Early last summer, at one of those smarmy Manhattan rooftop affairs where he does not belong, this reporter heard a currency trader spout on and on about how the yen was going to go to 180, about how the U.S.' and Japan's efforts to support the yen had failed and how there was nothing anybody, not even
, could do to stop the coming fall.
This was, it turned out, profoundly wrong. (Our smug friend, it should be noted, was hardly alone in his views.) Just as Rubin's decision to join Japan in fighting the dollar's weakness in 1995 marked the end of the greenback's decline, the yen buying by the June intervention ended the yen's free fall.
That someone with Rubin's sense for what moves markets feels secure enough to announce his resignation now shows how far we have come since the world's economy fell into turmoil last year. With his departure, it's hard to dub the global recovery fragile anymore.
"One of the major spins we have dealt with over the last six to 12 months is how he would have retired in the summer of 1998 if it hadn't been for that major market turmoil," says Bill Sullivan, chief money-market economist at
Morgan Stanley Dean Witter
. "Basically, he felt that it needed his stewardship to bring the markets back. Rubin's resignation implies that he now thinks that stewardship is no longer needed."
Source: Baseline, TSC Staff
For a while now there have been signs aplenty that the world economy was on the mend -- emerging markets coming back, commodities and commodity currencies like the Canadian and Australian dollars on the rebound -- but until recently officials have taken a rather cautious stance. It was only at last month's Washington meetings of the
finance ministers and of the
that we began to hear hopeful murmurs of how the world was really on the mend.
And even then, some have struck cautious notes. Of the recovery in the Brazilian markets,
New York Fed
wondered in a speech last month whether "anything goes that well that quickly. The answer," he said, "is usually not."
In truth, while their markets have surged, the economies of the countries hardest hit in the crisis are generally showing only nascent signs of recovery.
"What has changed more than the reality is the perception," says Josh Feinman, global markets economist at
. "The fundamentals haven't changed that much." But he points out that this is a case where perceptions count. "Keep in mind where we were last fall. It wasn't the economic fundamentals. It was just a complete panic in the market. If you remember, the talk was about Armageddon, global deflation."
Such prophecies can become self-fulfilling. Lenders, fearing the worst, hold fast to their money. Capital markets seize up. This fall, the world was on the verge of a global-economic nervous breakdown. Even after order was restored, there was a sense that a new round of crisis could beset the world, that the patient could crack again. Hardly a time to go home to New York.
But now the danger of relapse seems remote. The rolling series of crises that began with devaluation of the Thai baht nearly two years ago has apparently come to an end. "It's calm," says Feinman, "and that gave Rubin the feeling he could step aside now."
It would be a mistake, of course, to say that all the work has been done. With the lightning-fast movement of capital that has come with globalization, the dangers of market contagion are very real. There has been a lot of talk about the need for a new, global financial architecture, but the work has barely begun and with the recovery there's a risk complacency could set in.
"Poor Bob Rubin," remarks Neal Soss, chief economist at
Credit Suisse First Boston
. "If he had to wait for all the problems of the world to be resolved, he would have to wait until the Second Coming before he could go home."