Globalizing Reform

In October 2009, a newly installed government in Greece revealed that the nation, aided by Wall Street banks, had concealed the magnitude of its deficits for years. It became clear -- at least to policy-makers in the United States who pride themselves on their abilities as financial firefighters -- that the country would be unable to repay its debt without help. As weeks and then months passed without Greece's economic partners in the European Union taking definitive action, the crisis threatened to spread.

Undersecretary of the Treasury for International Affairs Lael Brainard, the United States' most important financial diplomat, became concerned that the Europeans weren't taking the situation seriously. The conventional response was clear: Greece would cut back on spending, while other countries and international institutions would put up hundreds of billions of dollars in loans to keep Greece from defaulting -- in other words, a bailout. In the view of Brainard and her boss, Treasury Secretary Tim Geithner, the sooner the Europeans acted, the cheaper and more effective their response would be. But Europe, led by Chancellor Angela Merkel of Germany, seemed unwilling to offer either a solution or accept help from the International Monetary Fund.

By May, U.S. warnings seemed prescient -- a small bailout package hadn't stopped plunging economic indicators. During a marathon weekend of international conference calls, Brainard corralled leaders from the G-7 (the seven large developed economies that set the agenda for global policy coordination), the European Union, the world's central bankers, and the IMF to devise an effective response. If pushing a bill through Congress seems difficult, imagine Geithner and Brainard's task: convincing some 27 legislatures, a handful of powerful, independent central banks, and a global institution or two to make hard choices and lay out billions of dollars. "Their styles are a little bit different -- Tim is a little bit more diplomatic; she's a little more hard-edged negotiator -- but that works well in some ways. Good cop, bad cop," says one Treasury official.

After much prodding, Greece undertook measures to severely cut its spending -- leading to violence in the streets -- and the IMF and the EU put up low-interest loans through a newly formed body called the European Financial Stability Facility to tide the country over. The crisis passed, but not without raising fears that other countries in Southern Europe could follow Greece's path.

It's almost certain that some will if economic recovery isn't pursued across the globe. Brainard's job is to convince world leaders to adopt Keynesian fiscal stimulus, implement an expansive set of financial reforms, and undertake quick strikes against debt problems to prevent them from spreading. Asserting U.S. economic leadership is a challenge in the wake of a crisis largely caused by American preferences in economic and financial policy. The task is more difficult as America's economic advantage over the rest of the world has declined, forcing U.S. officials to rely on expertise, norms, and institutions as well as financial might. Although the U.S. economy is tightly tied to those of other countries, many American politicians are ill-disposed toward helping abroad with so much trouble at home. Brainard has little room for error.

This is a job that stands out on a resume. The current and previous Democratic Treasury secretaries -- Geithner and, before him, top White House economic adviser Larry Summers -- each did a tour of duty in Brainard's role in the 1990s, a time when globalization made international economic policy increasingly important. Summers' work resulted in Time magazine anointing him a founding member of the "Committee to Save the World." Now, thanks to the financial crisis that has tarnished the committee's legacy, Brainard's challenge is even more complex.

***

Brainard's office in the Treasury Department building is cavernous, with heavy wooden furniture, thick blue carpeting, and a view of the White House next door. People tend to mention the room when you ask about her -- Have you seen her office? -- perhaps because it took her so long to arrive at the ostentatious digs.

Brainard earned a doctorate in economics from Harvard University in 1989, focusing on international trade and production, and became a professor at the Massachusetts Institute of Technology immediately afterward. She served briefly as a staffer in the George H.W. Bush White House, where she dealt with the economic transitions of former Eastern Bloc countries. Her first taste of high-level public service came as a White House fellow in the mid-1990s, when she worked for one of the few other women among elite economic policy-makers, Laura D'Andrea Tyson, the director of the Council of Economic Advisers and later the National Economic Council.

With Obama's inauguration in 2009, Brainard was set to be the top economist at the State Department, where her husband, Kurt Campbell, is the assistant secretary for East Asia. She had spent the previous eight years at the Brookings Institution, where she founded a program focused on reforming development assistance -- an interest she inherited from her father, a Foreign Service officer -- and looked forward to bringing that work to State. Then the original choice for the Treasury undersecretary withdrew, and Brainard was tapped for the job.

At the time, ubiquitous Democratic economic wonk Gene Sperling, who gave Brainard her first major opportunity in government during the Clinton administration, was advising Geithner from what would be Brainard's office and joked that he would stay there. For awhile, it looked like he might: Brainard's confirmation was held up for more than a year because of several minor discrepancies found in her tax returns. "Utterly ridiculous, personal and vindictive," is how one Treasury official characterized the process. "Her husband had gone through -- same taxes, same kids, same situation."

Brainard worked at Treasury in a limited capacity until she was finally confirmed in April 2010, becoming the highest-ranking female Treasury official in American history. Now that she is on the job full time, Brainard might find that her confirmation was the easy part. She is deeply engaged in the European debt crisis and has already "Sherpa'd" her boss through three international summits. ("Sherpa" is the unofficial title assigned to staffers who manage major negotiations for finance ministers and heads of state, doing all the groundwork so that their boss can plant the proverbial flag on the summit.)

This won't be the first time Brainard has worked on an economic team that has to deal with a foreign crisis, a querulous global response, and a suspicious domestic constituency. When President Bill Clinton was re-elected and Sperling, then 38, became the director of the National Economic Council, his colleagues urged him to choose an international-affairs deputy with some gravitas to bolster his position. Instead, he chose 35-year-old Brainard. She ascended to the job just as financial crises spread from Thailand to South Korea, Indonesia, Russia, Latin America, and eventually the United States. Brainard was Clinton's Sherpa, managing the president's diplomatic efforts and helping develop a prescient proposal that financially responsible countries be "pre-approved" for IMF aid, signaling to markets that the international community stood behind a country's debts. The proposal, which Clinton delivered at a major international summit, was rejected by European skeptics at the time but has finally been employed in the current crisis. In 2009, the IMF successfully adopted it, offering flexible credit lines to protect Mexico, Poland, and Hungary from nervous creditors.

Brainard would complete her transition from economic expert to adroit staffer during the trade battles of the 1990s, managing fallout from the NAFTA trade deal and China's entrance into the World Trade Organization. Her experiences brought her into contact with key constituencies in Congress and familiarized her with the human costs of globalization. "She's not a knee-jerk Washington Consensus type," Sperling says, referring to the tarnished neo-liberal advocates of increasing liberalization of markets, regulation, and trade. Later, at Brookings, Brainard would advocate for tougher enforcement of trade laws and mechanisms like wage insurance to protect American workers.

Brainard, like Geithner, grew up abroad -- her father, a soldier turned diplomat, was often stationed behind the Iron Curtain during the Cold War. Her childhood experiences in communist East Germany and Poland made her leery of centralized government solutions and dogma. But U.S. economic leadership during the Cold War -- and the respect it engendered among dissidents in communist states -- provided a lesson in what governments could accomplish.

It is unclear how successful the post-Cold War economic order will be in a new century. During the financial crises of the 1990s, world leaders responded much as they did to the recent debt collapse in Greece, and billions of dollars of rescue money were swallowed by rapacious currency speculators. International officials were forced to learn how to help countries protect their currencies and execute painful reforms, and they eventually stopped the spreading financial panic in Brazil -- where they enacted a "bail in" that asked creditors to share some of the economic pain, something that didn't happen in Greece.

The crises of the 1990s should have been seen as a sign of trouble to come. Instead they were taken as proof that officials in governments and central banks could, should the need arise, save the world.

***

Most of the key Americans involved in those crises are back in government -- not just Geithner, Summers, Sperling, and Brainard but also Michael Froman, Obama's international economics adviser, and David Lipton, another key White House official. While it's no surprise to see midlevel officials from a previous administration return to office, this group is equipped to address the international crisis because they are part of a loose-knit crew of international finance experts whose work takes them back and forth between government, organizations like the World Bank and IMF, and the financial sector.

You can see the characteristics of their worldview in Geithner's response to the domestic financial crisis in the United States: Act quickly, with overwhelming force (read: tons of money) to reassure the markets while policy-makers work to fix the underlying problems. In the past, these efforts have been effective (for instance, our contemporary bank bailout has been nearly repaid) but at the cost of public suspicion and moral hazard. There's also the temptation to loosen the requirements for reform to protect the broader economy -- consider the hesitation to crack down on banks during the recession.

The domestic financial crisis taught us that we needed new institutions, rules, and mechanisms to ensure that banks don't damage the rest of the economy. Internationally, the need is even greater. "The current institutions and mechanisms safeguarding the global system are dangerously weak," Paul Blustein, a noted economic journalist, writes in his 2001 book on the Asian financial crises, The Chastening. Unfortunately, all too little has changed.

"You have a need for some of these extraordinary mechanisms to be forged during the crucible of the crisis," Brainard tells me. "You define the need for new tools." The rescue of the Greek economy was engineered by experienced officials from developed economies with a direct financial stake in its success and a clear means of economic coordination -- and the effort still came close to failing. Greece remains wracked with internal division, and bond markets are skeptical of the country's prospects for growth. That doesn't bode well for future rescues in countries that lack Greece's advantages. The Obama team's crisis-as-opportunity approach calls for some revision: We need an agenda for reform, but it's not clear that this administration will provide it.

If we learned anything during this crisis, it's that our financial status quo -- manufactured in the 1990s by Summers' Committee to Save the World and the Washington Consensus -- is not sustainable. Domestically, this has led the administration's economic team to shift toward policies they once fought against, from tighter regulation of financial markets to deficit spending that stimulates the economy. While they have not swung nearly as far left as many progressives would like, there has been a clear dividing line between the policies of the Clinton era and those needed today. The problem is that, now as then, we're not going it alone. If anything, financial markets are more inextricable than ever -- which makes Brainard's position even more important.

The most commonly cited improvement since the 1990s is the incorporation of the G-20 -- the formal coalition of 20 major economies that includes important "developing" countries like Brazil, India, and China -- as the main venue for international economic coordination. Initially, cooperation was strong: In April 2009, at the depth of the recession, the G-20 met in London and agreed to follow the U.S. lead on the economy, committing to a global stimulus of $5 trillion and a $1 trillion increase in IMF funding for beleaguered nations. The moves restored confidence and allowed the IMF to quietly bail out half a dozen states, from Pakistan to Hungary, and provide financing to others, like Poland and Mexico, using the flexible credit lines that Brainard had proposed years before.

By June of this year, recovery had begun, so pressure for coordination had rescinded. At the G-20 summit in Toronto, Obama pushed for countries to continue their efforts to stimulate economic growth. Results were mixed: While G-20 leaders agreed to follow through on existing stimulus plans, much of the guiding communique created during the meeting focused on austerity policies. Administration officials claimed a rhetorical victory, but if austerity chokes growth, the consequences could undermine economic confidence as much as heavy debt loads could.

The key to encouraging growth is "economic rebalancing." Countries that spent and borrowed too much, like the U.S., need to develop their export and savings capacities. Countries that did the opposite, like China and Germany, should in turn develop internal demand rather than live off the deficits of other countries. If many developed countries start to spend less, especially in Europe (which is one-third of the world market for U.S. exports), Americans will feel it at home -- unless the other half of the balance makes up for lost demand.

One of Brainard's early victories on this front was the announcement, just before the G-20 summit, that China would allow its currency to appreciate against the dollar, creating a better market for U.S. exports. While critics downplayed the notice as nebulous and toothless, within the administration there is confidence that it represents a significant step forward. The key question now is whether China will act in time to prevent further stagnation.

The other side of protecting the U.S. from international crises is reforming international bank regulation. Despite criticisms of the United States' domestic regulatory reforms, we remain the first country to seriously upgrade financial supervision since the crisis. Many countries reject some of the concepts at the heart of reform, notably the idea that splitting apart risky and insured bank operations is key to stability. Though Brainard helped G-20 countries agree on the importance of new restrictions, such as increasing the amount of money banks must safeguard for emergencies, the details have been delegated to regulatory and banking institutions that will debate them for years to come. While skepticism abounds, Brainard believes that coherent global rules are achievable.

If the administration's international agenda stalls, or even slows, we're likely to see more debt crises, and that's a real problem because the solution to these crises is unpopular abroad (austerity reforms) and also here at home (bailouts). Mechanisms for solving international problems are still so limited that a simple meeting of stakeholders -- the G-20 -- is considered a major reform. While new tools like the flexible credit lines and Europe's new lending arm are important, they don't deal with the fact that cash-pressed countries have no clear path to renegotiate their debt. The Clinton administration succeeded in stanching the crises of the 1990s with a bail-in that forced creditors to share some loss with the people of the damaged countries. While mechanisms for restructuring sovereign debt have been debated for years, no progress has been made to formalize them -- and while Brainard has been supportive of those efforts in the past and brought up the idea during the Greek crisis, the political challenges of making them a reality may place real reform out of reach for the time being.

***

Brainard is not just Treasury's emissary to the rest of the world. She's also an ambassador to Congress, making the case for why the United States needs to be so deeply involved in other countries' finances. "We do have a hard time on the Hill explaining why a stabilization program for Greece may actually matter for somebody in a member's home district," an administration official says, but it's a case Brainard can make, tracing the connections between stability and growth abroad and credit and jobs in the United States.

In a political climate where any government economic intervention, especially one that can be rightfully called a bailout, is toxic, this task gets even harder. Even as the Obama administration was aggressively lobbying the European Union to take action on Greece, congressional Republicans were supporting a resolution calling on the U.S. to block the effort. (While no U.S. funds are on the line, our investment in the IMF is at risk -- although in its history, the IMF has never not repaid a loan.) Congress has a long tradition of looking askance at the executive's rescue efforts, dating back to when Clinton's Treasury secretary, Bob Rubin, tapped into an obscure fund to rescue Mexico in 1994. And after NAFTA, many in the Democratic base wonder who's reaping the benefits of free trade.

Brainard, however, might be just the person to allay skepticism from progressives about the trade-related efforts of past Democratic administrations. As a young consultant at McKinsey & Company right out of college, she worked with a U.K. textile firm and an American automaker that was facing increased competition from other countries. The experience demonstrated how rosy predictions about free trade don't always bear out in the real world. As she works with the U.S. trade representative, Ron Kirk, to achieve Obama's goal of doubling exports in the next five years, she'll have to keep in mind the challenges that U.S. firms will face -- and the cautions expressed by members of Congress.

Though her primary work now is handling large macroeconomic issues, Brainard also oversees Treasury's development efforts. This part of her portfolio attracts much less attention than the roller-coaster financial markets, but Brainard recently launched the Food Security Trust Fund to assist developing nations in creating sustainable agriculture, stopping hunger, and reducing poverty. If she can balance this more positive face of globalization with the face that asks nations to severely cut their budgets in a time of need, she may be in a position to craft a more realistic understanding of the modern financial order. This is not the overly optimistic "globalization with a human face" she helped articulate at the end of the Clinton administration but a pragmatic globalization that avoids cant of all kinds.

If she can explain this kind of vision and push it onto the administration's agenda, she may have a chance to keep moving up. Her friends and associates say she likes Washington and her work, and at 48, she is relatively young -- and there's just one office nicer than hers in the Treasury building.

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