He always has struck me as a man who belonged in spats. Probably the best place to see spats these days is in Hollywood movies from the 1930s or Planter Peanut jars, but once they were essential wardrobe item of anyone who was rich and successful.That is why the famous Mr. Peanut symbol, which was designed by the winner of a 1916 contest, sports three wardrobe items–a top hat, a monocle and spats.

As the pictures above show, spats went over the top of their shoes and covered the laces. They actually were originally a working class thing as they protected farmers and others who worked outdoors from getting things in their shoes. Military units favored them for the same reason and some still wear them, although now just for decoration.

During the Gilded Age the tycoons and would-be tycoons favored them. In the 1920s, they were worn by dapper, wheeler-dealers (think Gatsby) and gangsters (Edward G. Robinson sports them in Little Caesar). According to a 2007 Los Angeles Times piece, they were making a comeback just before the crash hit.

During the last few seasons, we’ve seen the return of 1960s patent-leather go-go boots, 1930s-era brogues, the classic 1950s ballet flat and the 1970s platform.

But spats?

That’s right, they’re not just for Mr. Peanut anymore.

The article goes on to quote a member of the Hives, which has made spats a part of their wardrobe:

“The fascination is part ’20s mobster, part Scrooge McDuck and part 1903 French infantry,” says frontman Pelle Almqvist.

From these data you might construct a spats theory of economics to go along with the one on skirt lengths: when spats are in style, the country goes into economic hyperdrive as the speculators and high-rollers enjoy the feast of what Vernon Parrington called the Great Barbecue. But as the penchant for gangsters to wear spats symbolizes, they also signal an out-of-control economy that can turn shady. So when spats are in fashion, economic speculation is running out-of-control and America is headed for a fall. With spats came the 1893 and 1930s depressions–and the current mess.

In this economy no one symbolizes the spats theory better than Robert Rubin, which is why I always imagine him wearing spats. The rise and fall of Robert Rubin represents an American tragedy that tells the story of our times, for Rubin was at the center of what we now recognize was an unmanageable, undisciplined economy.

Setting the Stage

As in any tragedy, Rubin had a huge role in creating the conditions that eventually produced his fall. For awhile many economists and business writers saw Rubin as a brilliant mind, a sage who understood the intricate workings of the market like a high stakes poker player who has figured out a system to beat the odds. It takes a very special mind to pull that off, one with a prodigious memory, one that comes with the equivalent of a built-in microchip that can instantly perform complex calculations of the odds and one that has a certain convincing charisma that enables someone to bring others under her or his spell.

In a revealing profile published last spring, Raymond J. McGuire, Citigroup’s co-head of global investment banking, told the New York Times:

It’s a little like visiting Yoda, You go and get a dose of wisdom.

In the same profile Roger Altman, a veteran of Wall Street who has known Mr. Rubin for nearly 30 years and served with him in the early years of the Clinton administration, described Rubin:

What’s unique about Bob is a combination of rare intellect and rare temperament. That’s what sets him apart. He’s self-effacing, always calm, with a low-ego style.

Low-ego style or not, at Citigroup Rubin displays prominently behind his desk a framed 1999 Time cover featuring him alongside his then Treasury deputy, Lawrence H. Summers, and then Federal Reserve chair Alan Greenspan. Time termed them the “Committee to Save the World.”

Significantly Rubin did not come from academia with a briefcase full of publications and ambitions for a Nobel Prize, but instead he came up through the ranks of the financial industry itself. To Wall Street he is one of them and to those who prize Wall Street over the Ivory Tower he was someone not just with big ideas, but hands-on experience, someone who has actually played the game and not just written about it.

The Early Days

From the very beginning when Rubin started out in arbitrage trading at Goldman Sachs in 1966–speculating on the stocks of companies subject to takeover attempts–the tragic flaw was apparent, but then, as in so many tragedies, what was actually a flaw was taken as a strength. According to the Times:

Mr. Rubin encouraged Goldman to move into more treacherous markets like proprietary trading and commodities trading.

Over the next two decades Rubin rose through the ranks, enriching his resume with experience in a variety of financial roles including heading Goldman’s stock and bond trading departments and reviving its commodities subsidiary. Eventually he rose to the position of the firm’s co-chair in 1990.

All this might seem a typical Wall Street rise story except for one thing, Robert Rubin became involved in politics, Democratic Party politics.  According to the Wall Street Journal, Goldman Sachs’ corporate culture encouraged executives to become involved in community activities, particularly politics, so a list of Goldman employees who are Washington insiders reads like a Who’s Who of those who have influenced economic policy in the last twi decades including Stephen Friedman (head of George W. Bush’s National Economic Council) and Henry Paulson (the current Treasury secretary), along with Rubin and Summers. Which means over the last two decades a the Treasury Department has largely been an extension of Goldman Sachs.

Lee Price, research director at the liberal Economic Policy Institute, notes:

Compared to other Wall Street firms, Goldman has a reputation for recruiting employees with a wonkish enthusiasm for government policy.

Today few remember it was Rubin who advised Walter Mondale to take the risk that cost him any chance of winning the long-shot 1984 election, making his call for a tax increase a major focus of his acceptance speech at the Democratic National Convention.

Mondale’s speech is one of the forgotten, yet flawed gems in American history. There are lines in it that would not be out of place today:

Mr. Reagan believes that the genius of America is in the boardrooms and exclusive country clubs. I believe that the greatness can be found in the men and women who built our nation; do its work; and defend our freedom.

What happened was, he gave each of his rich friends enough tax relief to buy a Rolls Royce - and then he asked your family to pay for the hub caps.

Lincoln once said that ours is to be a government of the people, by the people, and for the people. What we have today is a government of the rich, by the rich, and for the rich.

He was on a roll in that speech when he came to a section introducing what he termed the New Realism–a rhetorical shift in what up until then had been a great speech. It was here that he followed Mr. Rubin’s advice:

Let’s tell the truth. It must be done, it must be done. Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.

There’s another difference. When he raises taxes, it won’t be done fairly. He will sock it to average-income families again, and leave his rich friends alone. And I won’t stand for it. And neither will you and neither will the American people.

Rubin’s argument for the tax increase had more to do with his long-standing preference for a balanced budget than for any desire to restore the social programs that were cut during Ronald Reagan’s first term. In this Mondale’s speech has a certain schizophrenia which came to foretell the future of the Democratic Party over the next two decades–would it follow the New Deal value of the level playing field or would it follow the Wall Street value of open markets.

Treasury Secretary

Rubin continued to cultivate Democratic politicians, particularly those of the rising Democratic Leadership Council and the so-called New Democrats with their rising star, William Jefferson Clinton.  Long-time Rubin critic Robert Kuttner draws the big picture:

We have had two Democratic presidents, Carter and Clinton, who both turned away from earlier Twentieth Century Democrats who, since Roosevelt, were more explicit supporters of a more regulated form of capitalism.

We also had the rise, beginning in the mid-1980s, of the Democratic Leadership Council, as a center-right lobby within the Democratic Party. Under Clinton, the ties with Wall Street became even more explicit. Also, the countervailing power of the labor movement has been becoming weaker for close to 30 years. All of this was supercharged by the increasing cost of campaigning and Wall Street’s growing role as money-raiser.

The process is also ideological. Market fundamentalism has become the conventional wisdom, the dominant ideology of all of the Republican party and half of the Democratic party, and much of the press.

In essence for three decades the Democratic Party has been torn between the old New Deal ideas championed mainly by organized labor that government exists to keep the playing field level and the free-market philosophies of Rubin and others. Rubin’s appointment to Treasury Secretary by Bill Clinton signaled that in his administration, the free-market wing would dominate.

As the Mondale speech illustrates, Rubin has another very rare and valuable quality, when he is part of a mess, somehow he emerges without any of it on him. In fact people continue to see him as a genius. The Treasury Department web site contains a laudatory biography of Rubin that captures how much of the country thought of him during the 1990s and up until recently:

When President William Jefferson Clinton swore in Robert E. Rubin (b. 1938) as the 70th Secretary of the Treasury, he was already one of the most knowledgeable and best prepared leaders of finance to assume the office.

Mr. Rubin’s tenure at Treasury was extraordinarily varied.

Upon Mr. Rubin’s retirement, President Clinton called him the “greatest secretary of the Treasury since Alexander Hamilton.”

The official picture accompanying this shows a gray-haired man in a dark suit with his hands casually in his pockets. It is cut off at the knees and it is hard to believe that below the picture, Rubin is not wearing spats  In the years that followed what had been Rubin’s good fortune would fall as rapidly as the value of Citigroup stock. That story follows in the next installment.

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