In an Uncertain World Read Free Page A

or losses associated with each. My life on Wall Street was based on probabilistic decisions I made on a daily basis.
    This was the background I brought to the question of whether we should intervene in Mexico. With an enormous number of competing considerations, the key to reaching the best possible decision was identifying all of them and deciding what odds and import to attach to each—probabilistic decision making at work. Doing that also meant recognizing that our knowledge would never be as complete or perfect as I—or the rest of the team at Treasury—would like. Moreover, even with the most systematic and thorough work, a decision, though informed by the facts and analysis, would never emerge automatically from the yellow pad on which I scribbled notes. The final component of decision making was the intangible of judgment. The process of decision making that we evolved in the Mexican crisis—and that I would use over and over again in my time at Treasury—was familiar to me from my life in the private sector. But the range of considerations was much broader. For example, we had to think about the damage that a failed intervention could do to America’s credibility. If we attempted to help Mexico and did not succeed, our backing would be a less useful tool in some future crisis.
    Success had dangers as well. Even if our efforts helped stabilize Mexico, we might create a problem of what is known as “moral hazard.” Investors, after being insulated from the consequences of risk in Mexico, might pay insufficient attention to similar risks the next time, or operate on the expectation of official intervention. In Mexico, investors had become complacent, following a herd mentality in buying short-term dollar-linked bonds throughout 1994 without paying sufficient attention to the danger that the central bank’s currency reserves might not be sufficient to maintain their promised convertibility into dollars. We worried that our program to prevent Mexico’s failure might encourage investors to make similar mistakes again in the future.
    It was my good fortune to be able to think through these issues with Alan Greenspan and Larry Summers. In our backgrounds, our professional training, and our temperaments, the three of us were alike and very different. Alan is a conservative free-marketeer and an economist grounded in both macro policy and an acute empirical understanding of the American economy. Before entering government, he had his own private-sector consulting firm and traded actively for his own account. He is a precise man with an exceedingly good and understated wit. Larry, whose parents are both Ph.D. economists and who has two uncles who won Nobel Prizes in economics, was one of the youngest professors ever to receive tenure at Harvard. He is a forceful, self-assured theoretical economist with a good feel for the practical, both in politics and in markets. I had a pretty good conceptual understanding of economics, had spent a career in trading operations and management on Wall Street, and had been involved in Democratic politics. People who know me are familiar with my distrust of definitive answers and my habit of asking questions. While our personalities differed, they meshed—perhaps because our analytical approaches to a problem like Mexico proved highly compatible. Equally important was the spirit in which we worked. Though none of us is without ego, there was a remarkable lack of it in our meetings. Each of us tried to work with the others to find the best answer, not to show off his intellect or defend preconceived notions. Another crucial component of our relationship was the mutual trust we developed. For four and a half years, Alan, Larry, and I had breakfast or lunch at least once a week, along with many other meetings and discussions. After I resigned in 1999, Larry and Alan continued the tradition. To the best of my knowledge, nothing any of us said in any of those