In an Uncertain World Read Free

blossom into a full-blown economic crisis that embodied the heightened risks of a more global economy. In retrospect, the Mexican episode also offers much insight into the Clinton presidency. The Bill Clinton I watched come to the aid of Mexico was one the public too seldom saw. His seriousness of purpose, his depth of substantive understanding, and his keen intellectual quest for the right decision on Mexico are a continuing reminder to me of the way in which he remains, in important respects, a misunderstood figure. At a broader level, the dilemma Clinton faced with Mexico suggests to me that our politics may not be well suited to coping with the new risks of the global economy.
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    GETTING MY ARMS AROUND a problem like the Mexican crisis meant thinking about it as systematically and dispassionately as possible. The situation, as I rapidly came to understand following my preconfirmation conversation with Larry, was this: After the outgoing Salinas government had spent over $15 billion in a futile attempt to prop up the peso at the fixed rate of around 3 pesos per U.S. dollar, the newly installed government of Ernesto Zedillo had, in late December 1994, surrendered to overwhelming pressure in foreign exchange markets and allowed the Mexican currency to float freely. With only around $6 billion of its foreign exchange reserves left and far more than that in short-term debts coming due, Mexico had little choice. But with the government no longer providing support, the peso fell rapidly to around 5 pesos to the dollar. As the Mexican currency continued to slide, doubts grew about whether the government would be able to repay its debt, much of it very short term and linked to the dollar. Fearing a possible government default, investors were selling Mexican bonds, as well as the peso. In sum, Mexican authorities had lost control of their country’s finances.
    All of us working on the problem agreed that Mexico, now essentially cut off from private lenders, almost surely could not solve the crisis through its own policies alone. The Mexican government’s bond auctions were attracting few bidders, even at dollar interest rates approaching 20 percent. In the short term, the private sector was very unlikely to produce loans on the scale needed to prevent default.
    Nor, with requirements this large, could the international financial institutions—the IMF and World Bank—arrange a rescue on their own, as they had in many other cases. Michel Camdessus, the French managing director of the IMF, was unknown to most Americans despite his tremendous influence. Skillful and audacious, Camdessus was prepared to weather the anger of his organization’s European shareholders to make a stabilization loan to Mexico of unprecedented size. But the sums needed exceeded the IMF’s available capability. The only realistic chance of avoiding disaster was help from the United States. The questions for me then became the possible consequences of financial chaos and default in Mexico, the danger of the program failing, and the possible costs of that failure.
    What has guided my career in both business and government is my fundamental view that nothing is provably certain. One corollary of this view is probabilistic decision making. Probabilistic thinking isn’t just an intellectual construct for me, but a habit and a discipline deeply rooted in my psyche. I first developed this intellectual construct in the skeptical environment of Harvard College in the late 1950s, in part because of a yearlong course that almost led me to major in philosophy. I started to employ probabilistic decision making in practice at Goldman Sachs, where I spent my career before entering government. As an arbitrage trader, I’d learned that as good as an investment prospect might look, nothing was ever a sure thing. Success came by evaluating all the information available to try to judge the odds of various outcomes and the possible gains