Asian crises push deputy into spotlight

Outside the confines of Washington dinner parties, where minor political appointments can be endlessly debated, the post of Deputy US Treasury Secretary would barely raise a flicker of recognition.

In the recent past it has been held by a succession of shadowy, second-line figures who are there only to serve the reputations of their bosses - such powerful figures as William Simon, who served under Nixon, and Donald Regan and James Baker, who starred when Ronald Reagan was in the White House.

Had anyone suggested that it made political sense for the Deputy Treasury Secretary to sort out the most intractable difficulties facing the international economy, they would have been laughed at. The deputy's job, a bit like that of vice-president, is to do much of the preparatory work, then stand back and allow the Treasury Secretary - arguably the most powerful financial figure in the world - to take all the credit.

In the current Asian crisis, that has changed. Deputy Treasury Secretary Lawrence (Larry) Summers has become the focal point for rescues across the Pacific. While his boss, the former Goldman Sachs chairman Robert Rubin, makes grand speeches on modernising the global "economic architecture", Mr Summers is out there taking the bullets.

Now he has been hired by the White House to deal with America's most delicate problem: its relationship with Japan, the second richest nation on earth.

In past economic crises, where Mr Summers has also been at the forefront, the US has held most of the levers of power. Cash was not released to problem countries such as Mexico in late 1984 or Indonesia this year until binding promises of austerity and change had been extracted. This time the process was rather different.

Mr Clinton came charging to the rescue of Prime Minister Ryutaro Hashimoto as the yen scuttled down on the foreign exchanges, threatening to destabilise the whole Asia-Pacific region - including China. He agreed to use the US central bank, the Federal Reserve, to support the yen.

The intervention fund, an estimated $6 billion in all, was provided, however, without obtaining the binding promises that the West demands. The government and Diet in Japan can propose policy reforms and pass laws but only the all-powerful Ministry of Finance can force them through.

It is comparatively rare for a high-level economic fixer, yet alone one just into his 40s, to be catapulted from the cloisters of Harvard into power. But Mr Summers was not simply another academic.

He has some of the best economic genes in the world, as the son of two economists and nephew of Nobel prize-winner Paul Samuelson known to economic students around the world as the author of the standard text book. Economics was such a large part of the young Larry's upbringing that his father Robert would auction off control of the house television set among members of his family.

This early training in the workings of the demand curve and market dynamics appears to have done the trick. The precocious Summers earned his PhD with a dissertation on applying the mathematics of rocket scientists to economic analysis. He was ahead of his time. Many of the complex derivatives products, which transformed financial markets in the past decade, were based on precisely this mathematics.

It also impressed the Cambridge, Massachusetts, economic establishment. At the age of 28, he became the youngest tenured economics professor at Harvard University.

Mr Summers became increasingly interested in public policy and was among the economic thinkers behind the ideas that propelled Democratic Governor Michael Dukakis to national attention for the first US experiments in welfare-to-work and high-tech transformation - the "Massachusetts Miracle".

During the 1988 presidential election campaign Mr Summers was the chief economic adviser to Governor Dukakis's losing campaign against George Bush.

Shortly afterwards, he left his native Massachusetts to become chief economist at the World Bank. There he learnt the art of lending to poor countries and the needs of the East Asian economies. When Mr Clinton stormed to office in 1992, the Treasury Secretary Robert Rubin, a financial backer of first Dukakis and then Clinton, drafted in Mr Summers as Under-Secretary of the Treasury for Monetary Affairs.

It did not take long for the abrasive Mr Summers to find himself in difficulty on Capitol Hill. He clumsily suggested developing countries should consider dumping their environmental waste in the third world. The suggestion seemed preposterous and propelled him into the headlines for the first time - labelled as a political embarrassment. Now, the concept of trading global environmental pollution rights has been accepted as policy by the advanced countries.

In December 1994, in a dry run for the crisis in Asia, the Mexican peso collapsed. There was a run on the banks there and a serious threat of political upheaval which potentially could have led to a flood of refugees across the Rio Grande.

Mr Summers forced through an IMF loan, dipped into the US's own exchange equalisation account, controlled by the Treasury, for a $12 billion short-term credit.

Congress members who disliked Mr Summers for his habit of lecturing them as if they were his undergraduates took revenge. When he told members that they "had to approve the bail-out" support was refused and Mr Clinton had to act on his own, souring relations with congress.

Despite the political flak the Mexican bail-out worked and after Mr Clinton was re-elected, Mr Summers stepped up a notch to become deputy to Robert Rubin. As the Asian difficulties started in Thailand in the summer of 1997, Mr Summers was put in charge of the rescue. He determined that the International Monetary Fund should take the lead with the United States guarding its flanks. In a matter of months Mr Summers was at the forefront of negotiations which led to the mobilisation of some $113 billion in loans from the IMF, World Bank and the advanced economies to the ailing countries of East Asia.

When in January 1998, the then President Suharto of Indonesia baulked at the IMF terms for loans to the country, Mr Summers was dispatched to read the riot act. Summers found himself fighting a two-front battle: one which eventually resulted in Suharto's fall from power, and another on Capitol Hill to extract new capital for the IMF, a task not yet completed.

Dealing with recalcitrant East Asian countries is one thing, dealing with the world's most formidable manufacturing power is another. Resentment is building in Tokyo against perceived US economic imperialism. If the Deputy Treasury Secretary pulls this challenge off, he may yet fulfil his ambition to succeed Rubin.