Taking The Handoff

By Karl Taro Greenfeld

There exists a paradigm of the perfect economy, a place where a dismal scientist may even lay down his HP-19B calculator because analysis is superfluous in a land where supply and demand are calibrated, inflation is checked, growth steady, the workforce fully employed and the stock market bullish. For the moment, the U.S. may be that perfect economy, and that means the greatest challenge for Larry Summers, 44, the new nominee for Secretary of the Treasury, will be not to muck things up.

That's harder than it sounds. After all, when Seinfeld went off the air, NBC couldn't run a test pattern, and by the way, now that Michael Jordan has retired, how are the Chicago Bulls doing? Summers, currently the Deputy Secretary, is following a similarly tough act. Robert Rubin, perhaps the most popular Treasury Secretary in the postwar era, redefined that Cabinet post from discreet adviser and signatory of our currency to a sort of global emissary and projection of American geopolitical clout as it is expressed now--not in warheads or throw weights but in loan guarantees and bailout packages.

With Rubin's resignation and Summers' ascension, the question arises: To what extent did Rubin's personal strengths make possible the enlarging of the Treasury Secretary's mission? The former Goldman Sachs partner spent years as head of the firm's arbitrage desk, a position in which he had to make billion-dollar bets based on inadequate information, the kind of predicament that he says often confronts public officials. To him, the decision-making process should focus on probabilities rather than the absolute nature of any choice. "It's not that results don't matter," he says. "But judging solely on results is a serious deterrent to taking the risks that may be necessary to making the right decision." And the smooth-talking Rubin was one of the few men who could pick up a phone, as he did in late 1997, and persuade his brethren at banks and trading firms up and down Wall Street to keep their money invested in South Korea, an economy that at the time was melting down faster than a scoop of ice cream on a hot asphalt road.

Certainly, Summers has the intellectual rigor to succeed Rubin. He is often described as being the smartest guy in the room--and generous enough to let you know it. Rubin, on the other hand, may actually have been the smartest guy in the room without letting anyone else know it. And right there is the difference between an academic and a bond trader.

Others in the economists' fraternity say that some portion of Rubin's success can be attributed to the man who now replaces him. In part because Rubin dislikes travel, it was often Summers who was dispatched to hot spots to prescribe tough fiscal and monetary medicine. "He's been the point man in Asia," says Kobsak Chutikul, director general of economic affairs at Thailand's Foreign Ministry, "pushing a lot of very sensitive and controversial policy measures," including stiff interest rates.

Summers came in for some of the stern criticism hurled at the IMF, which follows the Treasury Secretary's lead, as Asian officials complained that the IMF's austerity measures were aggravating the crisis. "The handling of the crisis was a disaster in the beginning," says Andy Xie, chief China economist at Morgan Stanley Dean Witter in Hong Kong.

Now that Asia appears to be in fragile recovery, much of that criticism has turned to praise, and Summers has been receiving his share of the credit. Lim Chang Yuel, a former South Korean Deputy Prime Minister, has vivid memories of late 1997, when he and Summers often conferred until well after midnight seeking a solution to South Korea's economic woes. "I was surprised to see how energetic and hardworking he was. He was like a fireman putting out fires not only in Korea but throughout Asia."

So in December of last year, with economies settling down and currencies stabilizing, Rubin began to put in motion a long-contemplated plan to return to the private sector. Dining with Summers at the Jefferson Hotel, Rubin's Washington residence, he broke the news that he was leaving. Rubin felt strongly that the announcement of his departure and Summers' succession should be simultaneous. The Secretary also wanted to allow financial markets a full trading day to digest the news. Allaying market anxieties as well was an uncharacteristically non-opaque endorsement from Alan Greenspan reassuring Wall Street that Greenspan and Summers, whose friendship is well documented, have a close working relationship.

Rubin has been unequivocal in his praise for Summers, insisting that his former deputy has "a very good, practical sense of the financial markets. Larry is also self-aware, conscious of things he can do better, and works at it." Summers, who has made great strides in improving his people skills, has a reputation for brilliance, if not tact. "Larry Summers is to humility what Madonna is to chastity," wrote Paul Gigot of the Wall Street Journal. In diplomatic circles, his untucked shirts, mismatched socks and bluntness have seemed odd to some. But there is no doubt that he can deliver the conceptual goods.

Summers describes himself as a "market-oriented progressive"--his policies not that different from Rubin's. But unlike Rubin, he first made his mark in the relatively genteel realm of academia rather than on the trading floor. A product of the Cambridge crowd of economists--proponents of the so-called Third Way of economic policy, a sort of free-market advocacy with a social conscience--he taught at Harvard for 10 years. A father of three and an avid tennis player--he's a hard-serving, hard-hitting sort of player, as opposed to Greenspan and his cagey spin serves--Summers is a former cancer patient, found to have Hodgkins disease in 1983. He underwent a year of chemotherapy before battling the disease into remission.

The challenges on the domestic and international fronts will keep Summers' famously analytical mind busy--and he might have a hard time resisting the urge to tinker. Rising protectionism and Social Security reform could derail or further bolster the markets. And issues like currency instability and Russia's continuing crises should keep him jetting around the world. Even more worrisome are inflation fears that have driven the yield on the 30-year U.S. Treasury bond close to 6%.

But Summers does not lack confidence. Last week as he sat in his office joking with his Treasury aides, Summers ruminated on succeeding Rubin. He mused that it might be like replacing Yankee great Joe DiMaggio. And who remembers who replaced Joe DiMaggio? "It was Mickey Mantle," an aide answered. Larry Summers smiled. He already knew that.

--Reported by Bernard Baumohl/New York, Stella Kim/Seoul, David Liebhold/Bangkok, Hilary Roxe/Hong Kong and Adam Zagorin/Washington

With reporting by Bernard Baumohl/New York, Stella Kim/Seoul, David Liebhold/Bangkok, Hilary Roxe/Hong Kong and Adam Zagorin/Washington