut also undermined our cushion for the unexpected. Within a year, the tragedy of 9/11, the enormous drop in the stock market, and the generally deteriorating economic conditions showed how dramatically unexpected events can affect the country's fiscal condition.

The debate about what policies would have most effectively dealt with the slowdown will persist for years. The remarkable economic conditions of the 1990s inevitably led to excesses and imbalances—including high levels of consumer and corporate debt, a large current account deficit, and a stock market that was high by any conventional standard—that pointed toward a more difficult period in both financial markets and the economy. However, great strengths—such as low unemployment, high productivity growth, low inflation, and, initially, a strong fiscal position—also persisted. During the slowdown, monetary policy as well as tax cuts and increased spending on both military and homeland security provided strong stimulus to the weak economy. (These tax cuts in 2001 and 2003 could have provided this stimulus in a much less expensive, more effective way—and without long-term damage—had they been better targeted and temporary.) All of that stimulus was likely to lead to a cyclical upsurge. But the overriding questions remain: How well suited were the policy choices made in that period to minimizing the severity and duration of the downturn? And how did those choices affect our economy's position for the long term? My own view is that on both scores the policy decisions during this time were far from optimal, and that on the second question they have created a serious threat to our future.

   

I WAS IN my office at Citigroup on the morning of September 11, 2001, when Sandy Weill came into my office and told me a plane had hit the World Trade Center. My first thought was that it must have been a small propeller plane and some kind of freak accident. Then, twenty minutes later, Sandy came in again to say that another plane had hit—and that they were big planes. At that point, it became clear what had happened.

Our first thought was for the several thousand Citigroup employees who worked in the complex, though not in the twin towers themselves. We leased twenty-five floors in 7 World Trade Center, which fell about eight hours later, though thankfully without killing anyone. We also occupied two large buildings several blocks north of the World Trade Center on Greenwich Street, which housed the trading rooms of Salomon Smith Barney, and owned or leased three smaller buildings in the Wall Street area. All of them had to be evacuated. Tragically, we later learned that six Citigroup people who were in the towers on sales calls were killed, and that brought home to all of us in a more personal way the horror of what had occurred.

Sandy quickly organized what turned into a running meeting in one of the conference rooms to manage our crisis response. Our primary focus, after accounting for all of our people, was to continue functioning. As the nation's largest financial institution, that mattered not just to us but to the entire financial system. We weren't able to use our Salomon trading rooms on Greenwich Street or any of our other downtown offices. Moving to a backup facility in East Rutherford, New Jersey, kept us operational, but parts of our business still weren't functioning on September 12. The New York Stock Exchange was closed, initially for an undefined period. The clearing systems at the Bank of New York, an important clearing bank, went down. We were able to make payments, but it wasn't clear that other financial institutions would be able to make payments to us. We were concerned about the possibility of cascading defaults.

In this instance, the fundamental payment systems and financial systems on which our economy depends continued to function. The Federal Reserve Board acted promptly to make liquidity available to banks until payments could start to flow again. But the warning about how little it would take to create immense financial and economic disruption in this country was clear. Measures have since been taken to reduce this vulnerability, but a complex, modern society is inherently at risk.

   

IN THE IMMEDIATE aftermath of September 11, there was a great deal of fear about what the attacks might do to the national economy and a great deal of uncertainty on the part of most people about how they should respond. The stock market was closed for several days after the attacks, and no one had any idea how dramatically stocks might fall when it reopened. Many people I spoke to were worried that the shock might have major consequences for asset prices and liquidity.

My own initial reaction was that the attacks could have an immense impact on economic confidence. Consumers, investors, and businesses make their decisions in the context of some framework, whether conscious or unconscious. People go to excesses within that framework, then conditions revert to the mean, and so forth. But the attacks injected new variables that were far outside almost everybody's previous experience. People needed to develop new parameters—and hadn't yet. A fundamental change of that kind is very rare and can temporarily stifle economic activity by putting everybody on hold until they can figure out how to relate to the new realities. And given that I had thought the economy—both here and internationally—was in more difficulty before the attacks than most people had, my personal view was that conditions could be even worse than many feared.

In those initial days, I received many calls to go on television and discuss the economic implications. For a week, I declined all invitations. In the first place, I wasn't sure how to think about this, and I didn't want to say anything publicly until I was clearer about my views. I also didn't think that articulating my initial impressions would be helpful. People were looking for some kind of reassurance about the economy. And I didn't have much that was reassuring to say. However I phrased my views, they could have had the effect of unsettling people further.

But day by day, I kept working through the question of how to think and talk about the economic consequences of September 11, making notes on a legal pad as usual. Given my concerns, the basic problem was how to speak publicly in a way that was truthful but also calming and reassuring. This was an issue I'd faced before. After speaking several times with Gene Sperling, I arrived at the framework of “competing considerations.” On the one hand, the attacks were likely to harm confidence, as well as having a negative impact on various economic sectors, including airlines, hotels, and tourism. The ease and cost of trade would also suffer due to security requirements—and security costs throughout the economy would increase. On the other hand, government spending on the military and security would increase, providing an economic stimulus. The net effect of September 11 on an already troubled economy would be the balance of all such positives and negatives. My notion was to combine that approach for the short term with some kind of affirmative statement about the long-term economic potential of the country—but always noting that realizing this potential would require meeting many challenges. This enabled me to focus again on such issues as long-term fiscal conditions, trade liberalization, education, and the inner cities.

Ad-libbing at a speech I'd been scheduled to give at the Japan Society in New York, I suggested two scenarios. The positive scenario was that even if the United States continued to face a significant terrorist threat in the months and years ahead, any attacks would be of a magnitude that our society could adapt to. Over the course of the following year, the imbalances that had existed prior to 9/11 would work themselves out and the impact of the attack on economic confidence would abate. At the same time, we would have a powerful dose of economic stimulus coming through the system. The result of all this would be that by the third quarter of 2002, confidence would return and the country would be back to a healthy rate of growth. The negative scenario was that terrorist events might continue in some significant way, unsettling economic confidence for a lengthier period of time, and that, combined with the problems that had already existed prior to September 11, would bring about a much more extended period of difficulty.

I had no idea what probability to put on those scenarios. And despite the many predictions people were making about the prospects for the economy, no one else, no matter how well informed, had any real ability to judge the relative probabilities. What I avoided saying that evening was that my private instinct was to give more weight to the negative scenario than the positive one.

Toward the end of that first week, I got a call from Jack Welch, the former CEO of General Electric, who said that Lesley Stahl at CBS had asked him to be on
60 Minutes.
The program wanted to have a discussion that would air on Sunday night, before the New York Stock Exchange and other financial markets reopened the next morning. Warren Buffett had agreed to go on, and Jack said he would, too, if I would appear on the program as well.

At first I was inclined not to, because what I had to say, even in the competing-considerations formulation, just didn't seem constructive. But I did think that the three of us calmly discussing the economy on television might conceivably provide some reassurance, even with my mixed views of the outlook. So I told Jack I'd do it. Then I had a conference call with Ron Klain, Gene Sperling, and David Dreyer. The three of them tried to help me anticipate the kinds of questions I might be asked. Would you buy stock when the market opens, or would you sell? What do you think the market is going to do tomorrow? What do you think people should do with their investments?

My view, as always, was that investments should be made with a long-term view. But that didn't get me out of answering the questions I was likely to face about my short-term view of economic conditions and of the stock market. I spent a fair bit of time thinking about how to talk about all this. By the time the interview was taped that weekend, I had decided to express my analysis in two conclusions. I thought the odds of a substantial period of difficulty had increased because of the attacks. But I also continued to believe that the long-term potential of the American economy was strong. This seemed both nonalarmist and true to my views.

We had a preparatory conference call before the taping, and Lesley Stahl said, “One question I might ask is, ‘What do you think the market's going to do on Monday? Would you buy or sell?' ” Warren gave his answer—he wouldn't be selling anything when the market opened and might even buy some stocks if they got cheap enough. Then Jack answered, saying that he'd probably hold his stocks, because the United States remained the best place in the world to invest.

Then Lesley said, “What about you, Bob?”

“Well, I don't want to talk about the market,” I said. I felt that a former Treasury Secretary, whose voice some people might listen to, should exercise care in what he said—especially about stock market levels and the Fed—even after leaving office.

“You've got to talk about the market,” she said.

“No, I'm not going to talk about the market.”

“Okay, then I'll ask you about the Fed and whether they should lower rates,” she said.

“You can do that,” I said. “But I'm not going to talk about the Fed, either.”

“Aren't you going to talk about anything?” she asked. She was getting very worried. “I want you to be part of the show.”

“Don't worry, I'll find things to say.”

So we did the taping, and I did find things to say, though most of what I said was lost in the editing.

   

THERE WAS BROAD-BASED support across the political spectrum for the President's military response to terrorism, but the issue of how to deal with the economic impact was much more complicated both substantively and politically. A variety of issues arose. Should the government support the airline industry, the insurance industry, or others affected by September 11? Should the government act to stimulate the economy in some way? If so, with what kind of stimulus—emergency spending, tax cuts, or both? And if tax cuts, what kind of tax cuts? I quickly began getting calls from members of Congress who were grappling with all this.